UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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x
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
Fiscal Year Ended December 31, 2007
or
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission
File Number 0-14412
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Farmers
Capital Bank Corporation
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(Exact
name of registrant as specified in its charter)
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Kentucky
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61-1017851
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
Number)
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P.O.
Box 309, 202 West Main St.
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Frankfort,
Kentucky
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40601
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code: (502) 227-1600
Securities
registered pursuant to Section 12(b) of the Act:
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Common
Stock - $.125 per share Par Value
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The
NASDAQ Global Select Market
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(Title
of each class)
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(Name
of each exchange on which
registered)
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Securities
registered pursuant to Section 12(g) of the Act:
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None
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(Title
of Class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
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Yes
o
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No
x
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Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
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Yes
o
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No
x
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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.
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Yes
x
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No
o
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Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer o
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Accelerated
filer x
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Non-accelerated
filer o
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1
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act)
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Yes
o
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No
x
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The
aggregate market value of the registrant’s outstanding voting stock held by
non-affiliates on June 29, 2007 (the last business day of the registrant’s most
recently completed second fiscal quarter) was $212 million based on the closing
price per share of the registrant’s common stock reported on the
NASDAQ.
As of
March 10, 2008 there were 7,374,865 shares outstanding.
Documents
incorporated by reference:
Portions
of the Registrant’s Proxy Statement relating to the Registrant’s 2008 Annual
Meeting of Shareholders are incorporated by reference into Part
III.
An index of exhibits filed with this Form 10-K can be
found on page 82
2
FARMERS
CAPITAL BANK CORPORATION
FORM
10-K
INDEX
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Page
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Part
I
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Item
1.
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4
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Item
1A.
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12
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Item
1B.
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13
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Item
2.
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14
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Item
3.
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15
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Item
4.
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15
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Part
II
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Item
5.
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15
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Item
6.
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18
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Item
7.
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19
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Item
7A.
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41
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Item
8.
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42
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Item
9.
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77
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Item
9A.
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77
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Item
9B.
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78
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Part
III
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Item
10.
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78
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Item
11.
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79
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Item
12.
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79
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Item
13.
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79
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Item
14.
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79
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Part
IV
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Item
15.
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79
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81
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82
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3
PART
I
The
disclosures set forth in this item are qualified by Item 1A (“Risk Factors”) and the section captioned “Forward-Looking Statements” in Item 7 (“Management’s
Discussion and Analysis of Financial Condition and Results of Operations”) of
this report and other cautionary statements contain elsewhere in this
report.
Organization
Farmers
Capital Bank Corporation (the “Registrant” or the “Company”) is a financial
holding company. The Registrant was originally formed as a bank
holding company under the Bank Holding Company Act of 1956, as amended, on
October 28, 1982 under the laws of the Commonwealth of
Kentucky. During 2000, the Federal Reserve Board granted the Company
financial holding company status (see discussion in Supervision and Regulation
section of this report). The Company’s subsidiaries provide a wide
range of banking and bank-related services to customers throughout Central and
Northern Kentucky. The bank subsidiaries owned by the Company include
Farmers Bank & Capital Trust Co. ("Farmers Bank"), Frankfort, Kentucky;
United Bank & Trust Co. ("United Bank"), Versailles, Kentucky; The
Lawrenceburg Bank and Trust Company ("Lawrenceburg Bank"), Harrodsburg, Kentucky
(formerly Lawrenceburg National Bank); First Citizens Bank (“First Citizens”),
Elizabethtown, Kentucky; Farmers Bank and Trust Company ("Farmers Georgetown”),
Georgetown, Kentucky; Citizens Bank of Northern Kentucky, Inc. (“Citizens
Northern”), Newport, Kentucky; and Citizens Bank of Jessamine County (“Citizens
Jessamine”), Nicholasville, Kentucky (formerly Citizens National Bank of
Jessamine County).
The
Company also owns FCB Services, Inc., ("FCB Services"), a nonbank data
processing subsidiary located in Frankfort, Kentucky; Kentucky General Life
Insurance Company, Inc., (“Kentucky General Life”), an inactive nonbank
insurance agency subsidiary located in Frankfort, Kentucky; Kentucky General
Holdings, LLC, (“Kentucky General”), in Frankfort, Kentucky, which holds a 50%
voting interest in KHL Holdings, LLC (KHL Holdings acquired a 100% interest in
Kentucky Home Life Insurance Company effective January 1, 2005); FFKT Insurance
Services, Inc., (“FFKT Insurance”), a captive property and casualty insurance
company in Frankfort, Kentucky; and Farmers Capital Bank Trust I (“Trust I”),
Farmers Capital Bank Trust II (“Trust II”), and Farmers Capital Bank Trust III
(“Trust III”), which are unconsolidated trusts established to complete the
private offering of trust preferred securities.
The
Company provides a broad range of financial services to individuals,
corporations, and others through its 36 banking locations in 23 communities
throughout Central and Northern Kentucky. These services primarily
include the activities of lending and leasing, offering deposits, providing cash
management services, safe deposit box rental, and trust
activities. Operations are managed and financial performance is
evaluated at the subsidiary level. The Company’s chief decision
makers monitor the results of the various banking products and services of its
subsidiaries. Accordingly, all of the Company’s operations are considered by
management to be aggregated in one reportable operating segment of commercial
and retail banking. As of December 31, 2007, the Company had $2.1
billion in consolidated assets.
Organization
Chart
Subsidiaries
of Farmers Capital Bank Corporation are indicated in the table that follows.
Percentages reflect the ownership interest held by the parent company of each of
the subsidiaries. Tier 2 subsidiaries are direct subsidiaries of Farmers Capital
Bank Corporation. Tier 3 subsidiaries are direct subsidiaries of the Tier 2
subsidiary listed immediately above them. Tier 4 subsidiaries are direct
subsidiaries of the Tier 3 subsidiary listed immediately above
them.
4
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Tier
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Entity
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1
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Farmers
Capital Bank Corporation, Frankfort KY
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2
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United
Bank & Trust Co., Versailles KY 100%
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3
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EV
Properties, Inc., Versailles KY 100%
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2
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The
Lawrenceburg Bank and Trust Company, Harrodsburg KY
100%
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2
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Farmers
Bank & Capital Trust Co., Frankfort KY 100%
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3
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Farmers
Bank Realty Co., Frankfort KY 100%
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3
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Leasing
One Corporation, Frankfort KY 100%
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3
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EG
Properties, Inc., Frankfort KY 100%
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3
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Austin
Park Apartments, LTD, Frankfort KY 99%
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3
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Frankfort
Apartments II, LTD, Frankfort KY 99.9%
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3
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Farmers
Capital Insurance Corporation, Frankfort KY 100%
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4
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Farmers
Fidelity Insurance Agency, LLP, Lexington KY 50%
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2
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Citizens
Bank of Jessamine County, Nicholasville KY 100%
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2
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First
Citizens Bank, Elizabethtown KY 100%
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2
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Farmers
Bank and Trust Company, Georgetown KY 100%
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2
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Citizens
Bank of Northern Kentucky, Inc., Newport, KY 100%
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2
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FCB
Services, Inc., Frankfort KY 100%
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2
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Kentucky
General Holdings, LLC, Frankfort, KY 100%
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3
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KHL
Holdings, LLC, Frankfort KY 45% (equity), 50% (voting)
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4
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Kentucky
Home Life Insurance Company, Frankfort KY 100%
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2
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FFKT
Insurance Services, Inc., Frankfort, KY 100%
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2
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Farmers
Capital Bank Trust I, Frankfort, KY 100%
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2
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Farmers
Capital Bank Trust II, Frankfort, KY 100%
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2
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Farmers
Capital Bank Trust III, Frankfort, KY 100%
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2
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Kentucky
General Life Insurance Company, Frankfort KY
(Inactive)
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5
Farmers
Bank, originally organized in 1850, is a state chartered bank engaged in a wide
range of commercial and personal banking activities, which include accepting
savings, time and demand deposits; making secured and unsecured loans to
corporations, individuals and others; providing cash management services to
corporate and individual customers; issuing letters of credit; renting safe
deposit boxes; and providing funds transfer services. The bank's
lending activities include making commercial, construction, mortgage, and
personal loans and lines of credit. The bank serves as an agent in
providing credit card loans. It acts as trustee of personal trusts,
as executor of estates, as trustee for employee benefit trusts and as registrar,
transfer agent and paying agent for bond issues. Farmers Bank is the
general depository for the Commonwealth of Kentucky and has been for more than
70 years.
Farmers
Bank is the largest bank chartered in Franklin County. It conducts
business in its principal office and four branches within Frankfort, the capital
of Kentucky. Franklin County is a diverse community, including
government, commerce, finance, industry, medicine, education and
agriculture. The bank also serves many individuals and corporations
throughout Central Kentucky. On December 31, 2007, it had total
consolidated assets of $561 million, including loans net of unearned income of
$338 million. On the same date, total deposits were $401 million and
shareholders' equity totaled $33.2 million.
Farmers
Bank had six active subsidiaries during 2007: Farmers Bank Realty Co.
("Farmers Realty"), Leasing One Corporation ("Leasing One"), Farmers Capital
Insurance Corporation (“Farmers Insurance”), EG Properties, Inc. (“EG
Properties”), Austin Park Apartments, LTD (“Austin Park”), and Frankfort
Apartments II, LTD (“Frankfort Apartments”).
Farmers
Realty was incorporated in 1978 for the purpose of owning certain real estate
used by the Company and Farmers Bank in the ordinary course of
business. Farmers Realty had total assets of $3.3 million on December
31, 2007.
Leasing
One was incorporated in August 1993 to operate as a commercial equipment leasing
company. It is located in Frankfort and is currently licensed to
conduct business in fourteen states. At year-end 2007, it had total
assets of $17.0 million, including leases net of unearned income of $16.6
million.
Farmers
Insurance was organized in 1988 to engage in insurance activities permitted to
the Company under federal and state law. Farmers Bank capitalized
this corporation in December 1998. Farmers Insurance acts as an
agent for Commonwealth Land Title Co. At year-end 2007 it had total
assets of $824 thousand. Farmers Insurance holds a 50% interest in
Farmers Fidelity Insurance Company, LLP (“Farmers Fidelity”). The
Creech & Stafford Insurance Agency, Inc., an otherwise unrelated party to
the Company, also holds a 50% interest in Farmers Fidelity. Farmers Fidelity is
a direct writer of property and casualty coverage, both individual and
commercial.
In
November 2002 Farmers Bank incorporated EG Properties. EG Properties
is involved in real estate management and liquidation for certain properties
repossessed by Farmers Bank. It had total assets of $3.5 million at
December 31, 2007.
Farmers
Bank is a limited partner in Austin Park and Frankfort Apartments, two low
income housing tax credit partnerships located in Frankfort,
Kentucky. These investments provide for federal income tax credits to
the Company. Farmers Bank’s aggregate investment in these
partnerships was $1.1 million at year-end 2007.
On
February 15, 1985, the Company acquired United Bank, a state chartered bank
originally organized in 1880. It is engaged in a general banking
business providing full service banking to individuals, businesses and
governmental customers. It conducts business in its principal office
and two branches in Woodford County, Kentucky. During 2003 United
Bank incorporated EV Properties, Inc. EV Properties is involved in
real estate management and liquidation for certain properties repossessed by
United Bank. EV Properties had total assets of $384 thousand at
year-end 2007. Based on deposits, United Bank is the second largest
bank chartered in Woodford County with total assets of $224 million and total
deposits of $167 million at December 31, 2007.
On June
28, 1985, the Company acquired Lawrenceburg Bank, a state chartered bank
originally organized in 1885. It is engaged in a general banking
business providing full service banking to individuals, businesses and
governmental customers. During 1998, it moved its charter and main
office to Harrodsburg, Kentucky in Mercer County. In 2007, it changed from a
National to a state chartered bank. Lawrenceburg Bank conducts business at its
Harrodsburg site, two branches in Anderson County, Kentucky, and one branch in
Boyle County, Kentucky. Based on deposits, the Anderson County
branches rank number one in size compared to all banks chartered in
Anderson County. Total assets were $212 million and total deposits
were $168 million at December 31, 2007.
On March
31, 1986, the Company acquired First Citizens, a state chartered bank originally
organized in 1964. It is engaged in a general banking business
providing full service banking to individuals, businesses and governmental
customers. It conducts business at its main office and three branches in Hardin
County, Kentucky along with two branch offices in Bullitt County,
Kentucky. During 2003 First Citizens incorporated EH Properties,
Inc. This company was involved in real estate management and
liquidation for certain properties repossessed by First Citizens. EH
Properties was dissolved in January, 2007.
6
On
October 8, 2004, First Citizens acquired Financial National Electronic Transfer,
Inc. (“FiNET”), a data processing company that specializes in the processing of
federal benefit payments and military allotments and is headquartered in
Radcliff, Kentucky. Effective January 1, 2005 FiNET was merged into
First Citizens. These services are now operated using the name of
FirstNet.
On
November 2, 2006, First Citizens announced the signing of a definitive agreement
to acquire the military allotment operation of PNC Bank, National Association
based in Elizabethtown, Kentucky. The operation specializes in the processing of
data associated with military allotments and federal benefit payments. The
transaction was completed on January 12, 2007 and merged into First Citizens and
its FirstNet operations.
Based on
deposits, First Citizens ranks third in size compared to all banks chartered in
Hardin County. Total assets were $257 million and total deposits were
$203 million at December 31, 2007.
On June
30, 1986, the Company acquired Farmers Georgetown, a state chartered bank
originally organized in 1850. It is engaged in a general banking business
providing full service banking to individuals, businesses and governmental
customers. During the fourth quarter of 2004 the Company merged its
previously acquired Citizens Bank (Kentucky), Inc. (“Citizens Georgetown”) into
Farmers Georgetown. During 2006, Farmers Georgetown sold the Bath
County, Kentucky branches that it acquired from Citizens Georgetown. Farmers
Georgetown conducts business at its principal office and three branches in Scott
County, Kentucky and two branches in Fayette County, Kentucky.
On July
16, 2002, Farmers Georgetown incorporated Community Development of Kentucky,
Inc. (“CDK, Inc.”) in order to apply to be certified as a Community Development
Entity for participation in the New Markets Tax Credit Program (“Program”) as
provided by the Community Renewal Tax Relief Act of 2000. The Program
is designed to promote economic development in qualified low-income communities
as defined by the tax regulations. The Company decided not to
participate in the Program and CDK, Inc. was dissolved during
2006. In May 2004, Farmers Georgetown incorporated Pro Mortgage
Partners, LLC (“Pro Mortgage”), a mortgage brokerage company established to
offer a variety of fixed rate loan products. Pro Mortgage was merged
into Farmers Georgetown at year-end 2007.
Based on
deposits, Farmers Georgetown is the largest bank chartered in Scott County with
total assets of $350 million and total deposits of $223 million at December 31,
2007.
On June
15, 1987, the Company acquired Horse Cave State Bank, a state chartered bank
originally organized in 1926. During 1997, it moved its charter to
Glasgow, Kentucky. Subsequent to that approval, Horse Cave State Bank
changed its name to Kentucky Banking Centers, Inc. On December 1,
2006, the Company sold Kentucky Banking Centers to Citizens First Corporation,
an unrelated company headquartered in Bowling Green, Kentucky.
On
December 6, 2005, the Company acquired Citizens Bancorp, Inc. (“Citizens
Bancorp”) in Newport, Kentucky. Citizens Bancorp was subsequently
merged into Citizens Acquisition, a former bank holding company subsidiary of
the Company. During January 2007, Citizens Acquisition was merged into the
Company, leaving Citizens Northern as a direct subsidiary of the Company.
Citizens Northern is a state chartered bank organized in 1993 and is engaged in
a general banking business providing full service banking to individuals,
businesses, and governmental customers. It conducts business in its
principal office in Newport and four branches in Campbell County, Kentucky, one
branch in Boone County, Kentucky and two branches in Kenton County, Kentucky.
Based on deposits, Citizens Northern ranks second in size compared to all banks
chartered in Campbell County. Total assets were $262 million and
total deposits were $189
million at December 31, 2007. Citizens Financial Services, formerly an
investment brokerage subsidiary of Citizens Acquisition, was
dissolved during 2006.
On
October 1, 2006, the Company acquired Citizens National Bancshares (“Citizens
Bancshares”), the former one-bank holding company of Citizens Jessamine.
Citizens Bancshares was subsequently merged into the Company, leaving Citizens
Jessamine as a direct subsidiary of the Company. Citizens Jessamine, organized
in 1996 as a national charter bank engaged in a general banking business
providing full service banking to individuals, businesses, and governmental
customers. In 2007, it changed from a national to a state charter. It
conducts business in its principal office and three branches in Jessamine
County, Kentucky. Based on deposits, Citizens Jessamine ranks first in size
compared to all banks chartered in Jessamine County. Total assets were $218
million and total deposits were $147 million at December 31, 2007.
FCB
Services, organized in 1992, provides data processing services and support for
the Company and its subsidiaries. It is located in Frankfort,
Kentucky. It also performs data processing services for nonaffiliated
entities. FCB Services had total assets of $4.1 million at December
31, 2007.
Kentucky
General was incorporated in November 2004 and holds a 50% voting interest in KHL
Holdings, LLC. Effective January 1, 2005 KHL Holdings, LLC purchased Kentucky
Home Life Insurance Company (“KHL”). KHL writes credit life and health insurance
7
in
Kentucky. The remaining 50% voting interest in KHL Holdings, LLC is held by
Hamburg Insurance, LLC, an otherwise unrelated company. Kentucky General had
total assets of $2.1 million at December 31, 2007.
Kentucky
General Life was incorporated on June 22, 2000 to engage in insurance activities
permitted by federal and state law. This corporation was inactive as
of December 31, 2007.
Trust I,
Trust II, and Trust III are each separate Delaware statutory business trusts
sponsored by the Company. The Company completed two private offerings
of trust preferred securities during 2005 through Trust I and Trust II totaling
$25.0 million. During 2007, the Company completed a private offering of trust
preferred securities totaling $22.5 million. The Company owns all of the common
securities of each of the Trusts. The Company does not consolidate the Trusts
into its financial statements.
FFKT
Insurance was incorporated during 2005. It is a captive property and casualty
insurance company insuring primarily deductible exposures and uncovered
liability related to properties of the Company. It had total assets of $3.5
million at December 31, 2007.
Lending
A
significant part of the Company’s operating activities include originating
loans, approximately 82% of which are secured by real estate at December 31,
2007. Real estate lending primarily includes loans secured by
non-owner and owner-occupied one-to-four family residential properties as well
as commercial real estate mortgage loans to developers and owners of other
commercial real estate. Real estate lending primarily includes both
variable and adjustable rate products. Loan rates on variable rate
loans generally adjust upward or downward immediately based on changes in the
loan’s index, normally prime rate as published in the Wall Street
Journal. Rates on adjustable rate loans move upward or downward after
an initial fixed term of normally one, three, or five years. Rate adjustments on
adjustable rate loans are made annually after the initial fixed term expires and
are indexed primarily to shorter-term Treasury indexes. Generally,
variable and adjustable rate loans contain provisions that cap the amount of
interest rate increases over the life of the loan of up to 600 basis points and
lifetime floors of 100 basis points. In addition to the lifetime caps and floors
on rate adjustments, loans secured by residential real estate typically contain
provisions that limit annual increases at a maximum of 100 basis points. There
is typically no annual limit applied to loans secured by commercial real
estate.
The
Company also makes fixed rate commercial real estate loans to a lesser extent
with repayment terms generally not exceeding 12 months. The Company’s
subsidiary banks make first and second residential mortgage loans secured by
real estate not to exceed 90% loan to value without seeking third party
guarantees. Commercial real estate loans are made primarily to small
and mid-sized businesses, secured by real estate not exceeding 80% loan to
value. Other commercial loans are asset based loans secured by
equipment and lines of credit secured by receivables and include lending across
a diverse range of business types. Commercial lending and real estate
construction lending, including commercial leasing, generally
includes a higher degree of credit risk than other loans, such as residential
mortgage loans. Commercial loans, like other loans, are evaluated at
the time of approval to determine the adequacy of repayment sources and
collateral requirements. Collateral requirements vary to some degree
among borrowers and depend on the borrower’s financial strength, the terms
and amount of the loan, and collateral available to secure the
loan. Credit risk results from the decreased ability or willingness
to pay by a borrower. Credit risk also results when a liquidation of
collateral occurs and there is a shortfall in collateral value as compared to a
loans outstanding balance. For construction loans, inaccurate initial
estimates of a project’s costs and the property’s completed value could weaken
the Company’s position and lead to the property having a value that is
insufficient to satisfy full payment of the amount of funds advanced for the
property. Secured and unsecured consumer loans generally are made for
automobiles, boats, and other motor vehicles. In most cases loans are
restricted to the subsidiaries' general market area.
Supervision
and Regulation
The
Company and its subsidiaries are subject to comprehensive supervision and
regulation that affect virtually all aspects of their operations. These laws and
regulations are primarily intended to protect depositors and borrowers and, to a
lesser extent, stockholders. Changes in applicable laws, regulations, or in the
policies of banking and other government regulators may have a material adverse
effect on our current or future business. The following summarizes certain of
the more important aspects of the relevant statutory and regulatory
provisions.
Supervisory
Authorities
The
Company is a financial holding company, registered with and regulated by the
Federal Reserve Board (“FRB”). All seven of its subsidiary banks are Kentucky
state-chartered banks. Four of the Company’s subsidiary banks are members of
their regional Federal Reserve Bank. The Company and its subsidiary banks are
subject to supervision, regulation and examination by the Federal Deposit
Insurance Corporation (“FDIC”) and the Kentucky Office of Financial Institutions
(“Kentucky Office”). The regulatory authorities routinely examine the
Company and its subsidiary banks to monitor their compliance with laws and
regulations, financial condition, adequacy of capital and reserves, quality and
documentation of loans, payment of dividends, adequacy of systems and controls,
credit underwriting and asset liability management, and the establishment of
branches. The Company and its subsidiary banks are required to file regular
reports with the FRB, the FDIC and the Kentucky Office, as
applicable.
8
Capital
The FRB,
the FDIC, and the Kentucky Office require the Company and its subsidiary banks
to meet certain ratios of capital to assets in order to conduct their
activities. To be well-capitalized, the institutions must generally maintain a
Total Capital ratio of 10% or greater, a Tier 1 Capital ratio of 6% or greater,
and a leverage ratio of 5% or better. For the purposes of these tests, Tier 1
Capital consists of common equity and related surplus, retained earnings, and a
limited amount of qualifying preferred stock, less goodwill and certain core
deposit intangibles. Tier 2 Capital consists of non-qualifying preferred stock,
certain types of debt and a limited amount of other items. Total Capital is the
sum of Tier 1 and Tier 2 Capital.
In
measuring the adequacy of capital, assets are generally weighted for risk.
Certain assets, such as cash and U.S. government securities, have a zero risk
weighting. Others, such as commercial and consumer loans, have a 100% risk
weighting. Risk weightings are also assigned for off-balance sheet items such as
loan commitments. The various items are multiplied by the appropriate
risk-weighting to determine risk-adjusted assets for the capital calculations.
For the leverage ratio mentioned above, assets are not
risk-weighted.
If the
institution fails to remain well-capitalized, it will be subject to a series of
restrictions that increase as the capital condition worsens. For instance,
federal law generally prohibits a depository institution from making any capital
distribution, including the payment of a dividend or paying any management fee
to its holding company, if the depository institution would be undercapitalized
as a result. Undercapitalized depository institutions may not accept brokered
deposits absent a waiver from the FDIC, are subject to growth limitations and
are required to submit a capital restoration plan for approval, which must be
guaranteed by the institution’s parent holding company. Significantly
undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets, and
cessation of receipt of deposits from correspondent banks. Critically
undercapitalized institutions are subject to the appointment of a receiver or
conservator.
All of
the Company’s subsidiary banks exceed the minimum Tier 1, Total Capital and
leverage ratios and qualify as “well-capitalized” under current regulatory
criteria.
Expansion
and Activity Limitations
With
prior regulatory approval, the Company may acquire other banks or bank holding
companies and its subsidiaries may merge with other banks. Acquisitions of banks
located in other states may be subject to certain deposit-percentage, age or
other restrictions. In addition, as a financial holding company, the Company and
its subsidiaries are permitted to acquire or engage in activities that were not
previously permitted for bank holding companies such as insurance underwriting,
securities underwriting and distribution, travel agency activities, broad
insurance agency activities, merchant banking, and other activities that the FRB
determines to be financial in nature or complementary to these activities. The Company has
subsidiaries that engage in some of these additional activities, including
insurance underwriting and distribution and other activities that are financial
in nature. The FRB normally requires some form of notice or application to
engage in or acquire companies engaged in such activities. Under the Bank
Holding Company Act and Gramm-Leach-Bliley Act, the Company is generally
prohibited from engaging in or acquiring direct or indirect control of more than
5% of the voting shares of any company engaged in activities other than those
referred to above.
Limitations
on Acquisitions of Bank Holding Companies
As a
general proposition, other companies seeking to acquire control of a financial
holding company such as the Company would require the approval of the FRB under
the Bank Holding Company Act. In addition, individuals or groups of individuals
seeking to acquire control of a financial holding company such as the Company
would need to file a prior notice with the FRB (which the FRB may disapprove
under certain circumstances) under the Change in Bank Control Act. Control is
conclusively presumed to exist if an individual or company acquires 25% or more
of any class of voting securities of the bank holding company. Control may exist
under the Change in Bank Control Act if the individual or company acquires 10%
or more of any class of voting securities of the bank holding company and no
shareholder holds a larger percentage of the subject class of voting
securities.
Deposit
Insurance
All of
the Company’s subsidiary banks are members of the FDIC, and their deposits are
insured by the FDIC’s Deposit Insurance Fund up to the amount permitted by law.
The Company’s subsidiary banks are thus subject to FDIC deposit insurance
assessments. The FDIC utilizes a risk-based assessment system that imposes
insurance premiums based upon a risk matrix that takes into account a bank’s
capital level and supervisory rating. Under the Federal Deposit Insurance Reform
Act of 2005, which became law in 2006, the Company received a one-time
assessment credit of $1.2 million that can be applied against future premiums,
subject to certain limitations. Based on the one-time assessment credit, the
Company was not required to pay any deposit insurance premiums in 2006 and
unused credits from 2006 limited the amount of deposit insurance premiums paid
in 2007 to $55 thousand. During 2007, the Company paid $171 thousand in
Financing Corporation (“FICO”) assessments related to outstanding FICO bonds to
the FDIC as collection agent. The FICO is a mixed-ownership government
corporation established by the Competitive Equality Banking Act of 1987 whose
sole purpose was to function as a financing vehicle for the now defunct Federal
Savings & Loan Insurance Corporation.
9
It is
possible that the FDIC could impose assessment rates in the future in connection
with declines in the insurance funds or increases in the amount of insurance
coverage. An increase in the assessment rate could have a material adverse
effect on the Company’s earnings, depending on the amount of the
increase.
Other
Statutes and Regulations
The
Company and its subsidiary banks are subject to a myriad of other statutes and
regulations affecting their activities. Some of the more important
are:
Anti-Money
Laundering.
Financial institutions are required to establish anti-money laundering programs
that must include the development of internal policies, procedures, and
controls; the designation of a compliance officer; an ongoing employee training
program; and an independent audit function to test the performance of the
programs. The Company and its subsidiary banks are also subject to prohibitions
against specified financial transactions and account relationships as well as
enhanced due diligence and “know your customer” standards in their dealings with
foreign financial institutions and foreign customers. Financial
institutions must take reasonable steps to conduct enhanced scrutiny of account
relationships in order to guard against money laundering and to report any
suspicious transactions. Recent laws provide the law enforcement authorities
with increased access to financial information maintained by
banks.
Sections
23A and 23B of the Federal Reserve Act. The Company’s subsidiary
banks are limited in their ability to lend funds or engage in transactions with
the Company or other non-bank affiliates of the Company, and all transactions
must be on an arms’-length basis and on terms at least as favorable to the
subsidiary bank as prevailing at the time for transactions with unaffiliated
companies.
Dividends. The Parent Company’s
principal source of cash flow, including cash flow to pay dividends to its
shareholders, is the dividends that it receives from its subsidiary banks.
Statutory and regulatory limitations apply to the subsidiary banks’ payments of
dividends to the Parent Company as well as to the Parent Company’s payment of
dividends to its shareholders. A depository institution may not pay any dividend
if payment would cause it to become undercapitalized or if it already is
undercapitalized. The federal banking agencies may prevent the payment of a
dividend if they determine that the payment would be an unsafe and unsound
banking practice. Moreover, the federal agencies have issued policy statements
that provide that financial holding companies and insured banks should generally
only pay dividends out of current operating earnings.
Community
Reinvestment Act. The Company’s subsidiary
banks are subject to the provisions of the Community Reinvestment Act of 1977
(“CRA”), as amended, and the federal banking agencies’ related regulations,
stating that all banks have a continuing and affirmative obligation, consistent
with safe and sound operations, to help meet the credit needs for their entire
communities, including low and moderate-income neighborhoods. The CRA requires a
depository institution’s primary federal regulator, in connection with its
examination of the institution or its evaluation of certain regulatory
applications, to assess the institution’s record in assessing and meeting the
credit needs of the community served by that institution, including low and
moderate-income neighborhoods. The regulatory agency’s assessment of the
institution’s record is made available to the public.
Insurance
Regulation. The Company’s subsidiaries that underwrite or sell
insurance products are subject to regulation by the Kentucky Department of
Insurance.
Consumer
Regulation. The activities
of the Company and its bank subsidiaries are subject to a variety of statutes
and regulations designed to protect consumers. These laws and
regulations:
|
|
·
|
limit
the interest and other charges collected or contracted for by all of the
Company’s subsidiary banks;
|
|
|
·
|
govern
disclosures of credit terms to consumer
borrowers;
|
|
|
·
|
require
financial institutions to provide information to enable the public and
public officials to determine whether a financial institution is
fulfilling its obligation to help meet the housing needs of the community
it serves;
|
|
|
·
|
prohibit
discrimination on the basis of race, creed, or other prohibited factors in
extending credit;
|
|
|
·
|
require
all of the Company’s subsidiary banks to safeguard the personal non-public
information of its customers, provide annual notices to consumers
regarding the usage and sharing of such information and limit disclosure
of such information to third parties except under specific circumstances;
and
|
|
|
·
|
govern
the manner in which consumer debts may be collected by collection
agencies.
|
10
The
deposit operations of the Company’s subsidiary banks are also subject to laws
and regulations that:
|
|
·
|
require
disclosure of the interest rate and other terms of consumer deposit
accounts;
|
|
|
·
|
impose
a duty to maintain the confidentiality of consumer financial records and
prescribe procedures for complying with administrative subpoenas of
financial records; and
|
|
·
|
govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services. |
References
under the caption “Supervision and Regulation” to applicable statutes and
regulations are brief summaries of portions thereof which do not purport to be
complete and which are qualified in their entirety by reference
thereto.
Competition
The
Company and its subsidiaries compete for banking business with various types of
businesses other than commercial banks and savings and loan
associations. These include, but are not limited to, credit unions,
mortgage lenders, finance companies, insurance companies, stock and bond
brokers, financial planning firms, and department stores which compete for one
or more lines of banking business. The banks also compete for
commercial and retail business not only with banks in Central and Northern
Kentucky, but with banking organizations from Ohio, Indiana, Tennessee,
Pennsylvania, and North Carolina which have banking subsidiaries located in
Kentucky. These competing businesses may possess greater resources
and offer a greater number of branch locations, higher lending limits, and may
offer other services not provided by the Company. In addition, the Company’s
competitors that are not depository institutions are generally not subject to
the extensive regulations that apply to the Company and its subsidiary banks.
The Company has attempted to offset some of the advantages of its competitors by
arranging participations with other banks for loans above its legal lending
limits, expanding into additional markets and product lines, and entering into
third party arrangements to better compete for its targeted customer
base.
The
Company competes primarily on the basis of quality of services, interest rates
and fees charged on loans, and the rates of interest paid on deposit
funds.
The
business of the Company is not dependent upon any one customer or on a few
customers, and the loss of any one or a few customers would not have a material
adverse effect on the Company.
No
material portion of the business of the Company is seasonal. No material portion
of the business of the Company is subject to renegotiation of profits or
termination of contracts or subcontracts at the election of the government,
though certain contracts are subject to such renegotiation or
termination.
The
Company is not engaged in operations in foreign countries.
Employees
As of
December 31, 2007, the Company and its subsidiaries had 578 full-time equivalent
employees. Employees are provided with a variety of employee benefits. A salary
savings plan, group life insurance, hospitalization, dental, and major medical
insurance along with postretirement health insurance benefits are available to
eligible personnel. Employees are not represented by a union.
Management and employee relations are good.
The
Company maintains a Stock Option Plan (“Plan”) that grants certain eligible
employees the option to purchase a limited number of the Company’s common stock.
The Plan specifies the conditions and terms that the grantee must meet in order
to exercise the options.
In 2004,
the Company’s Board of Directors adopted an Employee Stock Purchase Plan
(“ESPP”). The ESPP was subsequently approved by the Company’s shareholders and
became effective July 1, 2004. Under the ESPP, in the discretion of the Board of
Directors, employees of the Company and its subsidiaries can purchase Company
common stock at a discounted price and without payment of brokerage costs or
other fees and in the process benefit from the favorable tax treatment afforded
such plans pursuant to Section 423 of the Internal Revenue Code.
Available
Information
The
Company makes available, free of charge through its website
(www.farmerscapital.com), its Code of Ethics, its annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
these reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after electronically filing such
material with the SEC.
11
Investing
in the Company’s common stock is subject to risks inherent to the Company’s
business. The material risks and uncertainties that management believes affect
the Company are described below. Before making an investment decision, you
should carefully consider the risks and uncertainties described below together
with all of the other information included or incorporated by reference in this
report. The risks and uncertainties described below are not the only ones facing
the Company. Additional risks and uncertainties that management is not aware of
or focused on or that management currently deems immaterial may also impair the
Company’s business operations. This report is qualified in its entirety by these
risk factors.
If any of
the following risks actually occur, the Company’s financial condition and
results of operations could be materially and adversely affected. If this were
to happen, the market price of the Company’s common stock could decline
significantly, and you could lose all or part of your investment.
Risks
associated with unpredictable economic and political conditions may be amplified
as a result of limited market area
Commercial
banks and other financial institutions are affected by economic and political
conditions, both domestic and international, and by governmental monetary
policies. Conditions such as inflation, value of the dollar, recession,
unemployment, high interest rates, short money supply, scarce natural resources,
international disorders, terrorism and other factors beyond our control may
adversely affect profitability. In addition, almost all of the Company’s primary
business area is located in Central and Northern Kentucky. A significant
downturn in this regional economy may result in, among other things,
deterioration in the Company’s credit quality or a reduced demand for credit and
may harm the financial stability of the Company’s customers. Due to the
Company’s regional market area, these negative conditions may have a more
noticeable effect on the Company than would be experienced by an institution
with a larger, more diverse market area.
The
Company’s status as a holding company makes it dependent on dividends from its
subsidiaries to meet its obligations
The
Company is a financial holding company and conducts almost all of its operations
through its subsidiaries. The Company does not have any significant assets other
than cash, company-owned life insurance and the stock of its subsidiaries.
Accordingly, the Company depends primarily on dividends from its subsidiaries to
meet its obligations and obtain revenue. The Company’s right to participate in
any distribution of earnings or assets of its subsidiaries is subject to the
prior claims of creditors of such subsidiaries. Under federal and state law, the
Company’s bank subsidiaries are limited in the amount of dividends they may pay
to the Company without prior regulatory approval. Also, bank regulators have the
authority to prohibit the subsidiary banks from paying dividends if the bank
regulators determine the payment would be an unsafe and unsound banking
practice.
Interest
rate volatility could significantly harm the Company’s business
The
Company’s results of operations are affected by the monetary and fiscal policies
of the federal government and the regulatory policies of governmental
authorities. A significant component of the Company’s earnings is its net
interest income, which is the difference between the income from
interest-earning assets, such as loans, and the expense of interest-bearing
liabilities, such as deposits. A change in market interest rates could adversely
affect the Company’s earnings if market interest rates change such that the
interest the Company’s subsidiaries pay on deposits and borrowings increases
faster than the interest they collect on loans and investments. Consequently,
the Company, along with other financial institutions generally, is sensitive to
interest rate fluctuations.
The
Company’s results of operations are significantly affected by the ability of its
borrowers to repay their loans
Lending
money is an essential part of the banking business. However, borrowers do not
always repay their loans. The risk of non-payment is affected by:
|
|
·
|
credit
risks of a particular borrower;
|
|
|
·
|
changes
in economic and industry
conditions;
|
|
|
·
|
the
duration of the loan; and
|
|
|
·
|
in
the case of a collateralized loan, uncertainties as to the future value of
the collateral.
|
Due to
the fact that the outstanding principal balances can be larger for commercial
loans than other types of loans, such loans present a greater risk to the
Company than other types of loans when non-payment by a borrower
occurs.
In
addition, consumer loans typically have shorter terms and lower balances with
higher yields compared to real estate mortgage loans, but generally carry higher
risks of frequency of default than real estate mortgage and commercial loans.
Consumer loan collections are dependent on the borrower’s continuing financial
stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount that can be
recovered on these loans.
12
The
Company’s financial condition and results of operations would be adversely
affected if its allowance for loan losses were not sufficient to absorb actual
losses
There is
no precise method of predicting loan losses. The Company can give no assurance
that the allowance for loan losses of its subsidiaries is or will be sufficient
to absorb actual loan losses. Excess loan losses could have a material adverse
effect on the Company’s financial condition and results of operations. Each of
the Company’s subsidiary banks attempts to maintain an appropriate allowance for
loan losses to provide for estimated losses in its loan portfolio, but there are
no guaranties actual future loan losses will not exceed these estimates and
allowances. Each subsidiary bank of the Company periodically determines the
amount of its allowance for loan losses based upon consideration of several
factors, including:
|
|
·
|
a
regular review of the quality, mix and size of the overall loan
portfolio;
|
|
|
·
|
historical
loan loss experience;
|
|
|
·
|
evaluation
of non-performing loans;
|
|
|
·
|
assessment
of economic conditions and their effects on the bank’s existing portfolio;
and
|
|
|
·
|
the
amount and quality of collateral, including guarantees, securing
loans.
|
Combining
a newly acquired bank or other business entity with the Company’s network of
banks may be more difficult, costly or time-consuming than we
expect
The
Company has generally operated newly acquired banks as independent bank
subsidiaries within the network of the Company’s existing banking subsidiaries.
Combining newly acquired banks or other entities within this network usually
involves converting certain data processing functions from their current format,
changing some of the policies and procedures in place, and other integration
issues. It is possible that integration processes could result in the
loss of key employees or disruption of each company’s ongoing business or
inconsistencies in standards, procedures and policies that would adversely
affect the Company’s ability to maintain relationships with clients and
employees or to achieve the anticipated benefits of a merger. If difficulties
with the integration processes occur, we might not achieve the economic benefits
we expect resulting from an acquisition. As with any merger of banking
institutions, there also may be business disruptions that cause a newly acquired
bank to lose customers or cause customers to take their deposits out of the bank
and move their business to other financial institutions.
Inability
to hire or retain certain key professionals, management and staff could
adversely affect our revenues and net income
The
Company relies on key personnel to manage and operate its business, including
major revenue generating functions such as its loan and deposit portfolios. The
loss of key staff may adversely affect the Company’s ability to maintain and
manage these portfolios effectively, which could negatively affect our revenues.
In addition, loss of key personnel could result in increased recruiting and
hiring expenses, which could cause a decrease in our net income.
The
Company’s controls and procedures may fail or be circumvented
The
Company’s management regularly reviews and updates its internal controls,
disclosure controls and procedures, and corporate governance policies and
procedures. Any system of controls, however well-designed and operated, can
provide only reasonable, not absolute, assurances that the objectives of the
system of controls are met. Any failure or circumvention of the Company’s
controls and procedures or failure to comply with regulations related to
controls and procedures could have a material and adverse effect on the
Company’s business, results of operations, and financial condition.
Trading
volume in the Company’s common stock is less than that of other similar
companies
The
Company’s common stock is listed for trading on the NASDAQ Global Select Stock
Market. However, the trading volume of the Company’s common stock is less than
that of other similar companies. An efficient public trading market is dependent
upon the existence in the marketplace of willing buyers and willing sellers of
the Company’s common stock at any given time. This existence depends on
individual decisions of investors and general economic and market conditions
over which the Company has no control. Given the lower trading volume of the
Company’s common stock, larger sales volumes of the Company’s common stock could
cause the value of the Company’s common stock to decrease.
None.
13
The
Company, through its subsidiaries, owns or leases buildings that are used in the
normal course of business. The corporate headquarters is located at 202 W. Main
Street, Frankfort, Kentucky, in a building owned by the Company. The Company’s
subsidiaries own or lease various other offices in the counties and cities in
which they operate. See the Notes to Consolidated Financial
Statements contained in Item 8, Financial Statement and Supplementary Data,
of this Form 10-K for information with respect to the amounts at which bank
premises and equipment are carried and commitments under long-term
leases.
Unless
otherwise indicated, the properties listed below are owned by the Company and
its subsidiaries as of December 31, 2007.
Corporate
Headquarters
202 – 208
W. Main Street, Frankfort, KY
|
Banking
Offices
|
|
125
W. Main Street, Frankfort, KY
|
|
555
Versailles Road, Frankfort, KY
|
|
1401
Louisville Road, Frankfort, KY
|
|
154
Versailles Road, Frankfort, KY
|
|
1301
US 127 South, Frankfort, KY (leased)
|
|
200
E. Main Street, Georgetown, KY
|
|
100
Farmers Bank Drive, Georgetown, KY (leased)
|
|
100
N. Bradford Lane, Georgetown, KY
|
|
3285
Main Street, Stamping Ground, KY
|
|
333
W. Vine Street, Suite 102, Lexington, KY (leased)
|
|
3098
Harrodsburg Road, Lexington, KY (leased)
|
|
100
United Bank Drive, Versailles, KY
|
|
Locust
& Green Streets, Versailles, KY
|
|
206
N. Gratz, Midway, KY
|
|
128
S. Main Street, Lawrenceburg, KY
|
|
West
Park Shopping Center, Lawrenceburg, KY
|
|
838
N. College Street, Harrodsburg, KY
|
|
1035
Ben Ali Drive, Danville, KY (leased)
|
|
425
W. Dixie Avenue, Elizabethtown, KY
|
|
3030
Ring Road, Elizabethtown, KY
|
|
111
Towne Drive (Kroger Store) Elizabethtown, KY (leased)
|
|
232
Redmar Plaza, Radcliff, KY (leased)
|
|
4810
N. Preston Highway, Shepherdsville, KY
|
|
157
Eastbrooke Court, Mt. Washington, KY
|
|
103
Churchill Drive, Newport, KY
|
|
7300
Alexandria Pike, Alexandria, KY
|
|
164
Fairfield Avenue, Bellevue, KY
|
|
8730
US Highway 42, Florence, KY
|
|
34
N. Ft. Thomas Avenue, Ft. Thomas, KY (leased)
|
|
2911
Alexandria Pike, Highland Heights, KY (leased)
|
|
2006
Patriot Way, Independence, KY
|
|
2774
Town Center Blvd., Crestview Hills, KY (leased)
|
|
201
N. Main Street, Nicholasville, KY
|
|
995
S. Main Street (Kroger Store), Nicholasville, KY
(leased)
|
|
986
N. Main Street, Nicholasville, KY
|
|
106
S. Lexington Avenue, Wilmore, KY
|
Data
Processing Center
102
Bypass Plaza, Frankfort, KY
Leasing
One Corporation & Farmers Capital Insurance Corporation
201 W.
Main Street, Frankfort, KY
The
Company considers its properties to be suitable and adequate based on its
present needs.
14
As of
December 31, 2007, there were various pending legal actions and proceedings
against the Company arising from the normal course of business and in which
claims for damages are asserted. Management, after discussion with
legal counsel, believes that these actions are without merit and that the
ultimate liability resulting from these legal actions and proceedings, if any,
will not have a material adverse effect upon the consolidated financial
statements of the Company.
No
matters were submitted during the fourth quarter of the fiscal year covered by
this report to a vote of security holders, through the solicitation of proxies
or otherwise.
PART
II
At
various times, the Company’s Board of Directors has authorized the purchase
shares of the Company’s outstanding common stock. No stated
expiration dates have been established under any of the previous authorizations.
There were no shares of common stock repurchased by the Company during the
quarter ended December 31, 2007. The maximum number of shares that may still be
purchased under previously announced repurchase plans is 128
thousand.
In July
2007, the Company announced a tender offer to purchase for cash up to 550
thousand shares of its outstanding common stock at a price not greater than
$35.00 or less than $31.00 per share through a process commonly known as a
modified “Dutch Auction”. The Company had the right to purchase up to an
additional 2% of the outstanding shares in accordance with applicable securities
laws. Pursuant to the terms of the tender offer, the Company purchased 559
thousand shares of its common stock, which represented 7.1% of the Company’s
issued and outstanding shares on the date of purchase, at a purchase price of
$32.00 per share.
15
Performance
Graph
The
following graph sets forth a comparison of the five-year cumulative total
returns among the shares of Company Common Stock, the NASDAQ Composite Index
("broad market index") and Southeastern Banks under 1 Billion
Market-Capitalization ("peer group index"). Cumulative shareholder return is
computed by dividing the sum of the cumulative amount of dividends for the
measurement period and the difference between the share price at the end and the
beginning of the measurement period by the share price at the beginning of the
measurement period. The broad market index includes over 3,000 domestic and
international based common shares listed on The NASDAQ Stock Market. The peer
group index consists of 45 banking companies in the Southeastern United States.
The Company is among the 45 companies included in the peer group
index.
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
|||||||||||||||||||
|
Farmers
Capital Bank Corporation
|
$ | 100.00 | $ | 106.31 | $ | 133.74 | $ | 103.81 | $ | 122.13 | $ | 101.02 | ||||||||||||
|
NASDAQ
Composite
|
100.00 | 149.75 | 164.64 | 168.60 | 187.83 | 205.22 | ||||||||||||||||||
|
Southeastern
Banks Under 1 Billion Market Capitalization
|
100.00 | 138.82 | 162.94 | 164.43 | 192.13 | 142.34 | ||||||||||||||||||
Corporate
Address
The
headquarters of Farmers Capital Bank Corporation is located at:
202 West
Main Street
Frankfort,
Kentucky 40601
Direct
correspondence to:
Farmers
Capital Bank Corporation
P.O. Box
309
Frankfort,
Kentucky 40602-0309
Phone:
(502) 227-1668
www.farmerscapital.com
16
Annual
Meeting
The
annual meeting of shareholders of Farmers Capital Bank Corporation will be held
Tuesday, May 13, 2008 at 11:00 a.m. at the main office of Farmers Bank &
Capital Trust Co., Frankfort, Kentucky.
Form
10-K
For a
free copy of Farmers Capital Bank Corporation's Annual Report on Form 10-K filed
with the Securities and Exchange Commission, please write:
C.
Douglas Carpenter, Senior Vice President, Secretary, & Chief Financial
Officer
Farmers
Capital Bank Corporation
P.O. Box
309
Frankfort,
Kentucky 40602-0309
Phone: (502)
227-1668
Web
Site Access to Filings
All
reports filed electronically by the Company to the United States Securities and
Exchange Commission, including annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are
available at no cost on the Company’s Web site at www.farmerscapital.com.
|
NASDAQ
Market Makers
|
|
|
J.J.B.
Hilliard, W.L. Lyons, Inc.
|
Morgan,
Keegan and Company
|
|
(502)
588-8400
|
(800)
260-0280
|
|
(800)
444-1854
|
|
UBS
Securities, LLC
|
Howe
Barnes Investments, Inc.
|
|
(859)
269-6900
|
(800)
621-2364
|
|
(502)
589-4000
|
The
Transfer Agent and Registrar for Farmers Capital Bank Corporation is American
Stock Transfer & Trust Company.
American
Stock Transfer & Trust Company
Shareholder
Relations
59 Maiden
Lane - Plaza Level
New York,
NY 10038
PH: (800)
937-5449
Fax:
(718) 236-2641
Email:
Info@amstock.com
Website:
www.amstock.com
Additional
information is set forth under the captions “Shareholder Information” and “Stock Prices” on page 40 under Part II, Item 7 and Note 18 “Regulatory Matters”, in the notes to the
Company's 2007 audited consolidated financial statements on pages 70 and 71 of
this Form 10-K and is hereby incorporated by reference.
17
|
Selected
Financial Highlights
|
||||||||||||||||||||
|
December
31,
(In
thousands, except per share data)
|
2007
|
2006 | 3 |
2005
|
2004
|
2003
|
||||||||||||||
|
Results
of Operations
|
||||||||||||||||||||
|
Interest
income
|
$ | 114,257 | $ | 92,340 | $ | 65,651 | $ | 55,296 | $ | 52,218 | ||||||||||
|
Interest
expense
|
56,039 | 41,432 | 24,409 | 16,729 | 17,565 | |||||||||||||||
|
Net
interest income
|
58,218 | 50,908 | 41,242 | 38,567 | 34,653 | |||||||||||||||
|
Provision
for loan losses
|
3,638 | 965 | 622 | 856 | 1,895 | |||||||||||||||
|
Noninterest
income
|
24,157 | 20,459 | 19,867 | 17,164 | 17,179 | |||||||||||||||
|
Noninterest
expense
|
58,823 | 53,377 | 42,164 | 38,812 | 34,555 | |||||||||||||||
|
Income
from continuing operations
|
15,627 | 13,665 | 14,532 | 13,064 | 12,267 | |||||||||||||||
|
Income
from discontinued operations1
|
7,707 | 1,240 | 328 | 696 | ||||||||||||||||
|
Net
income
|
15,627 | 21,372 | 15,772 | 13,392 | 12,963 | |||||||||||||||
|
Per
Share Data
|
||||||||||||||||||||
|
Basic:
|
||||||||||||||||||||
|
Income
from continuing operations
|
$ | 2.03 | $ | 1.82 | $ | 2.13 | $ | 1.94 | $ | 1.82 | ||||||||||
|
Net
income
|
2.03 | 2.85 | 2.31 | 1.99 | 1.93 | |||||||||||||||
|
Diluted:
|
||||||||||||||||||||
|
Income
from continuing operations
|
2.03 | 1.82 | 2.12 | 1.93 | 1.81 | |||||||||||||||
|
Net
income
|
2.03 | 2.84 | 2.30 | 1.98 | 1.92 | |||||||||||||||
|
Cash
dividends declared
|
1.32 | 1.43 | 1.32 | 1.32 | 1.29 | |||||||||||||||
|
Book
value
|
22.82 | 22.43 | 20.87 | 19.38 | 18.83 | |||||||||||||||
|
Selected
Ratios
|
||||||||||||||||||||
|
Percentage
of income from continuing operations to:
|
||||||||||||||||||||
|
Average
shareholders’ equity (ROE)
|
8.88 | % | 8.49 | % | 10.81 | % | 10.21 | % | 9.83 | % | ||||||||||
|
Average
total assets2
(ROA)
|
.83 | .85 | 1.10 | 1.07 | 1.07 | |||||||||||||||
|
Percentage
of dividends declared to income from continuing operations
|
64.52 | 78.89 | 61.67 | 68.10 | 70.70 | |||||||||||||||
|
Percentage
of average shareholders’ equity to average total assets2
|
9.33 | 10.04 | 10.19 | 10.45 | 10.88 | |||||||||||||||
|
Total
shareholders’ equity
|
$ | 168,491 | $ | 177,063 | $ | 154,236 | $ | 131,450 | $ | 126,471 | ||||||||||
|
Total
assets
|
2,068,247 | 1,825,108 | 1,673,943 | 1,399,896 | 1,324,341 | |||||||||||||||
|
Long-term
debt
|
316,309 | 87,992 | 75,291 | 51,265 | 53,932 | |||||||||||||||
|
Weighted
Average Shares Outstanding
|
||||||||||||||||||||
|
Basic
|
7,706 | 7,511 | 6,831 | 6,737 | 6,727 | |||||||||||||||
|
Diluted
|
7,706 | 7,526 | 6,864 | 6,780 | 6,770 | |||||||||||||||
1Includes
gain on disposals of $6,417 during 2006.
2Excludes
assets of discontinued operations.
3Certain balance sheet amounts and
related ratios have been revised for 2006. Please refer to Note
1 in the notes to the Company’s audited consolidated financial statements
contained in this Form 10-K.
18
Glossary
of Financial Terms
Allowance
for loan losses
A
valuation allowance to offset credit losses specifically identified in the loan
portfolio, as well as management’s best estimate of probable losses in the
remainder of the portfolio at the balance sheet date. Management
estimates the allowance balance required using past loan loss experience, an
assessment of the financial condition of individual borrowers, a determination
of the value and adequacy of underlying collateral, the condition of the local
economy, an analysis of the levels and trends of the loan portfolio, and a
review of delinquent and classified loans. Actual losses could differ
significantly from the amounts estimated by management.
Dividend
payout
Cash
dividends paid on common shares, divided by net income.
Basis
points
Each
basis point is equal to one hundredth of one percent. Basis points
are calculated by multiplying percentage points times 100. For
example: 3.7 percentage points equals 370 basis points.
Interest
rate sensitivity
The
relationship between interest sensitive earning assets and interest bearing
liabilities.
Net
charge-offs
The
amount of total loans charged off net of recoveries of loans that have been
previously charged off.
Net
interest income
Total
interest income less total interest expense.
Net
interest margin
Taxable
equivalent net interest income expressed as a percentage of average earning
assets.
Net
interest spread
The
difference between the taxable equivalent yield on earning assets and the rate
paid on interest bearing funds.
Other
real estate owned
Real
estate not used for banking purposes. For example, real estate acquired through
foreclosure.
Provision
for loan losses
The
charge against current income needed to maintain an adequate allowance for loan
losses.
Return
on average assets (ROA)
Net
income divided by average total assets. Measures the relative profitability of
the resources utilized by the Company.
Return
on average equity (ROE)
Net
income divided by average shareholders’ equity. Measures the relative
profitability of the shareholders' investment in the Company.
Tax
equivalent basis (TE)
Income
from tax-exempt loans and investment securities have been increased by an amount
equivalent to the taxes that would have been paid if this income were taxable at
statutory rates. In order to provide comparisons of yields and margins for all
earning assets, the interest income earned on tax-exempt assets is increased to
make them fully equivalent to other taxable interest income
investments.
Weighted
average number of common shares outstanding
The
number of shares determined by relating (a) the portion of time within a
reporting period that common shares have been outstanding to (b) the total time
in that period.
19
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following pages present management’s discussion and analysis of the consolidated
financial condition and results of operations of Farmers Capital Bank
Corporation (the “Company”), a financial holding company, and its bank and
nonbank subsidiaries. Bank subsidiaries include Farmers Bank & Capital Trust
Co. (“Farmers Bank”) in Frankfort, KY and its significant wholly-owned
subsidiaries Leasing One Corporation (“Leasing One”) and Farmers Capital
Insurance Corporation (“Farmers Insurance”). Leasing One is a commercial leasing
company in Frankfort, KY and Farmers Insurance is an insurance agency in
Frankfort, KY; Farmers Bank and Trust Company in Georgetown, KY (“Farmers
Georgetown”) and its formerly wholly-owned subsidiary Pro Mortgage Partners, LLC
(“Pro Mortgage”), a mortgage brokerage company that was merged into Farmers
Georgetown at year-end 2007; First Citizens Bank in Elizabethtown, KY (“First
Citizens”); United Bank & Trust Co. in Versailles, KY; The Lawrenceburg Bank
and Trust Company in Harrodsburg, KY; Kentucky Banking Centers, Inc. in Glasgow,
KY (“KBC”), which was sold during 2006; Citizens Bank of Northern Kentucky, Inc.
in Newport, KY (“Citizens Northern”); and Citizens Bank of Jessamine County in
Nicholasville, KY (“Citizens Jessamine”) acquired on October 1, 2006. The
Company has three active nonbank subsidiaries, FCB Services, Inc. (“FCB
Services”), Kentucky General Holdings, LLC (“Kentucky General”), and FFKT
Insurance Services, Inc. (“FFKT Insurance”). FCB Services is a data processing
subsidiary located in Frankfort, KY, which provides services to the Company’s
banks as well as unaffiliated entities. Kentucky General holds a 50% voting
interest in KHL Holdings, LLC, which is the parent company of Kentucky Home Life
Insurance Company. FFKT Insurance is a captive property and casualty insurance
company insuring primarily deductible exposures and uncovered liability related
to properties of the Company. In addition, the Company has three subsidiaries
organized as Delaware statutory trusts that are not consolidated into its
financial statements. These trusts were formed for the purpose of issuing trust
preferred securities. For a complete list of the Company’s subsidiaries, please
refer to the discussion under the heading “Organization” included in Part 1,
Item 1 of this Form 10-K. The following discussion should be read in conjunction
with the audited consolidated financial statements and related Notes that
follow.
This
report contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involve risks and
uncertainties. In general, forward-looking statements relate to a
discussion of future financial results or projections, future economic
performance, future operational plans and objectives, and statements regarding
the underlying assumptions of such statements. Although the Company
believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
included herein will prove to be accurate. Factors that could cause actual
results to differ from the results discussed in the forward-looking statements
include, but are not limited to: economic conditions (both generally and more
specifically in the markets in which the Company and its subsidiaries operate)
and lower interest margins; competition for the Company’s customers from other
providers of financial services; deposit outflows or reduced demand for
financial services and loan products; government legislation, regulation, and
changes in monetary and fiscal policies (which changes from time to time and
over which the Company has no control); changes in interest rates; changes in
prepayment speeds; inflation; material unforeseen changes in the liquidity,
results of operations, or financial condition of the Company’s customers;
changes in the level of non-performing assets and charge-offs; changes in the
number of common shares outstanding; the capability of the Company to
successfully enter into a definitive agreement for and close anticipated
transactions; the possibility that acquired entities may not perform as well as
expected; unexpected claims or litigation against the Company; technological or
operational difficulties; the impact of new accounting pronouncements and
changes in policies and practices that may be adopted by regulatory agencies;
acts of war or terrorism; and other risks or uncertainties detailed in the
Company’s filings with the Securities and Exchange Commission, all of which are
difficult to predict and many of which are beyond the control of the
Company. The Company expressly disclaims any intent or obligation to
update any forward-looking statements after the date hereof to conform such
statements to actual results or to changes in the Company’s opinions or
expectations.
Discontinued
Operations
In June
2006, the Company announced that it had entered into a definitive agreement to
sell KBC, its former wholly-owned subsidiary based in Glasgow,
Kentucky. In addition, Farmers Georgetown entered into a definitive
agreement during August 2006 to sell its Owingsville and Sharpsburg branches in
Bath County (the “Branches”). These sales were completed during the
fourth quarter of 2006. All prior period results included herein have been
reclassified to conform to the current presentation which displays the operating
results of KBC and the Branches as discontinued operations. These
reclassifications had no effect on net income or shareholders’ equity. Unless otherwise noted, this
Management’s Discussion
and Analysis of Financial Condition and Results of Operations relate only to the
Company’s continuing operations.
The
majority of the Company’s current operations are located in and around the
larger population areas of Central and Northern Kentucky. The decision to sell
KBC and the Branches allows the Company to focus its resources on geographical
areas it has determined to have the highest potential, including new and
existing markets.
20
Application
of Critical Accounting Policies
The
Company’s audited consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
and follow general practices applicable to the banking industry. Application of
these principles requires management to make estimates, assumptions, and
judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. These estimates, assumptions, and judgments are based on information
available as of the date of the financial statements; accordingly, as this
information changes, the financial statements could reflect different estimates,
assumptions, and judgments. Certain policies inherently have a greater reliance
on the use of estimates, assumptions, and judgments and as such have a greater
possibility of producing results that could be materially different than
originally reported. Estimates, assumptions, and judgments are necessary when
assets and liabilities are required to be recorded at fair value, when a decline
in the value of an asset warrants an impairment write-down or valuation reserve
to be established, or when an asset or liability needs to be recorded contingent
upon a future event. Carrying assets and liabilities at fair value inherently
results in more financial statement volatility. The fair values and the
information used to record valuation adjustments for certain assets and
liabilities are based either on quoted market prices or are provided by other
third-party sources, when available. When third-party information is not
available, valuation adjustments are estimated in good faith by management
primarily through the use of internal cash flow modeling
techniques.
The most
significant accounting policies followed by the Company are presented in Note 1
of the Company’s 2007 audited consolidated financial statements. These policies,
along with the disclosures presented in the other financial statement notes and
in this management’s discussion and analysis of financial condition and results
of operations, provide information on how significant assets and liabilities are
valued in the financial statements and how those values are determined. Based on
the valuation techniques used and the sensitivity of financial statement amounts
to the methods, assumptions, and estimates underlying those amounts, management
has identified the determination of the allowance for loan losses and accounting
for business acquisitions to be the accounting areas that requires the most
subjective or complex judgments, and as such could be most subject to revision
as new information becomes available.
The
allowance for loan losses represents credit losses specifically identified in
the loan portfolio, as well as management's estimate of probable credit losses
in the loan portfolio at the balance sheet date. Determining the amount of the
allowance for loan losses and the related provision for loan losses is
considered a critical accounting estimate because it requires significant
judgment and the use of estimates related to the amount and timing of expected
future cash flows on impaired loans, estimated losses on pools of homogeneous
loans based on historical loss experience, and consideration of current economic
trends and conditions, all of which may be susceptible to significant change.
The loan portfolio also represents the largest asset group on the consolidated
balance sheets. Additional information related to the allowance for loan losses
that describes the methodology and risk factors can be found under the captions
“Asset Quality” and “Nonperforming Assets” in this management’s discussion and
analysis of financial condition and results of operation, as well as Notes 1 and
5 of the Company’s 2007 audited consolidated financial statements.
The
Company accounts for business acquisitions as purchases in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 141, whereby the
purchase price is allocated to the tangible and intangible assets acquired and
liabilities assumed based on their estimated fair value. The excess of the
purchase price over estimated fair value of the net identifiable assets is
allocated to goodwill. The Company engages third-party appraisal firms to assist
in determining the fair values of certain assets acquired and liabilities
assumed. Determining fair value of assets and liabilities requires many
assumptions and estimates. These estimates and assumptions are sometimes refined
subsequent to the initial recording of the transaction with adjustments to
goodwill as information is gathered and final appraisals are completed. The
changes in these estimates could impact the amount of tangible and intangible
assets (including goodwill) and liabilities ultimately recorded on the Company’s
balance sheet as a result of an acquisition, and could impact the Company’s
operating results subsequent to such acquisition. The Company believes that its
estimates have been materially accurate in the past.
EXECUTIVE
LEVEL OVERVIEW
The
Company offers a variety of financial products and services at its 36 banking
locations in 23 communities throughout Central and Northern Kentucky. The most
significant products and services include consumer and commercial lending and
leasing, receiving deposits, providing trust services, and offering other
traditional banking products and services. The primary goals of the Company are
to continually improve profitability and shareholder value, maintain a strong
capital position, provide excellent service to our customers through our
community banking structure, and to provide a challenging and rewarding work
environment for our employees.
The
Company generates a significant amount of its revenue, cash flows, and net
income from interest income and net interest income,
respectively. Interest income is generated by earnings on the
Company’s earning assets, primarily loans and investment
securities. Net interest income is the excess of the interest income
earned on earning assets over the interest expense paid on amounts borrowed to
21
support
those earning assets. Interest expense is paid primarily on deposit
accounts and other short and long-term borrowing arrangements. The
ability to properly manage net interest income under changing market
environments is crucial to the success of the Company.
In
assessing the Company’s financial performance in this report, the following
items of note should be considered:
|
|
·
|
During
2007, the general trend of the interest rate environment has been sharply
lower, particularly with short-term rates. In the final half of 2007, the
Federal Reserve Board (“Fed”) lowered the short-term federal funds rate by
a total of 100 basis points and at year-end 2007 the rate was 4.25%. The
prime interest rate, which significantly impacts the Company’s loan
portfolio and certain deposits, declined in a similar
manner. Yields on U.S. Treasury obligations, which impact the
value of bond investments and certain funding sources, have declined
throughout all maturity periods in the year-end comparison. On shorter
term obligations, the yield on the one-year Treasury bill is down 166
basis points at year-end 2007 compared to a year earlier. For intermediate
term maturities, the three, five, and ten year notes have fallen 167, 125,
and 67 basis points in yield, respectively. The yield on the 20-year bond
is down 41 basis points and the 30-year bond is down 36 basis points. The
effect of lower market rates did have a negative impact on the Company’s
net interest spread and margin during 2007; however, the Company has yet
to absorb the full impact due to the timing of market interest rate
changes and the repricing characteristics of the Company’s interest
sensitive assets and liabilities. The Company expects further margin
compression during 2008.
|
Action by
the Fed to lower rates during 2007 coincides with a decline in many economic
data, particularly as it relates to the housing market, and the resulting
general tightening of credit conditions in the broader economy. In January 2008,
the Fed took further action by lowering the federal funds rate by an additional
125 basis points, including 75 basis points in advance of its normally scheduled
meeting of the Federal Open Market Committee. This action was taken a result of
the heightened concerns over a weakening economic outlook and increasing
downside risk to growth, as broader financial market conditions have
deteriorated and credit has tightened for many businesses and households.
Additionally, market data currently indicates a deepening of the housing
contraction as well as some softening in labor markets.
|
|
·
|
The
Company had a sharp increase in the provision for loan losses in the
fourth quarter of 2007, which is reflective of higher levels of
nonperforming loans, primarily nonaccrual loans. Nonperforming loans were
$21.1 million at December 31, 2007 compared to $12.4 million and $4.3
million at September 30, 2007 and December 31, 2006, respectively. A
significant amount of the increase in nonperforming loans during the
fourth quarter of 2007 compared to the third quarter of 2007 and the prior
year-end is limited to a relatively small number of larger-balance
credits. Although the Company believes that loan demand and credit quality
overall remains healthy, the real estate development segment of the
Company’s portfolio began to show deteriorating conditions, including a
slowdown in demand, in certain parts of its banking market in the fourth
quarter of 2007.
|
|
|
·
|
During
the fourth quarter of 2007, the Company entered into a balance sheet
leverage transaction to enhance earnings. The Company borrowed
approximately $200 million in multiple fixed rate repurchase agreements
and used
the proceeds to purchase a like amount of fixed rate Government National
Mortgage Association (“GNMA”) bonds. The leverage transaction added $423
thousand to net interest income during the fourth quarter of
2007.
|
|
|
·
|
During
the third quarter of 2007 the Company purchased 559 thousand shares of its
outstanding common stock at a price of $17.9 million or $32.00 per share
through a process commonly known as a modified “Dutch
Auction”. The number of shares purchased represented 7.1% of
the shares issued and outstanding on the date of
purchase.
|
As part
of the repurchase program, the Company issued trust preferred securities to
finance the cost of the shares purchased. Capital from the proceeds of trust
preferred securities is included in the Company’s regulatory capital base,
subject to certain limitations, and allows the Company to maintain its
historically strong, “well-capitalized” regulatory rating. Excess funds raised
from the trust preferred securities transaction that remained available
following the tender offer were used for general corporate
purposes.
|
|
·
|
In
January 2007, First Citizens completed its transaction to acquire the
Military Allotment operation of PNC Bank, National Association in a cash
transaction. First Citizens acquired intangible assets in the form of a
customer list and goodwill. It also recorded a core deposit intangible in
connection with receiving approximately $10.8 million in deposits from PNC
in the transaction. First Citizens merged the acquired Military Allotment
operation into its existing allotment operations, which specializes in the
processing of federal benefit payments and military allotments. The
purchase added $3.3 million in noninterest income for the year and $887
thousand in amortization expense related to the intangible assets
acquired.
|
|
|
·
|
During
the fourth quarter of 2006 the Company sold KBC and the Bath County
branches of its Farmers Georgetown bank subsidiary. The Company recorded a
pretax gain on these sales of $9.8 million. The impact from these sales,
which has been classified as discontinued operations, was a decrease in
net loans and deposits of $88.6 million and $146 million,
respectively.
|
22
RESULTS
OF OPERATIONS
Income
from continuing operations was $15.6 million for the twelve months ended
December 31, 2007, an increase of $2.0 million or 14.4% compared to $13.7
million reported for the twelve months ended December 31, 2006. Basic
and diluted income per share from continuing operations was $2.03 for the
current twelve months, an increase of $.21 or 11.5% compared to $1.82 a year
earlier.
Net
income was $15.6 million for the twelve months ended December 31, 2007, a
decrease of $5.7 million or 26.9% compared to $21.4 million reported for the
same period in 2006. Basic and diluted net income per share was $2.03 for the
current twelve months, a decrease of $.82 or 28.8% (basic) and $.81 or 28.5%
(diluted) as compared to $2.85 and $2.84, respectively, a year
earlier.
In June
2006, the Company announced that it had entered into a definitive agreement to
sell its former wholly-owned subsidiary, KBC. During the third
quarter of 2006, the Company also committed to a plan of sale of the Bath County
branches of its wholly-owned subsidiary Farmers Georgetown. Both
sales closed during the fourth quarter of 2006.
Net
interest income, the most significant component of the Company’s earnings, grew
$7.3 million or 14.4% in 2007 compared to a year earlier. The Citizens Jessamine
acquisition that occurred during the fourth quarter of 2006 was a key driver of
the current-year increase in net interest income.
The
decrease in net income in the current year was driven primarily by the impact of
prior-year discontinued operations and higher provisions for loan losses in the
current year. Income from discontinued operations was $7.7 million in the prior
year, including a net gain on disposals of $6.4 million recorded in the fourth
quarter of 2006. There was no comparable amount during 2007 since the
discontinued operations were disposed of in 2006. The provision for loan losses
was $3.6 million in 2007, an increase of $2.7 million compared to
2006.
A sharp
increase in the provision for loan losses occurred in the fourth quarter of 2007
and is reflective of higher levels of nonperforming loans, primarily nonaccrual
loans. Nonperforming loans were $21.1 million at December 31, 2007 compared to
$12.4 million and $4.3 million at September 30, 2007 and December 31, 2006,
respectively. A significant amount of
the increase in nonperforming loans in the fourth quarter of 2007 compared to
the third quarter of 2007 and the prior year-end is limited to a relatively
small number of larger-balance credits. The $8.7 million increase in
nonperforming loans at December 31, 2007 compared to September 30, 2007 is
attributed almost entirely to two larger-balance nonaccrual real estate
development credits. In the annual comparison, $15.9 million of the $16.7
million increase in nonperforming loans was driven by seven individual
larger-balance nonaccrual credits, substantially all of which is secured by real
estate. Although the Company believes that loan demand and credit quality
overall remains healthy, the real estate development segment of the Company’s
portfolio began to show deteriorating conditions, including a slowdown in
demand, in certain parts of its banking market in the fourth
quarter.
The
allowance for loan losses was $14.2 million at December 31, 2007. As a
percentage of net loans outstanding, the allowance for loan losses was 1.10% at
year-end 2007 compared to .91% at September 30, 2007 and 1.00% at December 31,
2006. Net charge-offs for 2007 were $1.4 million, up $320 thousand or 29.1%;
however, they remain near recent historical lows for the Company. Net
charge-offs as a percentage of average net loans outstanding were .11% for the
year ended December 31, 2007 compared to .10% at year-end 2006.
Noninterest
income was $24.2 million in 2007, an increase of $3.7 million or 18.1% compared
to a year earlier. The acquisition of Citizens Jessamine accounted for an
additional $1.1 million due to the timing of the transaction since there was
only three months of operations included in the prior year. Similarly, the
acquisition of the Military Allotment operations of PNC Bank, National
Association accounted for an additional $3.3 million of noninterest income
during 2007 since the acquisition occurred in January of 2007. The increase in
fee income in the current twelve months from these acquisitions was the major
factor that offset revenue declines in other line items from previously existing
operations.
Noninterest
expenses were $58.8 million in 2007, an increase of $5.4 million or 10.2%
compared to $53.4 million in the prior year. An increase in noninterest expenses
during 2007 was led by higher personnel costs of $2.4 million or 8.4%, increased
amortization expense of $1.4 million or 67.3%, and higher occupancy costs of
$597 thousand or 16.3%. The acquisitions of Citizens Jessamine and the Military
Allotment operations along with other business growth efforts were key drivers
of the higher noninterest expenses in the current year.
Income
from discontinued operations was $7.7 million or $1.02 per share (diluted) for
the twelve-month period ended December 31, 2006. There were no discontinued
operations in the current-year since all discontinued operations were disposed
of during the fourth quarter of 2006.
The
return on assets (“ROA”) was .83% in 2007, a decrease of 2 basis points from
..85% for the prior year-end. Net interest margin and the provision for loan
losses contributed 11 basis points and 13 basis points, respectively to lower
ROA in the comparison. These
23
negative
effects were partially offset by 22 basis points lower noninterest expenses as a
percentage of average assets. The return on equity (“ROE”) increased 39
basis points to 8.88% compared to 8.49% in the prior year. The higher ROE is a
result of the $2.0 million or 14.4% increase in income from continuing
operations, which grew at a higher pace than the increase in average equity
capital of $15.0 million or 9.3%.
Interest
Income
Interest
income results from interest earned on earning assets, which primarily include
loans and investment securities. Interest income is affected by volume (average
balance), composition of earning assets, and the related rates earned on those
assets. Total interest income for 2007 was $114 million, an increase of $21.9
million or 23.7% from the previous year. The increase in interest income is
mainly a result of increased interest on loans of $17.6 million or 22.8%.
Interest income on loans increased as a result of higher average loan balances
outstanding resulting from the Citizens Jessamine acquisition, higher internally
generated loan growth, and a 25 basis point increase in the average rate earned
on loans. The Citizens Jessamine acquisition accounted for $7.4 million or 41.9%
of the increased interest income on loans in the comparison. The
Company’s tax equivalent yield on earning assets for the current year was 7.0%,
an increase of 34 basis points compared to 6.7% the same period a year
ago.
Interest
and fees on loans was $94.9 million, an increase of $17.6 million or 22.8%
compared to $77.3 million a year earlier. Average loans increased $199 million
or 19.0% to $1.3 billion in the comparison, helped by $93.7 million additional
average loan balances outstanding from the Citizens Jessamine acquisition and
higher loan demand at our pre-existing bank subsidiaries in what remains a
relatively low rate environment. A higher average rate earned on loans also
contributed to the rise in interest income. New loans and variable rate loans
repricing during the current year have generally
repriced higher as the average interest rate earned has edged upward. The
tax equivalent yield on loans increased 25 basis points to 7.7% from 7.4% in the
year-to-year comparison.
Interest
on taxable securities was $12.6 million, an increase of $3.6 million or 39.9%
due to an increase in volume and the average rate earned. Volume rose to $253
million, an increase of $41.1 million or 19.3% compared to the previous year due
in part to the $200 million balance sheet leverage transaction that took place
during the fourth quarter of 2007. The average rate earned on taxable securities
increased 73 basis points to 5.0% from 4.3%. Taxable equivalent interest on
nontaxable securities decreased $301 thousand or 8.2% due to both volume and
rate declines. The average rate (TE) earned during 2007 on nontaxable securities
was 5.4%, a decrease of 35 basis points from 5.8% in 2006. The average balance
outstanding dropped to $88.5 million compared to $91.4 million in 2006. Interest
on short-term investments, including time deposits in other banks, federal funds
sold, and securities purchased under agreements to resell, increased $978
thousand or 41.5% due to an increase in the average rate earned of 98 basis
points combined with a $7.7 million or 12.3% increase in volume.
Interest
Expense
Interest
expense results from incurring interest on interest bearing liabilities, which
primarily include interest bearing deposits, federal funds purchased, securities
sold under agreements to repurchase, and other short and long-term borrowed
funds. Interest expense is affected by volume, composition of interest bearing
liabilities, and the related rates paid on those liabilities. Total interest
expense was $56.0 million for 2007, an increase of $14.6 million or 35.3% from
the prior year. Interest expense increased mainly as a result of higher interest
expense on deposits of $12.6 million or 38.7% and was mainly driven by
additional volume of $192 million or 18.1%. Interest expense on deposits
increased as a result of higher deposit balances outstanding from the Citizens
Jessamine acquisition, higher deposits generated internally, and higher rates
paid on interest bearing deposits throughout most of the deposit
portfolio. The Citizens Jessamine acquisition accounted for an
additional $91.1 million in average interest bearing deposits outstanding. The
Company’s cost of funds was 3.8% for 2007, an increase of 44 basis points from
3.4% for the prior year. The increase in cost of funds was led by a
68 basis point increase in time deposits.
Interest
expense on time deposits, the largest component of total interest expense,
increased $11.8 million or 48.6% to $36.2 million. The increase is due to both a
$162 million or 27.6% increase in volume combined with a 68 basis point increase
in the average rate paid to 4.8% from 4.2%. The increase in average
time deposits outstanding in the comparable periods was boosted by an additional
$55.6 million of time deposits related to the Citizens Jessamine acquisition
along with additional time deposits generated internally in order to fund
additional loan growth. The increase in the average rate paid is due to
competitive market conditions, the need to attract additional deposits to
support asset growth, and the relocation or opening of branch sites in existing
or new markets.
Interest
expense on interest bearing demand deposits in 2007 was $3.7 million, a decrease
of $90 thousand or 2.4% compared to $3.8 million a year ago. The lower expense
is attributed to a slight decline in both the average rate paid of three basis
points and volume of $1.4 million. Interest expense on savings deposits was $5.3
million, an increase of $862 thousand or 19.4% from $4.4 million in 2006. The
higher interest expense on savings deposits is mainly volume related, but an
increase in the average rate paid also contributed to the increase in interest
expense. The average outstanding balance of savings deposits was up $31.4
million or 14.7% to $244 million; the rate increased 9 basis points to 2.2% from
2.1% a year earlier. Average volume of savings deposits were up primarily due to
the Citizens Jessamine acquisition, which added $30.2 million in average savings
deposits in the comparison.
24
Interest
expense on federal funds purchased and other short-term borrowings declined $172
thousand or 3.7% due mainly to a lower average rate paid of 17 basis points.
Interest expense on securities sold under agreements to repurchase and other
long-term borrowings was $6.4 million for 2007, an increase of $2.2 million or
51.8% and is volume related. Average long-term borrowings increased $47.8
million during 2007 as a result of the $200 million balance sheet leverage
transaction during the fourth quarter and additional borrowings of $23.2 million
to fund the Company’s share buy-back program via a modified Dutch Auction during
the third quarter.
Net
Interest Income
Net
interest income is the most significant component of the Company’s earnings. Net
interest income is the excess of the interest income earned on earning assets
over the interest paid for funds to support those assets. The two most common
metrics used to analyze net interest income are net interest spread and net
interest margin. Net interest spread represents the difference
between the yields on earning assets and the rates paid on interest bearing
liabilities. Net interest margin represents the percentage of net
interest income to average earning assets. Net interest margin will
exceed net interest spread because of the existence of noninterest bearing
sources of funds, principally demand deposits and shareholders’ equity, which
are also available to fund earning assets. Changes in net interest
income and margin result from the interaction between the volume and the
composition of earning assets, their related yields, and the associated cost and
composition of the interest bearing liabilities. Accordingly, portfolio size,
composition, and the related yields earned and the average rates paid can have a
significant impact on net interest spread and margin. The table on the following
page represents the major components of interest earning assets and interest
bearing liabilities on a tax equivalent basis. To compare the
tax-exempt asset yields to taxable yields, amounts are adjusted to pretax
equivalents based on the marginal corporate Federal tax rate of
35%.
Tax
equivalent net interest income was $60.5 million for 2007, an increase of $7.5
million or 14.1% compared to $53.1 million in 2006. The net interest margin was
3.6%, a decrease of 11 basis points from 3.8% in the prior year. Net interest
spread declined 10 basis points to 3.2% from 3.3% a year earlier. The impact of
noninterest bearing sources of funds negatively impacted net interest margin by
one basis point in the comparison. The effect of noninterest bearing
sources of funds on net interest margin typically increases as the average cost
of funds rises. However, this relationship was negated because of the Company’s
lower net interest position during 2007 compared to 2006. Net interest position
is a measure that indicates the amount of earning assets that are funded by
noninterest bearing sources of funds.
During
2007, the Company’s tax equivalent yield on total earning assets was 7.0%, up 34
basis points from 6.7% for 2006. The cost of funds was 3.8%, up 44 basis points
compared to 3.4% for 2006. This resulted in a net interest spread of 3.2% and
3.3% for year-ends 2007 and 2006 as indicated above. Although the increase in
yield on earning assets was lower than the increase in the cost of funds, net
interest income increased because the amount of earning assets is much larger
than the amount of interest bearing liabilities.
The
Company remains proactive in management of the rate sensitive components of both
its assets and liabilities. This task continues to be challenging due to intense
market competition and the effects of a dynamic interest rate environment, that
is, however, still relatively low in historical terms. The Fed increased the
short-term federal funds rate eight separate times by a total of 200 basis
points in 2005 and an additional four times totaling 100 basis points in 2006.
Between September, 2007 and year-end 2007, the Fed lowered the federal funds
rate 100 basis points in the wake of weakening economic data and tightening
credit markets. The lowering trend continued into early 2008, with additional
rate cuts of 125 basis points in January.
The prime
interest rate, which has a significant impact on the Company’s interest income
on loans, moved in a similar manner to that of the federal funds rate.
Predicting the movement of future interest rates is uncertain. During 2007, the
average rates on the two most significant components of net interest income for
the Company, loans and time deposits, both increased as the impact of market
interest rate declines have yet to fully be realized in the Company’s loan and
deposit portfolio. Should interest rates on the Company’s earning assets and
interest paying liabilities reprice lower, the Company’s yield on earning assets
could potentially decrease faster than its cost of funds. Should interest rates
reprice higher, the Company’s cost of funds may also increase and could continue
to increase faster than the yields on earning assets, resulting in a smaller net
interest margin.
25
Distribution
of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest
Differential
|
Years
Ended December 31,
|
2007
|
2006
|
2005
|
|||||||||||||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||||||||||||
|
(In
thousands)
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
|||||||||||||||||||||||||||
|
Earning
Assets
|
||||||||||||||||||||||||||||||||||||
|
Investment
securities
|
||||||||||||||||||||||||||||||||||||
|
Taxable
|
$ | 253,423 | $ | 12,627 | 4.98 | % | $ | 212,357 | $ | 9,025 | 4.25 | % | $ | 208,967 | $ | 7,483 | 3.58 | % | ||||||||||||||||||
|
Nontaxable1
|
88,501 | 4,794 | 5.42 | 91,413 | 5,278 | 5.77 | 90,758 | 5,419 | 5.97 | |||||||||||||||||||||||||||
|
Time
deposits with banks, federal funds sold and securities purchased under
agreements to resell
|
70,062 | 3,333 | 4.76 | 62,378 | 2,355 | 3.78 | 68,212 | 1,811 | 2.65 | |||||||||||||||||||||||||||
|
Loans
1,2,3
|
1,250,423 | 95,825 | 7.66 | 1,051,002 | 77,836 | 7.41 | 805,014 | 52,990 | 6.58 | |||||||||||||||||||||||||||
|
Total
earning assets
|
1,662,409 | $ | 116,579 | 7.01 | % | 1,417,150 | $ | 94,494 | 6.67 | % | 1,172,951 | $ | 67,703 | 5.77 | % | |||||||||||||||||||||
|
Allowance
for loan losses
|
(11,486 | ) | (11,094 | ) | (10,528 | ) | ||||||||||||||||||||||||||||||
|
Total
earning assets, net of allowance for
loan losses
|
1,650,923 | 1,406,056 | 1,162,423 | |||||||||||||||||||||||||||||||||
|
Nonearning
Assets
|
||||||||||||||||||||||||||||||||||||
|
Cash
and due from banks
|
78,810 | 77,509 | 75,302 | |||||||||||||||||||||||||||||||||
|
Premises
and equipment, net
|
38,860 | 32,029 | 22,759 | |||||||||||||||||||||||||||||||||
|
Other
assets
|
117,459 | 88,044 | 58,566 | |||||||||||||||||||||||||||||||||
|
Assets
of discontinued operations
|
129,827 | 148,474 | ||||||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 1,886,052 | $ | 1,733,465 | $ | 1,467,524 | ||||||||||||||||||||||||||||||
|
Interest
Bearing Liabilities
|
||||||||||||||||||||||||||||||||||||
|
Deposits
|
||||||||||||||||||||||||||||||||||||
|
Interest
bearing demand
|
$ | 258,992 | $ | 3,684 | 1.42 | % | $ | 260,417 | $ | 3,774 | 1.45 | % | $ | 214,548 | $ | 1,878 | .88 | % | ||||||||||||||||||
|
Savings
|
244,299 | 5,299 | 2.17 | 212,948 | 4,437 | 2.08 | 182,337 | 2,575 | 1.41 | |||||||||||||||||||||||||||
|
Time
|
748,939 | 36,174 | 4.83 | 587,047 | 24,343 | 4.15 | 453,419 | 14,677 | 3.24 | |||||||||||||||||||||||||||
|
Federal
funds purchased and other short-term borrowings
|
97,192 | 4,504 | 4.63 | 97,489 | 4,676 | 4.80 | 82,717 | 2,592 | 3.13 | |||||||||||||||||||||||||||
|
Securities
sold under agreements to repurchase and other long-term
borrowings
|
127,277 | 6,378 | 5.01 | 79,472 | 4,202 | 5.29 | 62,628 | 2,687 | 4.29 | |||||||||||||||||||||||||||
|
Total
interest bearing liabilities
|
1,476,699 | $ | 56,039 | 3.79 | % | 1,237,373 | $ | 41,432 | 3.35 | % | 995,649 | $ | 24,409 | 2.45 | % | |||||||||||||||||||||
|
Noninterest
Bearing Liabilities
|
||||||||||||||||||||||||||||||||||||
|
Commonwealth
of Kentucky deposits
|
37,119 | 38,627 | 37,978 | |||||||||||||||||||||||||||||||||
|
Other
demand deposits
|
177,304 | 157,355 | 141,219 | |||||||||||||||||||||||||||||||||
|
Other
liabilities
|
19,009 | 7,705 | 11,292 | |||||||||||||||||||||||||||||||||
|
Liabilities
of discontinued operations
|
131,437 | 147,010 | ||||||||||||||||||||||||||||||||||
|
Total
liabilities
|
1,710,131 | 1,572,497 | 1,333,148 | |||||||||||||||||||||||||||||||||
|
Shareholders’
equity
|
175,921 | 160,968 | 134,376 | |||||||||||||||||||||||||||||||||
|
Total
liabilities and shareholders’ equity
|
$ | 1,886,052 | $ | 1,733,465 | $ | 1,467,524 | ||||||||||||||||||||||||||||||
|
Net
interest income
|
60,540 | 53,062 | 43,294 | |||||||||||||||||||||||||||||||||
|
TE
basis adjustment
|
(2,322 | ) | (2,154 | ) | (2,052 | ) | ||||||||||||||||||||||||||||||
|
Net
interest income
|
$ | 58,218 | $ | 50,908 | $ | 41,242 | ||||||||||||||||||||||||||||||
|
Net
interest spread
|
3.22 | % | 3.32 | % | 3.32 | % | ||||||||||||||||||||||||||||||
|
Effect
of noninterest bearing sources of funds
|
.42 | .43 | .37 | |||||||||||||||||||||||||||||||||
|
Net
interest margin
|
3.64 | % | 3.75 | % | 3.69 | % | ||||||||||||||||||||||||||||||
|
1
|
Income
and yield stated at a fully tax equivalent basis using the marginal
corporate Federal tax rate of 35%.
|
|
2
|
Loan
balances include principal balances on nonaccrual
loans.
|
|
3
|
Loan
fees included in interest income amounted to $2.7 million, $2.0
million, and $2.1 million for 2007, 2006, and 2005,
respectively.
|
26
|
|
The
following table is an analysis of the change in net interest
income.
|
Analysis of Changes in Net Interest
Income (tax equivalent basis)
|
Variance
|
Variance
Attributed to
|
Variance
|
Variance
Attributed to
|
|||||||||||||||||||||
|
(In
thousands)
|
2007/2006 | 1 |
Volume
|
Rate
|
2006/2005 | 1 |
Volume
|
Rate
|
||||||||||||||||
|
Interest
Income
|
||||||||||||||||||||||||
|
Taxable
investment securities
|
$ | 3,602 | $ | 1,908 | $ | 1,694 | $ | 1,542 | $ | 123 | $ | 1,419 | ||||||||||||
|
Nontaxable
investment securities2
|
(484 | ) | (167 | ) | (317 | ) | (141 | ) | 39 | (180 | ) | |||||||||||||
|
Time
deposits with banks, federal funds sold and securities purchased under
agreements to resell
|
978 | 315 | 663 | 544 | (167 | ) | 711 | |||||||||||||||||
|
Loans2
|
17,989 | 15,273 | 2,716 | 24,846 | 17,586 | 7,260 | ||||||||||||||||||
|
Total
interest income
|
22,085 | 17,329 | 4,756 | 26,791 | 17,581 | 9,210 | ||||||||||||||||||
|
Interest
Expense
|
||||||||||||||||||||||||
|
Interest
bearing demand deposits
|
(90 | ) | (19 | ) | (71 | ) | 1,896 | 471 | 1,425 | |||||||||||||||
|
Savings
deposits
|
862 | 666 | 196 | 1,862 | 486 | 1,376 | ||||||||||||||||||
|
Time
deposits
|
11,831 | 7,422 | 4,409 | 9,666 | 4,950 | 4,716 | ||||||||||||||||||
|
Federal
funds purchased and other short-term borrowings
|
(172 | ) | (13 | ) | (159 | ) | 2,084 | 522 | 1,562 | |||||||||||||||
|
Securities
sold under agreements to repurchase and other long-term
borrowings
|
2,176 | 2,410 | (234 | ) | 1,515 | 812 | 703 | |||||||||||||||||
|
Total
interest expense
|
14,607 | 10,466 | 4,141 | 17,023 | 7,241 | 9,782 | ||||||||||||||||||
|
Net
interest income
|
$ | 7,478 | $ | 6,863 | $ | 615 | $ | 9,768 | $ | 10,340 | $ | (572 | ) | |||||||||||
|
Percentage
change
|
100.0 | % | 91.8 | % | 8.2 | % | 100.0 | % | 105.9 | % | (5.9 | )% | ||||||||||||
|
1
|
The
changes which are not solely due to rate or volume are allocated on a
percentage basis using the absolute values of rate and volume variances as
a basis for allocation.
|
|
2
|
Income
stated at fully tax equivalent basis using the marginal corporate Federal
tax rate of 35%.
|
Noninterest
Income
Noninterest
income was $24.2 million for 2007, an increase of $3.7 million or 18.1% compared
to $20.5 million in 2006. Noninterest income represented 17.5% of
total revenue for 2007, a decrease of 69 basis points from 18.1% for 2006. The
decrease in noninterest income as a percentage of total income is mainly
attributed to the composition of the revenue streams of from the Citizens
Jessamine acquisition, which is more heavily weighted toward interest
income.
The
increase in noninterest income was driven by higher service charges and fees on
deposits of $2.8 million or 30.1% and higher allotment processing fees of $1.8
million or 67.7%. The primary factor driving the increase in service charges and
fees on deposits was a $1.4 million increase in account fees related to the
Company’s allotment line of business, which is up in the current year as a
result of the acquisition of the Military Allotment operations of PNC Bank
during the first quarter of 2007. Overdraft charges were also up $926 thousand
in 2007 compared to a year ago and are attributed to additional fees of $836
thousand from the Citizens Jessamine acquisition. The $1.8 million increase in
allotment processing fees is mainly attributed to the acquisition of the
Military Allotment operation in the current year. Trust income was $2.1 million
in 2007, an increase of $263 thousand or 14.7% and is due in part to both price
and volume increases. Assets under management grew 6.1% in 2007 compared to
2006, with higher volumes occurring in each of our trust markets.
The
Company experienced declines in the following noninterest income categories
during 2007 compared to a year earlier: non-deposit service charges,
commissions, and fees of $88 thousand or 3.4%, data processing fees of $492
thousand or 28.6%, gains on sale of loans of $58 thousand or 8.9%, income from
company-owned life insurance of $65 thousand or 4.8%, and net all other
noninterest income of $583 thousand.
The
decrease in data processing fees is attributed to the acquisition of Citizens
Jessamine and the sale of KBC, both of which were customers of the Company’s
data processing subsidiary. Data processing income from KBC was not eliminated
in consolidation once classified as discontinued operations in 2006, effectively
increasing data processing income
during the previous year by $380 thousand. There was no data processing fees
recognized from KBC during 2007 since it was sold during 2006. Additionally,
Citizens Jessamine was a separate unrelated entity until the Company purchased
it during the fourth quarter of 2006. Approximately $150 thousand was included
in data processing fees during 2006 that are not included in the current period
since inter-company amounts are eliminated in
27
consolidation.
The decline in all other noninterest income of $583 thousand in 2007 was made up
primarily of lower gains on sale of premises and equipment, which was higher
than normal during 2006, and lower income from the Company’s low income tax
credit partnerships.
Noninterest
Expense
Total
noninterest expenses were $58.8 million for 2007, an increase of $5.4 million or
10.2% compared to $53.4 million for 2006. The increase in noninterest
expenses occurred across a broad range of line items. The acquisition of
Citizens Jessamine during the fourth quarter of 2006 is a significant factor
contributing to the higher expenses, along with the Military Allotment
acquisition and other business expansion efforts. The largest increases in
noninterest expenses are attributed to higher salaries and employee benefits of
$2.4 million or 8.4%, amortization of intangible assets of $1.4 million or
67.3%, and higher occupancy costs of $597 thousand or 16.3%.
The
increase in salaries and employee benefits resulted primarily from the net
addition of 38 average full time equivalent employees, 31 of which are
attributed to the Citizens Jessamine acquisition, and normal salary increases
for existing employees. Salaries and related payroll taxes increased $1.5
million or 6.5%, with Citizens Jessamine accounting for $1.3 million of the
increase and, to a lesser extent, additional personnel related to the Military
Allotment acquisition during the current year. Benefit expenses increased $989
thousand or 17.7%, driven by additional postretirement benefit costs. Expense
related to the Company’s self-funded health insurance plan declined $178
thousand or 5.6% in the year-to-year comparison. Noncash compensation expense
related to the Company’s nonqualified stock option plan and employee stock
purchase plan declined $65 thousand in the comparison due to lower expense
recorded in the current period as all options have been fully
vested.
Intangible
asset amortization was $3.4 million for 2007. This represents an increase of
$1.4 million or 67.3% compared to 2006 and is due to the increase in customer
list and core deposit intangible assets resulting from the acquisitions of
Citizens Jessamine and the Military Allotment operations of PNC Bank.
Amortization expense attributed to current intangible assets is expected to
gradually decrease in the coming years, beginning with a $760 thousand decline
scheduled for 2008. The $597 thousand or 16.3% increase in net occupancy expense
is attributed primarily to the Citizens Jessamine acquisition and continued
expansion efforts. Data processing expenses decreased $261 thousand or 5.2% in
the comparison. Up until the early part of the fourth quarter of 2006, Citizen
Northern used the services of an unrelated third party vendor to meet its data
processing needs. During the fourth quarter of 2006, Citizens Northern began to
use the Company’s data processing subsidiary; as such, fees paid to the
unrelated third party vendor during 2006 are recognized as an expense prior to
the change in processing companies. Subsequent to the change, the fees paid to
the Company’s data processing subsidiary have been eliminated in consolidation.
All other noninterest expenses were up a net of $1.3 million or 9.6% and
occurred across a wide range of line items and are mainly attributed to the
Citizens Jessamine acquisition.
Income
Tax
Income
tax expense for 2007 was $4.3 million, an increase of $927 thousand or 27.6%
compared to $3.4 million for the prior year. The effective federal
income tax rate was 21.5%, an increase of 179 basis points compared to 19.7% in
the comparison. The higher effective tax rate is due to the beginning of
scheduled reductions in low income housing tax credits and lower tax-free
income.
2007-Fourth
Quarter
For the
fourth quarter of 2007, the Company reported income from continuing operations
of $1.9 million, a decrease of $567 thousand or 22.5% compared to $2.5 million
for the same period in 2006. Basic and diluted income per share from
continuing operations was $.26 for the current three months, a decline of $.06
or 18.8% compared to $.32 in the same three-month period a year ago. Net income
in the fourth quarter of 2007 was $1.9 million, a decrease of $7.0 million or
78.2% compared to $8.9 million for the same period in 2006. Basic and
diluted net income per share was $.26 for the current three months, a decline of
$.87 or 77.0% compared to $1.13 in the same three-month period a year ago. Net
income in the fourth quarter of 2006 includes a $6.4 million gain, net of tax,
related to disposals of discontinued operations.
The
provision for loan losses was $3.2 million in the final quarter of 2007, an
increase of $2.4 million compared to the final quarter of 2006. The sharp
increase in the provision for loan losses in the fourth quarter of 2007 is
reflective of higher levels of nonperforming loans, primarily nonaccrual loans
and is discussed further under the headings of “Asset Quality” and
“Nonperforming Assets”. Although the Company believes that loan demand and
credit quality overall remains healthy, the real estate development segment of
the Company’s portfolio began to show deteriorating conditions, including a
slowdown in demand, in certain parts of its banking market in the fourth quarter
of 2007.
At
December 31, 2006, the Company adopted SFAS No. 158 for it postretirement
benefit plans. During the fourth quarter of 2007 the Company learned that an
actuarial error caused the amount recorded upon adoption to be incorrect.
Accordingly, the Company’s stockholders equity as presented in the accompanying
audited consolidated financial statements included in this Form 10-K has been
revised to reflect the correct balance. This revision reduced total
shareholders’ equity at December 31, 2006 by $1.4 million or less than 0.8%. No
revision to the 2006 statement of income was required. In accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 108, the
Company’s consolidated balance sheet and statement of shareholders’ equity is
being presented as revised in this 2007 Annual report on Form
10-K.
28
Income
From Discontinued Operations
Income
from discontinued operations was zero in 2007 and $7.7 million or $1.02 per
diluted share for the year ended December 31, 2006. This includes a gain on the
sale of discontinued operations of $6.4 million, net of tax, which occurred in
the fourth quarter of 2006. There were no discontinued operations in the
current-year period presented since all discontinued operations were disposed of
during the fourth quarter of 2006.
FINANCIAL
CONDITION
The
Company’s total assets were $2.1 billion at December 31, 2007, an increase of
$243 million or 13.3% from the prior year-end. The most significant changes in
the Company’s assets from the prior year-end were as follows: an increase in
investment securities of $212 million or 63.5%, an increase in net loans of
$91.9 million or 7.8%, an increase of $9.4 million or 17.8% in goodwill and
other intangible assets, partially offset by $77.7 million or 49.5% lower cash
and cash equivalents. The changes within the asset groups are attributed mainly
to the $200 million balance sheet leverage transaction, the overall funding
position of the Company, and the purchase of the Military Allotment operation of
PNC Bank during 2007.
The
increase in investment securities was driven by the balance sheet leverage
transaction that occurred during the fourth quarter of 2007 whereby the Company
borrowed $200 million via long-term repurchase agreements and used the proceeds
to purchase a like amount of GNMA bonds. The increase in net loans outstanding
is representative of still-active loan demand and was funded mainly with higher
interest bearing deposit balances. The decrease in cash and cash equivalents is
mainly attributed to lower end of period deposit balances from the Commonwealth
of Kentucky of $53.3 million. Shareholders’ equity was $8.6 million or 4.8%
lower at year-end 2007 compared to a year earlier mainly due to the $17.9
million purchase of Company shares through its tender offer during
2007.
Management
of the Company considers it noteworthy to understand the relationship between
the Company’s principal subsidiary, Farmers Bank, and the Commonwealth of
Kentucky. Farmers Bank provides various services to state agencies of
the Commonwealth. As the depository for the Commonwealth, checks are
drawn on Farmers Bank by these agencies, which include paychecks and state
income tax refunds. Farmers Bank also processes vouchers of the WIC
(Women, Infants and Children) program for the Cabinet for Human Resources. The
Bank’s investment department also provides services to the Teacher’s Retirement
systems. As the depository for the Commonwealth, large fluctuations in deposits
are likely to occur on a daily basis. Therefore, reviewing average
balances is important to understanding the financial condition of the
Company.
On an
average basis, total assets were $1.9 billion for 2007, an increase of $282
million or 17.6% compared to average total assets related to continuing
operations at year-end 2006. Average earning assets, primarily loans and
securities, were $1.7 billion for 2007, an increase of $245 million or 17.3%
from year-end 2006. The increase was boosted by an additional $118
million in connection with the Citizens Jessamine acquisition during the fourth
quarter of 2006. Average earning assets represent 88.1% of total
average assets on December 31, 2007, a decrease of 23 basis points compared to
88.4% at year-end 2006.
Loans
Loans,
net of unearned income, totaled $1.3 billion on December 31, 2007, an increase
of $94.1 million or 7.9% from $1.2 billion at year-end 2006. The increase in
loans was led by $146 million or 16.1% higher outstanding balances of loans
secured by real estate. Higher real estate lending offset declines in the
following categories: commercial, financial, and agriculture of $43.6 million or
22.1%, consumer installments loans of $5.1 million or 8.9%, and lease financing
of $3.2 million or 9.5%. On average, loans represented 75.2% of earning assets
during 2007 compared to 74.2% for 2006. When loan demand declines, the available
funds are redirected to lower earning temporary investments or investment
securities, which typically involve a decrease in credit risk and lower yields.
The Company does not have direct exposure to the subprime mortgage market. The
Company does not originate subprime mortgages nor has it invested in bonds that
are secured by such mortgages.
The
composition of the loan portfolio, net of unearned income, is summarized in the
table below.
|
(In
thousands)
December
31,
|
2007
|
%
|
2006
|
%
|
2005
|
%
|
2004
|
%
|
2003
|
%
|
|||||||||||||||||||||||||
|
Commercial,
financial, and agricultural
|
$ | 154,015 | 11.9 | % | $ | 197,613 | 16.5 | % | $ | 173,797 | 18.1 | % | $ | 119,004 | 15.3 | % | $ | 99,291 | 14.7 | % | |||||||||||||||
|
Real
estate – construction
|
254,788 | 19.7 | 176,779 | 14.7 | 88,693 | 9.2 | 62,111 | 8.0 | 44,622 | 6.6 | |||||||||||||||||||||||||
|
Real
estate mortgage – residential
|
405,992 | 31.5 | 381,081 | 31.8 | 331,508 | 34.4 | 280,869 | 36.2 | 245,737 | 36.4 | |||||||||||||||||||||||||
|
Real
estate mortgage – farmland and other commercial
enterprises
|
394,900 | 30.6 | 351,793 | 29.4 | 274,411 | 28.5 | 210,701 | 27.2 | 192,541 | 28.5 | |||||||||||||||||||||||||
|
Installment
|
52,028 | 4.0 | 57,116 | 4.8 | 56,169 | 5.8 | 63,684 | 8.2 | 58,274 | 8.6 | |||||||||||||||||||||||||
|
Lease
financing
|
30,262 | 2.3 | 33,454 | 2.8 | 37,993 | 4.0 | 39,348 | 5.1 | 35,372 | 5.2 | |||||||||||||||||||||||||
|
Total
|
$ | 1,291,985 | 100.0 | % | $ | 1,197,836 | 100.0 | % | $ | 962,571 | 100.0 | % | $ | 775,717 | 100.0 | % | $ | 675,837 | 100.0 | % | |||||||||||||||
29
The
following table presents commercial, financial, and agricultural loans and real
estate construction loans outstanding at December 31, 2007 which, based on
remaining scheduled repayments of principal, are due in the periods
indicated.
Loan
Maturities
|
Within
|
After
One But
|
After
|
||||||||||||||
|
(In
thousands)
|
One
Year
|
Within
Five Years
|
Five
Years
|
Total
|
||||||||||||
|
Commercial,
financial, and agricultural
|
$ | 82,450 | $ | 30,643 | $ | 40,922 | $ | 154,015 | ||||||||
|
Real
estate – construction
|
181,804 | 65,190 | 7,794 | 254,788 | ||||||||||||
|
Total
|
$ | 264,254 | $ | 95,833 | $ | 48,716 | $ | 408,803 | ||||||||
The table
below presents commercial, financial, and agricultural loans and real estate
construction loans outstanding at December 31, 2007 that are due after one year,
classified according to sensitivity to changes in interest rates.
Interest
Sensitivity
|
Fixed
|
Variable
|
|||||||
|
(In
thousands)
|
Rate
|
Rate
|
||||||
|
Due
after one but within five years
|
$ | 48,913 | $ | 45,998 | ||||
|
Due
after five years
|
17,208 | 28,948 | ||||||
|
Total
|
$ | 66,121 | $ | 74,946 | ||||
Asset
Quality
The
Company’s loan portfolio is subject to varying degrees of credit risk. Credit
risk is mitigated by diversification within the portfolio, limiting exposure to
any single customer or industry, standard lending policies and underwriting
criteria, and collateral requirements. The Company maintains policies and
procedures to ensure that the granting of credit is done in a sound and
consistent manner. This includes policies on a company-wide basis that require
certain minimum standards to be maintained. However, the policies also permit
the individual subsidiary companies authority to adopt standards that are no
less stringent than those included in the company-wide policies. Credit
decisions are made at the subsidiary bank level under guidelines established by
policy. The Company’s internal audit department performs loan reviews at each
subsidiary
bank during the year. This loan review evaluates loan administration, credit
quality, documentation, compliance with Company loan standards, and the adequacy
of the allowance for loan losses on a consolidated and subsidiary
basis.
The
provision for loan losses represents charges made to earnings to maintain an
allowance for loan losses at an adequate level based on credit losses
specifically identified in the loan portfolio, as well as management’s best
estimate of probable loan losses in the remainder of the portfolio at the
balance sheet date. The allowance for loan losses is a valuation allowance
increased by the provision for loan losses and decreased by net charge-offs.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are
credited to the allowance.
Management
estimates the allowance balance required using a risk-rated methodology. Many
factors are considered when estimating the allowance. These include, but are not
limited to, past loan loss experience, an assessment of the financial condition
of individual borrowers, a determination of the value and adequacy of underlying
collateral, the condition of the local economy, an analysis of the levels and
trends of the loan portfolio, and a review of delinquent and classified loans.
The allowance for loan losses 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 risk factors. Allocations of the allowance may be made for specific
loans, but the entire allowance is available for any loan that, in management’s
judgment, should be charged off. Actual loan losses could differ significantly
from the amounts estimated by management.
The
risk-rated methodology includes segregating watch list and past due loans from
the general portfolio and allocating specific reserves to these loans depending
on their status. For example, watch list loans, which may be identified by the
internal loan review risk-rating system or by regulatory examiner
classification, are assigned a certain loss percentage while loans past due 30
days or more are assigned a different loss percentage. Each of these percentages
considers past experience as well as current factors. The remainder of the
general loan portfolio is segregated into three components having similar risk
characteristics as follows: commercial loans, consumer loans, and real estate
loans. Each of these components is assigned a loss percentage based on their
respective three year historical loss percentage. Additional allocations to the
allowance may then be made for subjective factors, such as those mentioned
above, as determined by senior managers who are knowledgeable about these
matters. During 2007, the Company further identified signs of deterioration in
certain real estate development loans and specific allowances related to these
loans were recorded.
30
While
management considers the allowance for loan losses to be adequate based on the
information currently available, additional adjustments to the allowance may be
necessary due to changes in the factors noted above. Borrowers may experience
difficulty in periods of economic deterioration, and the level of nonperforming
loans, charge-offs, and delinquencies could rise and require additional
increases in the provision. Also, regulatory agencies, as an integral part of
their examinations, periodically review the allowance for loan losses. These
reviews could result in additional adjustments to the provision based upon their
judgments about relevant information available during their
examination.
The
provision for loan losses was $3.6 million in 2007, an increase of $2.7 million
compared to $965 thousand for 2006. The sharp increase in the provision for loan
losses is reflective of higher levels of nonperforming loans, primarily
nonaccrual loans. Nonperforming loans were $21.1 million at December 31, 2007
compared to $4.3 million at year-end 2006. A significant amount of the increase
in nonperforming loans is limited to a relatively small number of larger-balance
credits. A significant amount of the $16.7 million increase in nonperforming
loans is attributed to seven individual larger-balance nonaccrual credits of
$15.9 million, substantially all of which is secured by real estate. Further,
the three largest nonaccrual credits represent $13.6 million of the increased
nonaccrual loan balances in the comparison. Although the Company believes that
loan demand and credit quality overall remains healthy, the real estate
development segment of the Company’s portfolio began to show deteriorating
conditions, including a slowdown in demand, in certain parts of its banking
market during the fourth quarter of 2007. Approximately $8.8 million of the
increase in nonperforming loans is concentrated in real estate
development.
Total net
charge-offs for the Company increased $320 thousand or 29.1% for year-end 2007
compared to 2006 and were as follows for 2007: commercial, financial,
and agricultural loans $394 thousand, real estate lending $385 thousand,
installment loans $637 thousand, and lease financing $5 thousand. The increase
in net charge-offs for 2007 compared to the prior
year was as follows: commercial, financial, and agriculture $170 thousand or
75.9%, real estate lending $266 thousand or 224%, installment loans $92 thousand
or 16.9%; net charge-off related to lease financing declined $208 thousand or
97.7%. Net charge-offs in 2007 were widely disbursed among relatively
small-balance credits. Net charge-offs were 0.1% of average loans for 2007,
unchanged from 2006 and remain near recent historical lows for the Company. The
allowance for loan losses was $14.2 million at year-end 2007 and represented
1.1% of loans net of unearned income at year-end 2007 compared to 1.0% at
year-end 2006. The allowance for loan losses as a percentage of nonperforming
loans was 67.5% and 278% at year-end 2007 and 2006, respectively. Management
continues to emphasize collection efforts and evaluation of risks within the
portfolio. The composition of the Company’s loan portfolio continues to be
diverse with no significant concentration to any individual or
industry.
The table
below summarizes the loan loss experience for the past five years.
|
Years
Ended December 31, (In thousands)
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Balance
of allowance for loan losses at beginning of year
|
$ | 11,999 | $ | 11,069 | $ | 11,043 | $ | 10,088 | $ | 9,931 | ||||||||||
|
Acquisition
of Citizens Jessamine
|
1,066 | |||||||||||||||||||
|
Acquisition
of Citizens Northern
|
1,410 | |||||||||||||||||||
|
Acquisition
of Citizens Georgetown
|
2,005 | |||||||||||||||||||
|
Loans
charged off:
|
||||||||||||||||||||
|
Commercial,
financial, and agricultural
|
520 | 486 | 301 | 678 | 171 | |||||||||||||||
|
Real
estate
|
626 | 200 | 288 | 462 | 650 | |||||||||||||||
|
Installment
loans to individuals
|
956 | 839 | 1,254 | 1,115 | 898 | |||||||||||||||
|
Lease
financing
|
52 | 254 | 602 | 113 | 385 | |||||||||||||||
|
Total
loans charged off
|
2,154 | 1,779 | 2,445 | 2,368 | 2,104 | |||||||||||||||
|
Recoveries
of loans previously charged off:
|
||||||||||||||||||||
|
Commercial,
financial, and agricultural
|
126 | 262 | 69 | 119 | 73 | |||||||||||||||
|
Real
estate
|
241 | 81 | 66 | 89 | 47 | |||||||||||||||
|
Installment
loans to individuals
|
319 | 294 | 260 | 229 | 227 | |||||||||||||||
|
Lease
financing
|
47 | 41 | 44 | 25 | 19 | |||||||||||||||
|
Total
recoveries
|
733 | 678 | 439 | 462 | 366 | |||||||||||||||
|
Net
loans charged off
|
1,421 | 1,101 | 2,006 | 1,906 | 1,738 | |||||||||||||||
|
Additions
to allowance charged to expense
|
3,638 | 965 | 622 | 856 | 1,895 | |||||||||||||||
|
Balance
at end of year
|
$ | 14,216 | $ | 11,999 | $ | 11,069 | $ | 11,043 | $ | 10,088 | ||||||||||
|
Average
loans net of unearned income
|
$ | 1,250,423 | $ | 1,051,002 | $ | 805,014 | $ | 735,697 | $ | 663,442 | ||||||||||
|
Ratio
of net charge-offs during year to average loans, net of
unearned income
|
.11 | % | .10 | % | .25 | % | .26 | % | .26 | % | ||||||||||
31
The
following table presents an estimate of the allocation of the allowance for loan
losses by type for the date indicated. Although specific allocations exist, the
entire allowance is available to absorb losses in any particular
category.
Allowance
For Loan Losses
|
December
31, (In thousands)
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Commercial,
financial, and agricultural
|
$ | 2,505 | $ | 2,223 | $ | 2,840 | $ | 2,108 | $ | 2,068 | ||||||||||
|
Real
estate
|
9,201 | 6,497 | 5,849 | 6,206 | 5,560 | |||||||||||||||
|
Installment
loans to individuals
|
1,979 | 2,316 | 1,601 | 1,634 | 1,478 | |||||||||||||||
|
Lease
financing
|
531 | 963 | 779 | 1,095 | 982 | |||||||||||||||
|
Total
|
$ | 14,216 | $ | 11,999 | $ | 11,069 | $ | 11,043 | $ | 10,088 | ||||||||||
Nonperforming
Assets
Nonperforming
assets for the Company include nonperforming loans, other real estate owned, and
other foreclosed assets. Nonperforming loans consist of nonaccrual loans,
restructured loans, and loans past due ninety days or more on which interest is
still accruing. Generally, the accrual of interest on loans is
discontinued when it is determined that the collection of interest or principal
is doubtful, or when a default of interest or principal has existed 90 days or
more, unless such loan is well secured and in the process of
collection.
Nonperforming
assets totaled $27.2 million at December 31, 2007, an increase of $17.8 million
or 189% compared to $9.4 million for 2006. The increase is primarily
due to a $16.6 million increase in nonaccrual loans followed by higher real
estate acquired through foreclosure of $1.0 million or 20.1%. The sharp increase
in nonaccrual loans is concentrated within a relatively small number of
larger-balance credits. Three larger-balance credits make up $13.6 million or
82% of the
increase in nonaccrual loans in the annual comparison while the top seven
larger-balance nonaccrual credits represent $15.9 million or 96% of the
increase. Of the three larger-balance credits, $8.8 million is related to real
estate development and $4.8 million attributed to commercial real estate.
Although the Company believes that loan demand and credit quality overall
remains healthy, the real estate development segment of the Company’s portfolio
began to show deteriorating conditions, including a slowdown in demand, in
certain parts of its banking market during the fourth quarter of
2007.
The
amount of interest income reversed from accrued interest receivable and interest
income on loans was $390 thousand and $589 thousand for the fourth quarter and
year-to-date 2007, respectively, attributed to the seven larger-balance credits
placed on nonaccrual status mentioned above. This reduced the yield on earning
assets, net interest spread, and net interest margin by eight basis points in
the fourth quarter and by four basis points for the year. The total amount of
interest income on loans lost related to these credits for 2007 was $783
thousand.
The
increase in other real estate owned of $1.0 million is due mainly to the
addition of commercial real estate properties of three different borrowers
acquired through foreclosure in the amount of $2.5 million; $1.7 million of
which was acquired during the fourth quarter of 2007. The amount of additional
properties acquired through foreclosure offset the amount of properties that
were liquidated during the current year and no longer held by the Company,
primarily $1.5 million in real estate collateral previously securing loans to a
financially troubled builder.
Nonperforming
loans represent 1.6% of loans net of unearned income at year-end 2007. This
represents an increase of 127 basis points from year-end 2006 and is attributed
to the higher nonaccrual loans as discussed above. Information pertaining to
nonperforming loans and assets is presented in the table below.
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Loans
accounted for on nonaccrual basis
|
$ | 18,073 | $ | 1,462 | $ | 2,269 | $ | 4,990 | $ | 4,823 | ||||||||||
|
Loans
past due 90 days or more and still accruing
|
2,977 | 2,856 | 2,383 | 2,831 | 3,235 | |||||||||||||||
|
Total
nonperforming loans
|
21,050 | 4,318 | 4,652 | 7,821 | 8,058 | |||||||||||||||
|
Other
real estate owned
|
6,044 | 5,031 | 8,786 | 3,719 | 1,662 | |||||||||||||||
|
Other
foreclosed assets
|
66 | 54 | 21 | 32 | 218 | |||||||||||||||
|
Total
nonperforming assets
|
$ | 27,160 | $ | 9,403 | $ | 13,459 | $ | 11,572 | $ | 9,938 | ||||||||||
Temporary
Investments
Temporary
investments consist of interest bearing deposits in other banks and federal
funds sold and securities purchased under agreements to resell. The Company uses
these funds in the management of liquidity and interest rate sensitivity. At
December 31, 2007, temporary investments were $34.2 million, a decrease of $6.9
million or 16.9% compared to $41.2 million at year-end 2006.
32
Temporary
investments averaged $70.1 million during 2007, an increase of $7.7 million or
12.3% from 2006. The increase is a result of the Company’s overall net funding
position. Temporary investments are reallocated as loan demand and other
investment alternatives present the opportunity.
Investment
Securities
The
investment securities portfolio is comprised primarily of U.S.
government-sponsored agency securities, mortgage-backed securities, and
tax-exempt securities of states and political subdivisions. Total investment
securities were $546 million on December 31, 2007, an increase of $212 million
or 63.5% from year-end 2006. The increase in investment securities was driven by
the fourth quarter 2007 balance sheet leverage transaction to enhance earnings.
In the transaction, the Company borrowed approximately $200 million in multiple
fixed rate repurchase agreements with an initial weighted average cost of 3.95%.
The borrowings mature in time periods ranging from three to 10 years with a
weighted average maturity of 6.5 years and are callable quarterly after time
periods ranging from one to five years. The Company used the proceeds from the
borrowing to purchase a like amount of fixed rate GNMA bonds (the “Bonds”). The
Bonds had an initial weighted average yield of 5.69% and a stated maturity of 30
years. The estimated weighted average maturity of the Bonds is seven years. The
leverage transaction added $423 thousand to net interest income during the
fourth quarter of 2007.
The funds
made available from maturing or called bonds have been redirected as necessary
to fund higher yielding loan growth, reinvested to purchase additional
investment securities, or otherwise employed to improve the composition of the
balance sheet. The purchase of nontaxable obligations of states and political
subdivisions is one of the primary means of managing the Company’s tax position.
The impact of the alternative minimum tax related to the Company’s ability to
acquire
tax-free obligations at an attractive yield is routinely monitored. The
Company does not have direct exposure to the subprime mortgage market. The
Company does not originate subprime mortgages nor has it invested in bonds that
are secured by such mortgages.
Investment
securities averaged $342 million in total for 2007, up $38.2 million or 12.6%.
The increase in average investment securities was driven by the Bonds that were
purchased in the balance sheet leverage transaction, which accounts for $24.7
million of the higher average balance outstanding. The Company had a net
unrealized gain on available for sale investment securities of $374 thousand at
December 31, 2007 compared to a net unrealized loss of $2.0 million at year-end
2006. The $2.4 million improvement in the current period is mainly attributed to
a net increase in the market value on available for sale investment securities,
particularly during the final half of 2007. The higher market value of available
for sale investment securities is due primarily to the impact of changing
economic conditions, including a decrease in Treasury yields in nearly every
maturity range in the current period compared to December 31, 2006. As overall
yields have decreased, the portfolio has increased in value. Market
values of fixed rate investments are inversely related to changes in market
interest rates. Unrealized losses on investment securities have not been
included in income since they are considered interest rate related and
identified as temporary.
On
December 31, 2007, available for sale securities made up 99.3% of the total
investment securities, up from 97.7% from a year earlier. The increase is a
result of the Company classifying reinvested proceeds from matured or called
held to maturity investment securities into available for sale investment
securities.
Mortgage-backed
securities in the available for sale portfolio were $343 million at year-end
2007, an increase of $256 million compared to $86.7 million at year-end 2006.
Mortgage-backed securities accounted for 63.2% and 26.6% of the available for
sale securities portfolio at December 31, 2007 and 2006, respectively. The
higher concentration of mortgage-backed securities is attributed to the $200
million of GNMA bonds purchased in the balance sheet leverage transaction in the
fourth quarter of 2007. U.S. government-sponsored entities were $88.5
million and $142 million at year-end 2007 and 2006, respectively. This
represents 16.3% and 43.4% of the total available for sale securities portfolio
at year-end 2007 and 2006, respectively. Obligations of states and political
subdivisions in the available for sale and held to maturity portfolio were $94.2
million and $3.8 million, respectively at December 31, 2007. This represents
17.4% and 100% of the available for sale and held to maturity portfolio,
respectively. A $1.5 million or 18.4% increase in equity securities is due to
additional purchases of Federal Home Loan Bank and Federal Reserve Bank stock.
Other investment securities were $5.1 million at year-end 2007 and represent
floating rate trust preferred capital securities of a global financial services
firm.
33
The
following table summarizes the carrying values of investment securities on
December 31, 2007, 2006, and 2005. The investment securities are
divided into available for sale and held to maturity
securities. Available for sale securities are carried at the
estimated fair value and held to maturity securities are carried at amortized
cost.
|
December
31,
|
2007
|
2006
|
2005
|
|||||||||||||||||||||
|
(In
thousands)
|
Available
for
Sale
|
Held
to
Maturity
|
Available
for
Sale
|
Held
to
Maturity
|
Available
for
Sale
|
Held
to
Maturity
|
||||||||||||||||||
|
Obligations
of U.S. government-sponsored entities
|
$ | 88,522 | $ | 141,832 | $ | 123,684 | ||||||||||||||||||
|
Obligations
of states and political subdivisions
|
94,181 | $ | 3,844 | 88,147 | $ | 7,788 | 86,031 | $ | 13,610 | |||||||||||||||
|
Mortgage-backed
securities
|
343,176 | 86,716 | 98,025 | |||||||||||||||||||||
|
U.S.
Treasury securities
|
863 | 484 | 104 | |||||||||||||||||||||
|
Money
market mutual funds
|
1,396 | 1,396 | 925 | |||||||||||||||||||||
|
Equity
securities
|
9,363 | 7,910 | 6,298 | |||||||||||||||||||||
|
Other
|
5,132 | |||||||||||||||||||||||
|
Total
|
$ | 542,633 | $ | 3,844 | $ | 326,485 | $ | 7,788 | $ | 315,067 | $ | 13,610 | ||||||||||||
The
following table presents an analysis of the contractual maturity and tax
equivalent weighted average interest rates of investment securities at December
31, 2007. For purposes of this analysis, available for sale securities are
stated at fair value and held to maturity securities are stated at amortized
cost. Equity securities in the available for sale portfolio consist primarily of
restricted FHLB and Federal Reserve Board stocks, which have no stated maturity
and are not included in the maturity schedule that follows.
Available
for Sale
|
After
One But
|
After
Five But
|
|||||||||||||||||||||||||||||||
|
Within
One Year
|
Within
Five Years
|
Within
Ten Years
|
After
Ten Years
|
|||||||||||||||||||||||||||||
|
(In
thousands)
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
||||||||||||||||||||||||
|
Obligations
of U.S. government-sponsored entities
|
$ | 63,238 | 4.2 | % | $ | 17,256 | 4.8 | % | $ | 7,025 | 5.2 | % | $ | 1,003 | 4.9 | % | ||||||||||||||||
|
Obligations
of states and political subdivisions
|
3,288 | 6.1 | 44,882 | 5.6 | 32,935 | 5.5 | 13,076 | 6.1 | ||||||||||||||||||||||||
|
Mortgage-backed
securities
|
21,314 | 4.6 | 23,490 | 4.8 | 33,244 | 4.9 | 265,128 | 5.5 | ||||||||||||||||||||||||
|
U.S.
Treasury securities
|
605 | 3.4 | 258 | 3.1 | ||||||||||||||||||||||||||||
|
Money
market mutual funds
|
1,396 | 4.5 | ||||||||||||||||||||||||||||||
|
Other
|
5,132 | 7.2 | ||||||||||||||||||||||||||||||
|
Total
|
$ | 89,841 | 4.3 | % | $ | 85,886 | 4.4 | % | $ | 73,204 | 4.4 | % | $ | 284,339 | 5.5 | % | ||||||||||||||||
Held
to Maturity
|
After
One But
|
After
Five But
|
|||||||||||||||||||||||||||||||
|
Within
One Year
|
Within
Five Years
|
Within
Ten Years
|
After
Ten Years
|
|||||||||||||||||||||||||||||
|
(In
thousands)
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
||||||||||||||||||||||||
|
Obligations
of states and political subdivisions
|
$ | 1,980 | 6.8 | % | $ | 789 | 6.6 | % | $ | 0 | 0 | % | $ | 1,075 | 6.3 | % | ||||||||||||||||
The
calculation of the weighted average interest rates for each category is based on
the weighted average costs of the securities. The weighted average tax rates on
exempt states and political subdivisions are computed based on the marginal
corporate Federal tax rate of 35%.
Deposits
The
Company’s primary source of funding for its lending and investment activities
results from its customer deposits, which consist of noninterest and interest
bearing demand, savings, and time deposits. On December 31, 2007 total deposits
were $1.5 billion, an increase of $19.3 million or 1.3% from year-end
2006. Interest bearing deposits were up $69.8 million or 5.8% to $1.3
billion, which offset a $50.5 million or 20.8% decline in noninterest bearing
deposits to $192 million. The decrease in end of period noninterest bearing
deposits was driven by lower balances from the Commonwealth of Kentucky of $53.3
million or 77.6%. Balances related to the Commonwealth can fluctuate
significantly from day to day.
34
Average
total deposits were $1.5 billion during 2007, an increase of $210 million or
16.7% compared to average year-end 2006 balances. Net increases in average
deposits were consistent throughout much of the deposit portfolio as
follows: noninterest bearing demand of $18.4 million or 9.4%, savings
accounts of $31.4 million or 14.7%, and time deposits of $162 million or 27.6%.
Interest bearing demand deposits, on average, declined $1.4 million or .5%. The
net increase in average total deposits outstanding is due in large part to the
Citizens Bank acquisition during the fourth quarter of 2006. This acquisition
contributed an additional $16.5 million and $91.1 million in average noninterest
bearing and interest bearing deposits, respectively, during 2007 compared to the
year-end 2006 average balances.
A summary
of average balances and rates paid on deposits follows.
|
Years
Ended December 31,
|
2007
|
2006
|
2005
|
|||||||||||||||||||||
|
(In
thousands)
|
Average
Balance
|
Average
Rate
|
Average
Balance
|
Average
Rate
|
Average
Balance
|
Average
Rate
|
||||||||||||||||||
|
Noninterest
bearing demand
|
$ | 214,423 | $ | 195,982 | $ | 179,197 | ||||||||||||||||||
|
Interest
bearing demand
|
258,992 | 1.42 | % | 260,417 | 1.45 | % | 214,548 | .88 | % | |||||||||||||||
|
Savings
|
244,299 | 2.17 | 212,948 | 2.08 | 182,337 | 1.41 | ||||||||||||||||||
|
Time
|
748,939 | 4.83 | 587,047 | 4.15 | 453,419 | 3.24 | ||||||||||||||||||
|
Total
|
$ | 1,466,653 | 3.08 | % | $ | 1,256,394 | 2.59 | % | $ | 1,029,501 | 1.85 | % | ||||||||||||
Maturities
of time deposits of $100,000 or more outstanding at December 31, 2007 are
summarized as follows.
|
(In
thousands)
|
Amount
|
|||
|
3
months or less
|
$ | 48,724 | ||
|
Over
3 through 6 months
|
82,323 | |||
|
Over
6 through 12 months
|
85,345 | |||
|
Over
12 months
|
36,111 | |||
|
Total
|
$ | 252,503 | ||
Short-term
Borrowings
Short-term
borrowings primarily consist of federal funds purchased and securities sold
under agreements to repurchase with year-end balances of $80.3 million, $67.9
million, and $71.3 million for 2007, 2006, and 2005, respectively. Such
borrowings are generally on an overnight basis. Other short-term borrowings
consist of FHLB borrowings totaling $0, $8.0 million, and $0 at year-end 2007,
2006, and 2005, respectively, and demand notes issued to the U.S. Treasury under
the treasury tax and loan note option account totaling $440 thousand, $777
thousand, and $779 thousand in 2007, 2006, and 2005 respectively. A summary of
short-term borrowings is as follows.
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Amount
outstanding at year-end
|
$ | 80,755 | $ | 76,718 | $ | 72,115 | ||||||
|
Maximum
outstanding at any month-end
|
155,362 | 113,926 | 166,550 | |||||||||
|
Average
outstanding
|
97,192 | 97,489 | 82,717 | |||||||||
|
Weighted
average rate at year-end
|
3.71 | % | 4.55 | % | 3.89 | % | ||||||
|
Weighted
average rate during the year
|
4.63 | 4.80 | 3.13 | |||||||||
The
Company’s long-term borrowings consist mainly of FHLB advances to the Company’s
subsidiary banks, subordinated notes payable to unconsolidated trusts, and
securities sold under agreements to repurchase. FHLB advances are secured by
restricted holdings of FHLB stock that the banks are required to own as well as
certain mortgage loans as required by the FHLB. Such advances are made pursuant
to several different credit programs, which have their own interest rates and
range of maturities. Interest rates on FHLB advances are generally fixed and
range between 3.84% and 6.90%, with a weighted average rate of 4.65%, and
maturities of up to 13 years. Approximately $10.0 million of the total long-term
advances from the FHLB are convertible to a floating interest rate. These
advances may convert to a floating interest rate indexed to three-month LIBOR
only if LIBOR equals or exceeds 7%. At year-end 2007, the three-month LIBOR was
4.70%. FHLB advances are generally used to increase the Company’s lending
activities and to aid the efforts of asset and liability management by utilizing
various repayment options offered by the FHLB. Long-term advances from the FHLB
totaled $66.5 million at December 31, 2007, an increase of $5.4 million or 8.7%
from year-end 2006.
The
Company has completed three private offerings of trust preferred securities
through three separate Delaware statutory trusts sponsored by the Company.
Farmers Capital Bank Trust I (“Trust I”) sold $10.0 million of preferred
securities, Farmers Capital Bank Trust II (“Trust II”) sold $15.0 million of
preferred securities, and Farmers Capital Bank Trust III (“Trust III”) sold
$22.5 million of preferred securities (Trust I, Trust II, and Trust III are
hereafter collectively referred to as the “Trusts”). The proceeds from Trust I
and Trust II were used to fund the cash portion of the Citizens Bancorp
acquisition during 2005. The Company used most of the proceeds
35
from
Trust III for the purpose of financing the cost of acquiring Company shares
under a Modified Dutch Auction share repurchase program during 2007. Remaining
funds were used for general corporate operating purposes. The Company owns all
of the common securities of each of the Trusts.
The
Trusts used the proceeds from the sale of preferred securities, plus capital
contributed by the Company to establish the trusts, to purchase the Company’s
subordinated notes in amounts and bearing terms that parallel the amounts and
terms of the respective preferred securities. The subordinated notes of Trust I
and Trust II mature in 2035 and bear a floating interest rate (current
three-month LIBOR plus 150 basis points in the case of the notes held by Trust I
and current three-month LIBOR plus 165 basis points in the case of the notes
held by Trust II). The subordinated notes of Trust III mature in 2037 and bear a
fixed interest rate through 2012 of 6.60% and convert to floating thereafter at
current three-month LIBOR plus 132 basis points. Interest on the notes is
payable quarterly.
The
subordinated notes of Trust I and Trust II are redeemable in whole or in part,
without penalty, at the Company’s option on or after September 30, 2010 and
mature on September 30, 2035. The subordinated notes of Trust III are redeemable
in whole or in part, without penalty, at the Company’s option on or after
November 1, 2012. The subordinated notes are junior in right of payment of all
present and future senior indebtedness. At December 31, 2007, the balance of the
subordinated notes payable to Trust I, Trust II, and Trust III was $10.3
million, $15.5 million, and $23.2 million, respectively. The interest rates in
effect as of the last determination date in 2007 were 6.73%, 6.88%, and 6.60%
for Trusts I, II, and III, respectively.
Securities
sold under agreements to repurchase represent long-term obligations whereby the
Company borrowed approximately $200 million in multiple fixed rate repurchase
agreements with an initial weighted average cost of 3.95%. The borrowings mature
in time periods ranging from three to 10 years with a weighted average maturity
of 6.5 years and are callable quarterly after time periods ranging from one to
five years. The Company used the proceeds from the borrowing to purchase a like
amount of fixed rate GNMA bonds. The Bonds had an initial weighted average yield
of 5.69% and a stated maturity of 30 years. The estimated weighted average
maturity of the Bonds is seven years.
Contractual
Obligations
The
Company is contractually obligated to make payments as follows.
|
Payments
Due by Period
|
||||||||||||||||||||
|
Contractual
Obligations (In thousands)
|
Total
|
Less
Than
One
Year
|
One
to Three
Years
|
Three
to Five
Years
|
More
Than Five
Years
|
|||||||||||||||
|
Long-term
FHLB debt
|
$
|
66,526 | $ | 10,565 | $ | 14,079 | $ | 17,015 | $ | 24,867 | ||||||||||
|
Subordinated
notes payable
|
48,970 | 48,970 | ||||||||||||||||||
|
Securities
sold under agreements to repurchase
|
200,000 | 50,000 | 50,000 | 100,000 | ||||||||||||||||
|
Unfunded
postretirement benefit obligations
|
4,930 | 361 | 823 | 894 | 2,852 | |||||||||||||||
|
Operating
leases
|
3,906 | 596 | 962 | 656 | 1,692 | |||||||||||||||
|
Capital
lease obligations
|
813 | 237 | 243 | 248 | 85 | |||||||||||||||
|
Total
|
$ | 325,145 | $ | 11,759 | $ | 66,107 | $ | 68,813 | $ | 178,466 | ||||||||||
Long-term
FHLB debt represents FHLB advances pursuant to several different credit
programs. Long-term FHLB debt subordinated notes payable, and securities sold
under agreements to repurchase are more fully described under the caption “Long-Term Borrowings” above and in Note 9 of the Company’s 2007 audited consolidated financial
statements. Payments for borrowings in the table above do not include interest.
Postretirement benefit obligations are actuarially determined and estimated
based on various assumptions with payouts projected over the next 10 years.
Estimates can vary significantly each year due to changes in significant
assumptions. Capital lease obligations represent amounts relating to the
acquisition of data processing hardware and software. Operating leases include
standard business equipment used in the Company’s day-to-day business as well as
the lease of certain branch sites. Operating lease terms generally range from
one to five years, with the ability to extend certain branch site leases at the
Company’s option. Payments related to leases are based on actual payments
specified in the underlying contracts.
Guarantees
During
2007, the Parent Company entered into a guarantee agreement whereby it agreed to
become unconditionally and irrevocably the guarantor of the obligations of its
bank subsidiaries in connection with the balance sheet leverage transaction in
the fourth quarter. The amount of borrowings outstanding guaranteed by the
Parent Company at December 31, 2007 was $200 million, with various maturity
dates ranging from three to ten years. The $200 million outstanding borrowings
are secured by GNMA bonds held by the Parent Company’s subsidiary banks valued
at 106% of the outstanding borrowings or $212 million. Should any of the
subsidiary banks default on its borrowings under the agreement, the GNMA bonds
securing the borrowings would be liquidated to satisfy amounts due. If the value
of the GNMA bonds fall below the obligation under the contract, the Parent
Company is obligated to cover any such
36
shortfall
in absence of the subsidiary banks ability to do so. The Parent Company believes
its subsidiary banks are fully capable of fulfilling their obligations under the
borrowing arrangement and that the Parent Company will not be required to make
any payments under the guarantee agreement.
Effects
of Inflation
The
majority of the Company’s assets and liabilities are monetary in nature.
Therefore, the Company differs greatly from most commercial and industrial
companies that have significant investments in nonmonetary assets, such as fixed
assets and inventories. However, inflation does have an important impact on the
growth of assets in the banking industry and on the resulting need to increase
equity capital at higher than normal rates in order to maintain an appropriate
equity to assets ratio. Inflation also affects other noninterest expense, which
tends to rise during periods of general inflation.
Management
believes the most significant impact on financial and operating results is the
Company’s ability to react to changes in interest rates. Management
seeks to maintain an essentially balanced position between interest sensitive
assets and liabilities in order to protect against the effects of wide interest
rate fluctuations.
Market
risk is the risk of loss arising from adverse changes in market prices and
rates. The Company’s market risk is comprised primarily of interest rate risk
created by its core banking activities of extending loans and receiving
deposits. The Company’s success is largely dependent upon its ability
to manage this risk. Interest rate risk is defined as the exposure of the
Company’s net interest income to adverse movements in interest
rates. Although the Company manages other risks, such as credit and
liquidity risk, management considers interest rate risk to be its most
significant risk, which could potentially have the largest and a material effect
on the Company’s financial condition and results of operations. A sudden and
substantial change in interest rates may adversely impact the Company’s earnings
to the extent that the interest rates earned on assets and paid on liabilities
do not change at the same speed, to the same extent, or on the same
basis. Other events that could have an adverse impact on the
Company’s performance include changes in general economic and financial
conditions, general movements in market interest rates, and changes in consumer
preferences. The Company’s primary purpose in managing interest rate risk is to
effectively invest the Company’s capital and to manage and preserve the value
created by its core banking business.
The
Company has a Corporate Asset and Liability Management Committee (“ALCO”). ALCO
monitors the composition of the balance sheet to ensure comprehensive management
of interest rate risk and liquidity. ALCO also provides guidance and support to
each ALCO of the Company’s subsidiary banks and is responsible for monitoring
risks on a company-wide basis. ALCO has established minimum standards in its
asset and liability management policy that each subsidiary bank must adopt.
However, the subsidiary banks are permitted to deviate from these standards so
long as the deviation is no less stringent than that of the Corporate
policy.
The
Company uses a simulation model as a tool to monitor and evaluate interest rate
risk exposure. The model is designed to measure the sensitivity of net interest
income and net income to changing interest rates during the next twelve months.
Forecasting net interest income and its sensitivity to changes in interest rates
requires the Company to make assumptions about the volume and characteristics of
many attributes, including assumptions relating to the replacement of maturing
earning assets and liabilities. Other assumptions include, but are not limited
to, projected prepayments, projected new volume, and the predicted relationship
between changes in market interest rates and changes in customer account
balances. These effects are combined with the Company’s estimate of the most
likely rate environment to produce a forecast for the next twelve months. The
forecasted results are then compared to the effect of a gradual 200 basis point
increase and decrease in market interest rates on the Company’s net interest
income and net income. Because assumptions are inherently uncertain, the model
cannot precisely estimate net interest income or net income or the effect of
interest rate changes on net interest income and net income. Actual results
could differ significantly from simulated results.
At
December 31, 2007, the model indicated that if rates were to gradually increase
by 200 basis points over the next twelve months, then net interest income (TE)
and net income would increase 3.4% and 5.7%, respectively, compared to
forecasted results. The model indicated that if rates were to gradually decrease
by 200 basis points over the next twelve months, then net interest income (TE)
and net income would decrease 1.9% and 3.8%, respectively, compared to
forecasted results.
In the
current relatively low interest rate environment, it is not practical or
possible to reduce certain deposit rates by the same magnitude as rates on
earning assets. The average rate paid on some of the Company’s deposits remains
below 2%. This situation magnifies the model’s predicted results when modeling a
decrease in interest rates, as earning assets with higher yields have more of an
opportunity to reprice at lower rates than lower-rate deposits.
37
LIQUIDITY
Liquidity
measures the ability to meet current and future cash flow needs as they become
due. For financial institutions, liquidity reflects the ability to meet loan
requests, to accommodate possible outflows in deposits, and to capitalize on
interest rate market opportunities. A financial institution’s ability to meet
its current financial obligations is dependent upon the structure of its balance
sheet, its ability to liquidate assets, and its access to alternative sources of
funds. The Company’s goal is to meet its funding needs by maintaining a level of
liquid funds through its asset/liability management.
The
Company uses a liquidity ratio to help measure its ability to meet its cash flow
needs. This ratio is monitored by ALCO at both the bank level and on a
consolidated basis. The liquidity ratio is based on current and projected levels
of sources and uses of funds. This measure is useful in analyzing cash needs and
formulating strategies to achieve desired results. For example, a low liquidity
ratio could indicate that the Company’s ability to fund loans might become more
difficult. A high liquidity ratio could indicate that the Company may have a
disproportionate amount of funds in low yielding assets, which is more likely to
occur during periods of sluggish loan demand. The Company’s liquidity position
was lower at year-end 2007 compared to year-end 2006, but remains within ALCO
guidelines and considered by management to be at an adequate level.
At the
Parent Company level, liquidity is primarily affected by the receipt of
dividends from its subsidiary banks (see Note 18 of the Company’s 2007 audited
consolidated financial statements), cash balances maintained, and borrowings
from nonaffiliated sources. The Parent Company’s primary uses of cash include
the payment of dividends to its common shareholders, repurchasing its common
stock, business acquisitions, interest expense on borrowings, and paying for
general operating expenses.
The
primary source of funds for the Parent Company is the receipt of dividends from
its subsidiary banks. As of December 31, 2007, combined retained earnings of the
subsidiary banks were $46.4 million, of which $12.6 million was available for
the payment of dividends to the Parent Company without obtaining prior approval
from bank regulatory agencies. As a practical matter, payment of future
dividends is also subject to the maintenance of other capital ratio
requirements. Management expects that in the aggregate, its subsidiary banks
will continue to have the ability to dividend adequate funds to the Parent
Company to meet its near-term liquidity needs. In addition, the Parent Company
has a $15.0 million unsecured line of credit with an unrelated financial
institution available for general corporate purposes. This line of credit
matures in June 2008 and bears interest at the three-month LIBOR rate plus 125
basis points.
The
Parent Company had cash balances of $15.0 million at year-end 2007, an increase
of $3.9 million or 34.9% from the prior year-end. Significant cash receipts of
the Parent Company during 2007 include $22.6 million in dividends from its
subsidiaries and $23.2 million in proceeds from debt issued to Trust III in a
trust preferred securities borrowing transaction. Significant cash payments by
the Parent Company during 2007 include $18.6 million to purchase Company common
stock, $11.1 million for the payment of dividends to shareholders, and $8.0
million additional investment in First Citizens to facilitate the purchase of
the allotment operations of PNC Bank, National Association. Each of the
Company’s subsidiary banks continued to maintain “well capitalized” status as
defined by the FDIC subsequent to their dividend payments.
The
Company's objective as it relates to liquidity is to ensure that its subsidiary
banks have funds available to meet deposit withdrawals and credit demands
without unduly penalizing profitability. In order to maintain a proper level of
liquidity, the subsidiary banks have several sources of funds available on a
daily basis that can be used for liquidity purposes. Those sources of funds
include the subsidiary banks' core deposits, consisting of both business and
nonbusiness deposits; cash flow generated by repayment of principal and interest
on loans and investment securities; FHLB and other borrowings; and federal funds
purchased and securities sold under agreements to repurchase. While maturities
and scheduled amortization of loans and investment securities are generally a
predictable source of funds, deposit outflows and mortgage prepayments are
influenced significantly by general interest rates, economic conditions, and
competition in our local markets. As of December 31, 2007, the
Company had $220 million in additional borrowing capacity under various FHLB,
federal funds, and other borrowing agreements. However, there is no guarantee
that these sources of funds will continue to be available to the Company, or
that current borrowings can be refinanced upon maturity, although the Company is
not aware of any events or uncertainties that are likely to cause a decrease in
the Company’s liquidity from these sources.
For the
longer term, the liquidity position is managed by balancing the maturity
structure of the balance sheet. This process allows for an orderly flow of funds
over an extended period of time. The Company’s ALCOs, both at the bank
subsidiary level and on a consolidated basis, meets regularly and monitors the
composition of the balance sheet to ensure comprehensive management of interest
rate risk and liquidity.
Liquid
assets consist of cash, cash equivalents, and available for sale investment
securities. At December 31, 2007, consolidated liquid assets totaled $622
million, a $138 million or 28.6% increase compared to the prior year-end. Cash
and equivalents decreased $77.7 million or 49.5%, offset by a $216 million or
66.2% in available for sale investment securities in the comparison. The lower
cash and cash equivalents amount at year-end 2007 is due mainly to lower cash
balances from the Commonwealth of Kentucky of $53.3 million
38
or 77.6%
and the overall net funding position of the Company, which changes as loan
demand, deposit levels, and other sources and uses of funds fluctuate. Available
for sale investment securities were up sharply as a result of the $200 million
balance sheet leverage transaction that occurred during the fourth quarter of
2007.
Net cash
provided by continuing operating activities was $22.1 million in 2007,
relatively unchanged from $21.3 million for 2006. Net cash used in continuing
investing activities was $313 million during 2007 compared to $135 million a
year earlier. The $178 million increase in the comparison is attributed mainly
to additional net cash outflows related to investment securities transactions,
primarily driven by the purchase of additional GNMA bonds in the Company’s $200
million balance sheet leverage transaction. Net cash provided by continuing
financing activities totaled $213 million for the year 2007 compared to $130
million during 2006. This represents an increase in cash flows of $83.3 million
or 64.3% in the comparison and is due primarily to a net increase in borrowing
activity of $218 million, partially offset by $115 million in lower net deposit
activity and additional purchases of Company common shares of $17.8 million in
the comparable periods. Increased borrowing activity is due in large part to the
$200 million funds borrowed in the balance sheet leverage transaction and the
$23.2 million borrowed relating to the Company’s share buy-back plan. The lower
net deposit activity between the periods is attributed in part to fluctuations
in balances related to the Commonwealth. During 2006, net deposits from the
Commonwealth increased $47.1 million; during 2007, net deposits declined $53.3
million. The additional number of Company shares purchased during 2007 is
attributed to the share buy-back plan announced during the third quarter of
2007, whereby the Company purchased 559 thousand of its outstanding shares at a
cost of $17.9 million.
Information
relating to off-balance sheet arrangements is disclosed in Note 15 of the Company’s 2007 audited consolidated financial
statements. These transactions are entered into in the ordinary course of
providing traditional banking services and are considered in managing the
Company’s liquidity position. The Company does not expect these commitments to
significantly affect the liquidity position in future periods. The Company has
not entered into any contracts for financial derivative instruments such as
futures, swaps, options, or similar instruments.
CAPITAL
RESOURCES
Shareholders’
equity was $168 million on December 31, 2007, a decrease of $8.6 million or 4.8%
from $177 million at December 31, 2006. Retained earnings declined
$6.2 million or 4.8% as a result of $15.6 million of net income partially offset
by $10.1 million or $1.32 per share in cash dividends declared and $11.7 million
attributed to the Company’s purchase of its outstanding common stock. The total
decline in shareholders’ equity related to share repurchase activity in 2007 was
$18.6 million. This includes $17.9 million paid for outstanding shares through
the Company’s modified Dutch Auction self tender offer during the third quarter
of 2007.
Other
significant changes to shareholders’ equity include $1.5 million in proceeds
from employees stock option exercises and an increase in accumulated other
comprehensive income that increased equity by $2.7 million. The higher
accumulated other comprehensive income is attributed to a net increase in the
market value on available for sale investment securities of $1.6 million, net of
tax. The increase in the market value of available for sale investment
securities is due primarily to the impact of changing economic conditions,
including a decline in Treasury yields at December 31, 2007 compared to December
31, 2006. The decline in yields occurred in nearly all maturity ranges, with
shorter-term rates experiencing the largest decreases. As overall yields have
decreased, the portfolio has increased in value. Market values of
fixed rate investments are inversely related to changes in market interest
rates. The remaining $1.1 million increase in accumulated other comprehensive
income is attributed to the change in the funded status of the Company’s defined
benefit postretirement health insurance plans.
Under
current regulatory requirements, accumulated other comprehensive amounts related
to the net unrealized gain or loss on securities available for sale and the
funded status of the Company’s defined benefit postretirement benefit plans do
not impact regulatory capital; therefore, they are not included in the
risk-based capital or leverage ratios that follow.
During
the third quarter of 2007, the Company reclassified its previous presentation of
treasury stock to conform to its current presentation. The current presentation
displays purchased shares as retired. These reclassifications, which include
$43.1 million and $42.4 million in cumulative stock repurchased at June 30, 2007
and December 31, 2006, respectively, had no impact on net income or total
shareholders’ equity as previously reported and is not material to the Company’s
financial statements.
Consistent
with the objective of operating a sound financial organization, the Company’s
goal is to maintain capital ratios well above the regulatory minimum
requirements. The Company's capital ratios as of December 31, 2007, the
regulatory minimums, and the regulatory standard for a well-capitalized
institution are as follows.
|
Farmers
Capital
Bank
Corporation
|
Regulatory
Minimum
|
|||||||
|
Tier
1 risk-based
|
11.55 | % | 4.00 | % | ||||
|
Total
risk-based
|
12.60 | 8.00 | ||||||
|
Leverage
|
8.08 | 4.00 | ||||||
39
The
capital ratios of each subsidiary bank were in excess of the applicable minimum
regulatory capital ratio requirements at December 31, 2007. The Company is not
aware of any recommendations by its regulatory authorities which, if
implemented, would have a material effect on its capital resources, liquidity,
or operations.
The table
below is an analysis of dividend payout ratios and equity to asset ratios for
the previous five years.
|
Years
Ended December 31,
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Percentage
of dividends declared to income from continuing operations
|
64.52 | % | 78.89 | % | 61.67 | % | 68.10 | % | 70.70 | % | |||||||||||
|
Percentage
of average shareholders’ equity to average total assets1
|
9.33 | 10.04 | 10.19 | 10.45 | 10.88 | ||||||||||||||||
1Excludes
assets of discontinued operations.
Share
Buy Back Program
At
various times, the Company’s Board of Directors has authorized the purchase
shares of the Company’s outstanding common stock. No stated
expiration dates have been established under any of the previous authorizations.
There are approximately 128 thousand shares that may still be purchased under
the various authorizations.
In July
2007, the Company announced a tender offer to purchase for cash up to 550
thousand shares of its outstanding common stock at a price not greater than
$35.00 or less than $31.00 per share through a process commonly known as a
modified “Dutch Auction”. The Company had the right to purchase up to an
additional 2% of the outstanding shares in accordance with applicable securities
laws. Pursuant to the terms of the tender offer, the Company purchased 559
thousand shares of its common stock, which represented 7.1% of the Company’s
issued and outstanding shares on the date of purchase, at a purchase price of
$32.00 per share.
As of
February 22, 2008, the Company had 2,653 shareholders of record.
Farmers
Capital Bank Corporation's stock is traded on the NASDAQ Stock Market LLC
exchange in the Global Select Market tier, with sales prices reported under the
symbol: FFKT. The table below lists the stock prices and dividends declared for
2007 and 2006.
Stock
Prices
|
High
|
Low
|
Dividends
Declared
|
||||||||||
|
2007
|
||||||||||||
|
Fourth
Quarter
|
$ | 30.72 | $ | 26.43 | $ | .33 | ||||||
|
Third
Quarter
|
33.50 | 28.35 | .33 | |||||||||
|
Second
Quarter
|
31.66 | 28.29 | .33 | |||||||||
|
First
Quarter
|
35.35 | 29.00 | .33 | |||||||||
|
2006
|
||||||||||||
|
Fourth
Quarter
|
$ | 36.98 | $ | 32.40 | $ | .44 | ||||||
|
Third
Quarter
|
34.59 | 29.78 | .33 | |||||||||
|
Second
Quarter
|
32.82 | 29.25 | .33 | |||||||||
|
First
Quarter
|
33.54 | 30.59 | .33 | |||||||||
The
closing price per share of common stock on December 31, 2007, the last trading
day of the Company’s fiscal year, was $27.00. Dividends declared per share were
$1.32 and $1.43 for 2007 and 2006, respectively. A special one-time $.11 per
share dividend was declared during the fourth quarter of 2006.
Recently
Issued Accounting Standards
Please
refer to the caption “Recently Issued But
Not Yet Effective Accounting Standards” in Note 1 of the Company’s 2007
audited consolidated financial statements.
2006
Compared to 2005
Consolidated
net income for 2006 was $21.4 million, an increase of $5.6 million or 35.5%
compared to $15.8 million for 2005. Basic and diluted net income per share for
2006 was $2.85 and $2.84, respectively. This represents an increase of $.54 or
23.4% and 23.5% on a basic and diluted basis, respectively. Net income for 2006
includes $7.7 million attributed to discontinued operations, including
40
gains on
disposals (net of tax) of $6.4 million. Income from continuing operations for
2006 was $13.7 million, a decline of $867 thousand or 6.0% from $14.5 million in
2005. Basic and diluted income per share from continuing operations for 2006 was
$1.82 compared to $2.13 and $2.12 in 2005, respectively. This represents a
decrease of $.31 or 14.6% on a basic per share basis and $.30 or 14.2% on a
diluted per share basis.
For 2006,
the Company reported a $9.7 million or 23.4% increase in net interest income and
a higher provision for loan losses of $343 thousand. The increase in net
interest income is primarily due to higher interest on loans of $24.7 million or
47.0%, partially offset by $13.4 million or 70.2% higher interest expense on
deposits. The increase in net interest income was driven by the Citizens Bancorp
and Citizens Jessamine acquisitions, which occurred during the fourth quarter of
2005 and the fourth quarter of 2006, respectively. Net noninterest expense
(noninterest expense in excess of noninterest income) grew $10.6 million and the
provision for income taxes was down $431 thousand.
The
general trend of the short-term interest rate environment for 2006 was upward
primarily as a result of short-term interest rate increases by the Fed. The Fed
began to increase the short-term federal funds rate by increments of 25 basis
points during the last half of 2004 that continued into 2006. In all, the
federal funds rate was increased 125 basis points during 2004, 200 basis points
during 2005, and 100 basis points during 2006 and stood at 5.25% at year-end
2006. Longer-term yields, such as for the 3, 5, 10, and 20 year treasuries, were
also up at year-end 2006 compared to year-end 2005, with the 3, 5, and 10 year
notes up 37, 35, and 32 basis points, respectively and the 20 year bond up 30
basis points. For the Company, this has had a relatively neutral impact on net
interest margin and spread in the comparison. Net interest margin for
2006 increased 6 basis points to 3.75% from 3.69% due to the impact of
noninterest bearing sources of funds used to support the increase in interest
earning assets.
The
information required by this item is incorporated by reference to Part II, Item
7 under the caption “Market Risk
Management” on page 37 of this Form 10-K.
41
MANAGEMENT’S
RESPONSIBILITY FOR FINANCIAL REPORTING
The
management of Farmers Capital Bank Corporation has the responsibility for
preparing the accompanying consolidated financial statements and for their
integrity and objectivity. The statements were prepared in accordance with
accounting principles generally accepted in the United States of America. The
consolidated financial statements include amounts that are based on management's
best estimates and judgments. Management also prepared other information in the
annual report and is responsible for its accuracy and consistency with the
financial statements.
The
Company’s 2007 consolidated financial statements have been audited by Crowe
Chizek and Company LLC independent accountants. Management has made available to
Crowe Chizek and Company LLC all financial records and related data, as well as
the minutes of Boards of Directors’ meetings. Management believes
that all representations made to Crowe Chizek and Company LLC during the audit
were valid and appropriate.
 |
 |
|
G.
Anthony Busseni
|
C.
Douglas Carpenter
|
|
President
and CEO
|
Senior
Vice President, Secretary, and CFO
|
|
March
12, 2008
|
42
Board of
Directors and Shareholders
Farmers
Capital Bank Corporation
Frankfort,
Kentucky
We have
audited the accompanying consolidated balance sheets of Farmers Capital Bank
Corporation as of December 31, 2007, and 2006, and the related consolidated
statements of income, comprehensive income, changes in shareholders’ equity, and
cash flows for each of the years in the three-year period ended December 31,
2007. We also have audited Farmers Capital Bank Corporation's internal control
over financial reporting as of December 31, 2007, based on criteria established
in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting
(see Item 9A in the accompanying Form 10-K). Our responsibility is to express an
opinion on these financial statements and an opinion on the company's internal
control over financial reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2007
and 2006, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2007 in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Crowe
Chizek and Company LLC
Louisville,
Kentucky
March 12,
2008
43
|
December
31, (In thousands, except share data)
|
2007
|
2006 | 1 | |||||
|
Assets
|
||||||||
|
Cash
and cash equivalents:
|
||||||||
|
Cash
and due from banks
|
$ | 44,896 | $ | 115,640 | ||||
|
Interest
bearing deposits in other banks
|
2,290 | 1,783 | ||||||
|
Federal
funds sold and securities purchased under agreements to
resell
|
31,954 | 39,405 | ||||||
|
Total
cash and cash equivalents
|
79,140 | 156,828 | ||||||
|
Investment
securities:
|
||||||||
|
Available
for sale, amortized cost of $542,259 (2007) and $328,499
(2006)
|
542,633 | 326,485 | ||||||
|
Held
to maturity, fair value of $3,863 (2007) and $7,849 (2006)
|
3,844 | 7,788 | ||||||
|
Total
investment securities
|
546,477 | 334,273 | ||||||
|
Loans,
net of unearned income
|
1,291,985 | 1,197,836 | ||||||
|
Allowance
for loan losses
|
(14,216 | ) | (11,999 | ) | ||||
|
Loans,
net
|
1,277,769 | 1,185,837 | ||||||
|
Premises
and equipment, net
|
38,663 | 37,775 | ||||||
|
Company-owned
life insurance
|
34,171 | 32,929 | ||||||
|
Goodwill
|
52,408 | 42,822 | ||||||
|
Other
intangible assets, net
|
9,543 | 9,755 | ||||||
|
Other
assets
|
30,076 | 24,889 | ||||||
|
Total
assets
|
$ | 2,068,247 | $ | 1,825,108 | ||||
|
Liabilities
|
||||||||
|
Deposits:
|
||||||||
|
Noninterest
bearing
|
$ | 192,432 | $ | 242,938 | ||||
|
Interest
bearing
|
1,281,665 | 1,211,882 | ||||||
|
Total
deposits
|
1,474,097 | 1,454,820 | ||||||
|
Federal
funds purchased and other short-term borrowings
|
80,755 | 76,718 | ||||||
|
Securities
sold under agreements to repurchase and other long-term
borrowings
|
267,339 | 62,218 | ||||||
|
Subordinated
notes payable to unconsolidated trusts
|
48,970 | 25,774 | ||||||
|
Dividends
payable
|
2,436 | 3,472 | ||||||
|
Other
liabilities
|
26,159 | 25,043 | ||||||
|
Total
liabilities
|
1,899,756 | 1,648,045 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Shareholders’
Equity
|
||||||||
|
Preferred
stock, no par value; 1,000,000 shares authorized; none
issued
|
||||||||
|
Common
stock, par value $.125 per share; 9,608,000 shares
authorized;
7,384,865
and 7,895,452 shares issued and outstanding at
December
31, 2007 and 2006, respectively
|
923 | 988 | ||||||
|
Capital
surplus
|
48,176 | 53,201 | ||||||
|
Retained
earnings
|
122,498 | 128,652 | ||||||
|
Accumulated
other comprehensive loss
|
(3,106 | ) | (5,778 | ) | ||||
|
Total
shareholders’ equity
|
168,491 | 177,063 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 2,068,247 | $ | 1,825,108 | ||||
See
accompanying notes to consolidated financial statements.
|
|
1Certain amounts have been revised
related to the Company’s postretirement benefits plans and equity
accounts. Please refer to Note 1 under the captions “Revised 2006 Balance Sheet and Statement of Changes in
Shareholders’ Equity” and “Treasury
Stock”.
|
|
(In
thousands, except per share data)
|
||||||||||||
|
Years
Ended December 31,
|
2007
|
2006
|
2005
|
|||||||||
|
Interest
Income
|
||||||||||||
|
Interest
and fees on loans
|
$ | 94,941 | $ | 77,303 | $ | 52,579 | ||||||
|
Interest
on investment securities:
|
||||||||||||
|
Taxable
|
12,627 | 9,025 | 7,483 | |||||||||
|
Nontaxable
|
3,356 | 3,657 | 3,778 | |||||||||
|
Interest
on deposits in other banks
|
64 | 53 | 61 | |||||||||
|
Interest
on federal funds sold and securities purchased under agreements
to resell
|
3,269 | 2,302 | 1,750 | |||||||||
|
Total
interest income
|
114,257 | 92,340 | 65,651 | |||||||||
|
Interest
Expense
|
||||||||||||
|
Interest
on deposits
|
45,157 | 32,554 | 19,130 | |||||||||
|
Interest
on federal funds purchased and other short-term borrowings
|
4,504 | 4,676 | 2,592 | |||||||||
|
Interest
on subordinated notes payable to unconsolidated trusts
|
2,394 | 1,747 | 623 | |||||||||
|
Interest
on securities sold under agreements to purchase and other long-term
borrowings
|
3,984 | 2,455 | 2,064 | |||||||||
|
Total
interest expense
|
56,039 | 41,432 | 24,409 | |||||||||
|
Net
interest income
|
58,218 | 50,908 | 41,242 | |||||||||
|
Provision
for loan losses
|
3,638 | 965 | 622 | |||||||||
|
Net
interest income after provision for loan losses
|
54,580 | 49,943 | 40,620 | |||||||||
|
Noninterest
Income
|
||||||||||||
|
Service
charges and fees on deposits
|
11,955 | 9,191 | 8,543 | |||||||||
|
Allotment
processing fees
|
4,363 | 2,601 | 2,656 | |||||||||
|
Other
service charges, commissions, and fees
|
2,529 | 2,617 | 2,245 | |||||||||
|
Data
processing income
|
1,227 | 1,719 | 1,786 | |||||||||
|
Trust
income
|
2,053 | 1,790 | 1,616 | |||||||||
|
Investment
securities losses, net
|
(195 | ) | (3 | ) | ||||||||
|
Gains
on sale of mortgage loans, net
|
591 | 649 | 653 | |||||||||
|
Income
from company-owned life insurance
|
1,278 | 1,343 | 1,189 | |||||||||
|
Other
|
161 | 744 | 1,182 | |||||||||
|
Total
noninterest income
|
24,157 | 20,459 | 19,867 | |||||||||
|
Noninterest
Expense
|
||||||||||||
|
Salaries
and employee benefits
|
31,420 | 28,978 | 22,347 | |||||||||
|
Occupancy
expenses, net
|
4,261 | 3,664 | 2,751 | |||||||||
|
Equipment
expenses
|
3,232 | 2,929 | 2,587 | |||||||||
|
Data
processing and communications expenses
|
4,719 | 4,980 | 4,161 | |||||||||
|
Bank
franchise tax
|
2,086 | 1,831 | 1,377 | |||||||||
|
Correspondent
bank fees
|
721 | 692 | 883 | |||||||||
|
Amortization
of intangibles
|
3,362 | 2,009 | 934 | |||||||||
|
Other
|
9,022 | 8,294 | 7,124 | |||||||||
|
Total
noninterest expense
|
58,823 | 53,377 | 42,164 | |||||||||
|
Income
from continuing operations before income taxes
|
19,914 | 17,025 | 18,323 | |||||||||
|
Income
tax expense from continuing operations
|
4,287 | 3,360 | 3,791 | |||||||||
|
Income
from continuing operations
|
15,627 | 13,665 | 14,532 | |||||||||
|
Income
from discontinued operations before income taxes (including gain on
disposals of $9,873 in 2006)
|
11,842 | 1,723 | ||||||||||
|
Income
tax expense from discontinued operations (including $3,456 related to gain
on disposals in 2006)
|
4,135 | 483 | ||||||||||
|
Income
from discontinued operations
|
7,707 | 1,240 | ||||||||||
|
Net
income
|
$ | 15,627 | $ | 21,372 | $ | 15,772 | ||||||
|
Net
Income Per Common Share
|
||||||||||||
|
Income
from continuing operations – basic
|
$ | 2.03 | $ | 1.82 | $ | 2.13 | ||||||
|
Income
from discontinued operations – basic
|
1.03 | .18 | ||||||||||
|
Net
income per common share – basic
|
2.03 | 2.85 | 2.31 | |||||||||
|
Income
from continuing operations – diluted
|
2.03 | 1.82 | 2.12 | |||||||||
|
Income
from discontinued operations - diluted
|
1.02 | .18 | ||||||||||
|
Net
income per common share - diluted
|
2.03 | 2.84 | 2.30 | |||||||||
|
Weighted
Average Shares Outstanding
|
||||||||||||
|
Basic
|
7,706 | 7,511 | 6,831 | |||||||||
|
Diluted
|
7,706 | 7,526 | 6,864 | |||||||||
See
accompanying notes to consolidated financial statements.
45
|
(In
thousands)
|
||||||||||||
|
Years
Ended December 31,
|
2007
|
2006
|
2005
|
|||||||||
|
Net
income
|
$ | 15,627 | $ | 21,372 | $ | 15,772 | ||||||
|
Other
comprehensive income:
|
||||||||||||
|
Unrealized
holding gain (loss) on available for sale securities arising during the
period on securities held at end of period, net of tax of $830, $306, and
$1,410, respectively
|
1,542 | 568 | (2,622 | ) | ||||||||
|
Reclassification
adjustment for prior period unrealized loss previously reported in other
comprehensive income recognized during current period, net of tax of $5,
$22, and $3, respectively
|
10 | 40 | 5 | |||||||||
|
Change
in unfunded portion of postretirement benefit obligation, net of tax of
$603
|
1,120 | |||||||||||
|
Other
comprehensive income (loss)
|
2,672 | 608 | (2,617 | ) | ||||||||
|
Comprehensive
income
|
$ | 18,299 | $ | 21,980 | $ | 13,155 | ||||||
See
accompanying notes to consolidated financial statements.
46
|
(In
thousands, except per share data)
|
Accumulated
Other
|
Total
|
||||||||||||||||||||||
|
Years
Ended
|
Common
Stock
|
Capital
|
Retained
|
Comprehensive
|
Shareholders’
|
|||||||||||||||||||
|
December
31, 2007, 2006, and 2005
|
Shares
|
Amount
|
Surplus
|
Earnings
|
Income
(Loss)
|
Equity1
|
||||||||||||||||||
|
Balance
at January 1, 2005
|
6,784 | $ | 848 | $ | 17,427 | $ | 112,475 | $ | 700 | $ | 131,450 | |||||||||||||
|
Net
income
|
15,772 | 15,772 | ||||||||||||||||||||||
|
Other
comprehensive loss
|
(2,617 | ) | (2,617 | ) | ||||||||||||||||||||
|
Cash
dividends declared, $1.32 per share
|
(8,961 | ) | (8,961 | ) | ||||||||||||||||||||
|
Purchase
of common stock
|
(17 | ) | (2 | ) | (44 | ) | (525 | ) | (571 | ) | ||||||||||||||
|
Stock
options exercised, including related tax benefits
|
31 | 4 | 770 | 774 | ||||||||||||||||||||
|
Shares
issued pursuant to Employee Stock Purchase Plan
|
7 | 1 | 186 | 187 | ||||||||||||||||||||
|
Shares
issued in connection with the
purchase
of Citizens Bancorp, Inc.
|
584 | 73 | 18,129 | 18,202 | ||||||||||||||||||||
|
Balance
at December 31, 2005
|
7,389 | 924 | 36,468 | 118,761 | (1,917 | ) | 154,236 | |||||||||||||||||
|
Net
income
|
21,372 | 21,372 | ||||||||||||||||||||||
|
Other
comprehensive income
|
608 | 608 | ||||||||||||||||||||||
|
Cash
dividends declared, $1.43 per share
|
(10,781 | ) | (10,781 | ) | ||||||||||||||||||||
|
Purchase
of common stock
|
(26 | ) | (3 | ) | (117 | ) | (700 | ) | (820 | ) | ||||||||||||||
|
Stock
options exercised, including related tax benefits
|
60 | 8 | 1,536 | 1,544 | ||||||||||||||||||||
|
Shares
issued pursuant to Employee Stock Purchase Plan
|
8 | 1 | 222 | 223 | ||||||||||||||||||||
|
Stock
option expense
|
154 | 154 | ||||||||||||||||||||||
|
Shares
issued in connection with the purchase of Citizens
National Bancshares, Inc.
|
464 | 58 | 14,938 | 14,996 | ||||||||||||||||||||
|
Adjustment
to initially apply SFAS
No.
158, net of tax of $2,4071
|
(4,469 | ) | (4,469 | ) | ||||||||||||||||||||
|
Balance
at December 31, 2006
|
7,895 | 988 | 53,201 | 128,652 | (5,778 | ) | 177,063 | |||||||||||||||||
|
Net
income
|
15,627 | 15,627 | ||||||||||||||||||||||
|
Other
comprehensive income
|
2,672 | 2,672 | ||||||||||||||||||||||
|
Cash
dividends declared, $1.32 per share
|
(10,082 | ) | (10,082 | ) | ||||||||||||||||||||
|
Purchase
of common stock
|
(584 | ) | (73 | ) | (6,877 | ) | (11,699 | ) | (18,649 | ) | ||||||||||||||
|
Stock
options exercised, including related tax benefits
|
63 | 7 | 1,540 | 1,547 | ||||||||||||||||||||
|
Shares
issued pursuant to Employee Stock Purchase Plan
|
11 | 1 | 253 | 254 | ||||||||||||||||||||
|
Stock
option expense
|
59 | 59 | ||||||||||||||||||||||
|
Balance
at December 31, 2007
|
7,385 | $ | 923 | $ | 48,176 | $ | 122,498 | $ | (3,106 | ) | $ | 168,491 | ||||||||||||
See
accompanying notes to consolidated financial statements.
1Certain amounts have been revised
related to the Company’s postretirement benefits plans and equity accounts.
Please refer to Note 1 under the captions “Revised 2006
Balance Sheet and Statement of Changes in Shareholders’ Equity” and “Treasury Stock”.
47
|
Years
Ended December 31, (In thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Cash
Flows from Operating Activities
|
||||||||||||
|
Net
income
|
$ | 15,627 | $ | 21,372 | $ | 15,772 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
7,477 | 5,826 | 4,085 | |||||||||
|
Net
amortization (accretion) of investment security premiums and
discounts:
|
||||||||||||
|
Available
for sale
|
(1,132 | ) | (424 | ) | 323 | |||||||
|
Held
to maturity
|
1 | (25 | ) | (39 | ) | |||||||
|
Provision
for loan losses
|
3,638 | 965 | 622 | |||||||||
|
Deferred
income tax benefit
|
(1,807 | ) | (1,848 | ) | (194 | ) | ||||||
|
Noncash
stock option expense
|
59 | 125 | ||||||||||
|
Mortgage
loans originated for sale
|
(19,684 | ) | (29,539 | ) | (35,456 | ) | ||||||
|
Proceeds
from sale of mortgage loans
|
21,081 | 26,973 | 35,849 | |||||||||
|
Gains
on sale of mortgage loans, net
|
(591 | ) | (649 | ) | (653 | ) | ||||||
|
Gain
on sale of credit card portfolio
|
(700 | ) | ||||||||||
|
Loss
(gain) on sale of premises and equipment, net
|
89 | (174 | ) | 14 | ||||||||
|
Loss
on sale of available for sale investment securities, net
|
195 | 3 | ||||||||||
|
Increase
in accrued interest receivable
|
(1,602 | ) | (3,450 | ) | (1,705 | ) | ||||||
|
Income
from company-owned life insurance
|
(1,242 | ) | (1,301 | ) | (1,162 | ) | ||||||
|
Decrease
in other assets
|
1,124 | 6,157 | 2,869 | |||||||||
|
Increase
in accrued interest payable
|
1,672 | 2,594 | 618 | |||||||||
|
(Decrease)
increase in other liabilities
|
(2,656 | ) | 4,409 | (1,335 | ) | |||||||
|
Gain
on sales of discontinued operations
|
(9,873 | ) | ||||||||||
|
Net
cash provided by discontinued operating activities
|
1,390 | 1,638 | ||||||||||
|
Net
cash provided by operating activities
|
22,054 | 22,723 | 20,549 | |||||||||
|
Cash
Flows from Investing Activities
|
||||||||||||
|
Proceeds
from maturities and calls of investment securities:
|
||||||||||||
|
Available
for sale
|
323,155 | 121,699 | 164,014 | |||||||||
|
Held
to maturity
|
3,943 | 5,847 | 4,314 | |||||||||
|
Proceeds
from sale of available for sale investment securities
|
20,009 | 19,263 | 3,038 | |||||||||
|
Purchases
of available for sale investment securities:
|
(555,792 | ) | (138,081 | ) | (158,252 | ) | ||||||
|
Loans
originated for investment, net of principal collected
|
(96,376 | ) | (112,426 | ) | (37,461 | ) | ||||||
|
Purchase
of company-owned life insurance
|
(1,579 | ) | ||||||||||
|
Payment
of prior year accrued purchase price-Citizens Bancorp,
Inc.
|
(21,846 | ) | ||||||||||
|
Net
cash acquired in purchase of Citizens National Bancshares,
Inc.
|
1,066 | |||||||||||
|
Purchase
of Citizens Bancorp, Inc., net of cash acquired
|
(29 | ) | 10,620 | |||||||||
|
Purchase
of PNC Military Allotment operations, net of cash acquired
|
(1,943 | ) | ||||||||||
|
Purchase
price refinements of previous acquisitions
|
50 | (205 | ) | |||||||||
|
Investment
in unconsolidated trusts
|
(696 | ) | (774 | ) | ||||||||
|
Additions
to mortgage servicing rights, net
|
(94 | ) | (47 | ) | ||||||||
|
Purchases
of premises and equipment
|
(5,245 | ) | (9,682 | ) | (3,341 | ) | ||||||
|
Proceeds
from sale of equipment
|
330 | 720 | 124 | |||||||||
|
Net
cash received on disposal of discontinued operations
|
47 | |||||||||||
|
Net
cash provided by discontinued investing activities
|
9,384 | 15,058 | ||||||||||
|
Net
cash used in investing activities
|
(312,659 | ) | (125,664 | ) | (2,865 | ) | ||||||
|
Cash
Flows from Financing Activities
|
||||||||||||
|
Net
increase in deposits
|
8,407 | 123,728 | 29,891 | |||||||||
|
Net
increase in federal funds purchased and other short-term
borrowings
|
4,037 | 1,722 | 10,767 | |||||||||
|
Proceeds
from securities sold under agreements to purchase and other long-term
debt
|
249,196 | 26,198 | 27,774 | |||||||||
|
Repayments
of securities sold under agreements to purchase and other long-term
debt
|
(20,879 | ) | (13,496 | ) | (7,750 | ) | ||||||
|
Dividends
paid
|
(11,118 | ) | (9,553 | ) | (8,949 | ) | ||||||
|
Purchase
of common stock
|
(18,649 | ) | (820 | ) | (571 | ) | ||||||
|
Shares
issued under Employee Stock Purchase Plan
|
254 | 223 | 187 | |||||||||
|
Stock
options exercised and related tax benefits
|
1,669 | 1,697 | 880 | |||||||||
|
Net
cash provided by (used in) discontinued financing
activities
|
3,710 | (12,607 | ) | |||||||||
|
Net
cash provided by financing activities
|
212,917 | 133,409 | 39,622 | |||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(77,688 | ) | 30,468 | 57,306 | ||||||||
|
Less:
net increase in cash and cash equivalents of discontinued
operations
|
(4,658 | ) | (4,089 | ) | ||||||||
|
Net
(decrease) increase in cash and cash equivalents from continuing
operations
|
(77,688 | ) | 25,810 | 53,217 | ||||||||
|
Cash
and cash equivalents from continuing operations at beginning of
year
|
156,828 | 131,018 | 77,801 | |||||||||
|
Cash
and cash equivalents from continuing operations at end of
year
|
$ | 79,140 | $ | 156,828 | $ | 131,018 | ||||||
|
(table
continues on next page)
|
||||||||||||
48
|
Supplemental
Disclosures
|
||||||||||||
|
Cash
paid during the year for:
|
||||||||||||
|
Interest
|
$ | 54,367 | $ | 42,685 | $ | 26,973 | ||||||
|
Income
taxes
|
9,854 | 4,900 | 2,725 | |||||||||
|
Transfers
from loans to repossessed assets
|
3,952 | 1,973 | 2,751 | |||||||||
|
Cash
dividend declared and unpaid at year-end
|
2,436 | 3,472 | 2,244 | |||||||||
|
Issuance
of 464 and 584 shares of common stock to acquire Citizens National
Bancshares, Inc. and Citizens Bancorp, Inc., respectively
|
14,996 | 18,202 | ||||||||||
|
Acquisition
purchase price payable at year-end
|
21,846 | |||||||||||
See
accompanying notes to consolidated financial statements.
49
|
1.
|
Summary
of Significant Accounting Policies
|
The
accounting and reporting policies of Farmers Capital Bank Corporation and
subsidiaries conform to accounting principles generally accepted in the United
States of America and general practices applicable to the banking industry.
Significant accounting policies are summarized below.
Principles
of Consolidation and Nature of Operations
The
consolidated financial statements include the accounts of Farmers Capital Bank
Corporation (the "Company"), a financial holding company, and its bank and
nonbank subsidiaries. Bank subsidiaries include Farmers Bank & Capital Trust
Co. (“Farmers Bank”) in Frankfort, KY and its wholly-owned subsidiaries Leasing
One Corporation (“Leasing One”) and Farmers Capital Insurance Corporation
(“Farmers Insurance”). Leasing One is a commercial leasing company in Frankfort,
KY and Farmers Insurance is an insurance agency in Frankfort, KY; Farmers Bank
and Trust Company in Georgetown, KY (“Farmers Georgetown”) including its
formerly wholly-owned subsidiary Pro Mortgage Partners, LLC (“Pro Mortgage”), a
mortgage brokerage company established in 2004 that was merged into Farmers
Georgetown at year-end 2007; First Citizens Bank in Elizabethtown, KY (“First
Citizens”); United Bank & Trust Co. in Versailles, KY; The Lawrenceburg Bank
and Trust Company in Harrodsburg, KY; Kentucky Banking Centers, Inc. (“KBC”) in
Glasgow, KY, which was sold during 2006; Citizens Bank of Northern Kentucky,
Inc. in Newport, KY (“Citizens Northern”); and Citizens Bank of Jessamine County
in Nicholasville, KY (“Citizens Jessamine”). The Company has three active
nonbank subsidiaries, FCB Services, Inc. (“FCB Services”), Kentucky General
Holdings, LLC (“Kentucky General”), and FFKT Insurance Services, Inc. (“FFKT
Insurance”). FCB Services is a data processing subsidiary located in Frankfort,
KY, which provides services to the Company’s banks as well as other unaffiliated
entities. Kentucky General holds a 50% voting interest in KHL Holdings, LLC,
which is the parent company of Kentucky Home Life Insurance Company. FFKT
Insurance is a captive property and casualty insurance company insuring
primarily deductible exposures and uncovered liability related to properties of
the Company. All significant intercompany transactions and balances are
eliminated in consolidation.
The
Company provides financial services at its 36 locations in 23 communities
throughout Central and Northern Kentucky to individual, business, agriculture,
government, and educational customers. Its primary deposit products are
checking, savings, and term certificate accounts. Its primary lending
products are residential mortgage, commercial lending and leasing, and
installment loans. Substantially all loans and leases are secured by specific
items of collateral including business assets, consumer assets, and commercial
and residential real estate. Commercial loans and leases are expected to be
repaid from cash flow from operations of businesses. Farmers Bank has served as
the general depository for the Commonwealth of Kentucky for over 70 years and
also provides investment and other services to the Commonwealth. Other services
include, but are not limited to, cash management services, issuing letters of
credit, safe deposit box rental, and providing funds transfer
services. Other financial instruments, which potentially represent
concentrations of credit risk, include deposit accounts in other financial
institutions and federal funds sold.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates used in the preparation of the
financial statements are based on various factors including the current interest
rate environment and the general strength of the local
economy. Changes in the overall interest rate environment can
significantly affect the Company's net interest income and the value of its
recorded assets and liabilities. Actual results could differ from those
estimates used in the preparation of the financial statements. The allowance for
loan losses, carrying value of real estate, actuarial assumptions used to
calculate postretirement benefits, and the fair values of financial instruments
are estimates that are particularly subject to change.
At
December 31, 2006, the Company adopted Financial Accounting Standards Board
(“FASB”) Statement of Financial Accounting Standards No. (“SFAS”) 158 for its
postretirement benefit plans. During the fourth quarter of 2007 the Company
learned that an actuarial error, related to the selection of the appropriate
actuarial table, caused the amount recorded upon adoption to be incorrect. The
previously recorded adjustment upon adoption was $3,091,000; it should
have been
$4,469,000. Although the error was not material to the 2006 consolidated
financial statements, the Company determined that the 2006 amount should be
revised because correcting the error through the 2007 consolidated financial
statements would have resulted in a material misstatement of other comprehensive
income within the consolidated statement of comprehensive income. Accordingly,
other assets, other liabilities, and the comprehensive income component of
shareholders’ equity have been revised to reflect the correct balance. These
revisions increased total assets at December 31, 2006 by $742,000, increased
total liabilities by $2,120,000, and reduced total shareholders’ equity by
$1,378,000 or less than 1%; no revision to the 2006 statement of income was
required. In accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 108, the Company’s consolidated balance sheet and statement of
changes in shareholders’ equity for 2006 is presented as revised in this 2007
annual report on Form 10-K.
50
Reclassifications
Certain
amounts in the accompanying consolidated financial statements presented for
prior years have been reclassified to conform to the 2007 presentation. These
reclassifications do not affect net income or total shareholders' equity as
previously reported.
Segment
Information
The
Company provides a broad range of financial services to individuals,
corporations, and others through its 36 banking locations throughout Central and
Northern Kentucky. These services primarily include the activities of lending
and leasing, receiving deposits, providing cash management services, safe
deposit box rental, and trust activities. Operations are managed and financial
performance is evaluated at the subsidiary level. The Company’s chief decision
makers monitor the results of the various banking products and services of its
subsidiaries. Accordingly, all of the Company’s operations are considered by
management to be aggregated in one reportable operating segment; commercial and
retail banking.
Cash
Flows
For
purposes of reporting cash flows, cash and cash equivalents include the
following: cash on hand, deposits from other financial institutions that have an
initial maturity of less than 90 days when acquired by the Company, federal
funds sold, and securities purchased under agreements to resell. Generally,
federal funds sold and securities purchased under agreements to resell are
purchased and sold for one-day periods. Net cash flows are reported
for loan and deposit transactions.
Investment
Securities
Investments
in debt and equity securities are classified into three categories. Securities
that management has the positive intent and ability to hold until maturity are
classified as held to maturity. Securities that are bought and held specifically
for the purpose of selling them in the near term are classified as trading
securities. The Company had no securities classified as trading during 2007,
2006, or 2005. All other securities are classified as available for
sale. Securities are designated as available for sale if they might
be sold before maturity. Securities classified as available for sale are carried
at estimated market value. Unrealized holding gains and losses for available for
sale securities are reported net of deferred income taxes in other comprehensive
income. Investments classified as held to maturity are carried at
amortized cost. Interest income includes amortization and accretion
of purchase premiums or discounts. Premiums and discounts on securities are
amortized using the interest method over the expected life of the securities.
Realized gains and losses on the sales of securities are recorded on the trade
date and computed on the basis of specific identification of the adjusted cost
of each security and are included in noninterest income. A decline in the market
value of any available for sale or held to maturity security below cost that is
deemed other than temporary results in a charge to earnings and the
establishment of a new cost basis for the security. In estimating
other-than-temporary losses, management considers each of the following: the
length of time and extent that fair value has been less than cost, the financial
condition and near term prospects of the issuer, and the Company’s ability and
intent to hold the security for a period sufficient to allow for any anticipated
recovery in fair value. Federal Home Loan Bank (“FHLB”) and Federal Reserve
Board stock is carried at cost.
Loans
and Interest Income
Loans
that management has the intent and ability to hold for the foreseeable future or
until maturity or pay-off are reported at their unpaid principal amount
outstanding adjusted for any charge-offs and any deferred fees or costs on
originated loans. Interest income on loans is recognized using the interest
method based on loan principal amounts outstanding during the period. Interest
income also includes amortization and accretion of any premiums or discounts
over the expected life of acquired loans at the time of purchase or business
acquisition. Net fees and incremental direct costs associated
with loan origination are deferred and amortized as yield adjustments over the
contractual term of the loans. Generally, the accrual of interest on
loans is discontinued when it is determined that the collection of interest or
principal is doubtful, or when a default of interest or principal has existed
for 90 days or more, unless such loan is well secured and in the process of
collection. Past due status is based on the contractual terms of the
loan. Cash payments received on nonaccrual loans generally are
applied to principal, and interest income is only recorded once principal
recovery is reasonably assured. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
Loans
Held for Sale
The
Company’s operations include a limited amount of mortgage banking. Mortgage
banking activities include the origination of fixed-rate residential mortgage
loans for sale to various third-party investors. Mortgage loans originated and
intended for sale in the secondary market, principally under programs with the
Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association, and other commercial lending institutions are carried at the lower
of cost or estimated market value determined in the aggregate and are included
in net loans on the balance sheet until sold. These loans are sold with the
related servicing rights either retained or released by the Company depending on
the economic conditions present at the time of origination. Mortgage loans held
for sale included in net loans totaled $1,386,000 and $2,921,000 at December 31,
2007 and December 31, 2006, respectively. Mortgage banking revenues, including
origination fees, servicing fees, net gains or losses on sales of mortgages, and
other fee income were .6%, .8%, and .9% of the Company’s total revenue for the
years ended December 31, 2007, 2006, and 2005, respectively.
51
Provision
and Allowance for Loan Losses
The
provision for loan losses represents charges made to earnings to maintain an
allowance for loan losses at an adequate level based on credit losses
specifically identified in the loan portfolio, as well as management’s best
estimate of probable loan losses in the remainder of the portfolio at the
balance sheet date. The allowance for loan losses is a valuation allowance
increased by the provision for loan losses and decreased by net charge-offs.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are
credited to the allowance.
Management
estimates the allowance balance required using a risk-rated methodology. Many
factors are considered when estimating the allowance. These include, but are not
limited to, past loan loss experience, an assessment of the financial condition
of individual borrowers, a determination of the value and adequacy of underlying
collateral, the condition of the local economy, an analysis of the levels and
trends of the loan portfolio, and a review of delinquent and classified loans.
The allowance for loan losses 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 risk factors. Allocations of the allowance may be made for specific
loans, but the entire allowance is available for any loan that, in management’s
judgment, should be charged off. Actual loan losses could differ significantly
from the amounts estimated by management.
The
risk-rated methodology includes segregating watch list and past due loans from
the general portfolio and allocating specific amounts to these loans depending
on their status. For example, watch list loans, which may be identified by the
internal loan review risk-rating system or by regulatory examiner
classification, are assigned a certain loss percentage while loans past due 30
days or more are assigned a different loss percentage. Each of these percentages
considers past experience as well as current factors. The remainder of the
general loan portfolio is segregated into three components having similar risk
characteristics as follows: commercial loans, consumer loans, and
real estate loans. Each of these components is assigned a loss percentage based
on their respective three year historical loss percentage. Additional
allocations to the allowance may then be made for subjective factors, such as
those mentioned above, as determined by senior managers who are knowledgeable
about these matters. During 2007, the Company further identified signs of
deterioration in certain real estate development loans and specific allowances
related to these loans were recorded.
The
Company accounts for impaired loans in accordance with the SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition. SFAS No. 114, as amended,
requires that impaired loans be measured at the present value of expected future
cash flows, discounted at the loan’s effective interest rate, at the loan’s
observable market price, or at the fair value of the collateral if the loan is
collateral dependent. A loan is impaired when full payment under the contractual
terms is not expected. Generally,
impaired loans are also in nonaccrual status. In certain circumstances, however,
the Company may continue to accrue interest on an impaired loan. Cash receipts
on impaired loans are typically applied to the recorded investment in the loan,
including any accrued interest receivable. Loans that are part of a large group
of smaller-balance homogeneous loans, such as residential mortgage, consumer,
and smaller-balance commercial loans, are collectively evaluated for impairment
and, accordingly, they are not separately identified for impairment
disclosures.
Mortgage
Servicing Rights
Mortgage
servicing rights are recognized in other intangible assets on the Company’s
consolidated balance sheet for the allocated cost of retained servicing rights
on loans sold. Mortgage servicing rights are expensed in proportion to, and over
the period of, estimated net servicing revenues. Impairment is evaluated based
on the fair value of the rights, using groupings of the underlying loans as to
interest rates. Any impairment of a grouping is reported as a valuation
allowance. Capitalized mortgage servicing rights were $413,000 and $496,000 at
December 31, 2007 and 2006. No impairment of the asset was determined to exist
on either of these dates.
Fair
Value of Financial Instruments
Fair
values of financial instruments are estimated using relevant market information
and other assumptions, as more fully disclosed in a separate
note. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular
items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Business
Combinations
The
Company accounts for its business acquisitions as a purchase in accordance with
SFAS No. 141, whereby the purchase price is allocated to the tangible and
intangible assets acquired and liabilities assumed based on their estimated fair
value. The excess of the purchase price over estimated fair value of the net
identifiable assets is allocated to goodwill. The Company engages third-party
appraisal firms to assist in determining the fair values of certain assets
acquired and liabilities assumed. Determining fair value of assets and
liabilities requires many assumptions and estimates. These estimates and
assumptions are sometimes refined subsequent to the initial recording of the
transaction with adjustments to goodwill as information is gathered and final
appraisals are completed.
52
Goodwill
and Other Intangible Assets
Goodwill
results from business acquisitions and represents the excess of the purchase
price over the fair value of acquired tangible assets and liabilities and
identifiable intangible assets. Goodwill is assessed at least annually for
impairment and any such impairment is recognized in the period
identified.
Other
intangible assets consist of core deposit and acquired customer relationship
intangible assets arising from business acquisitions. They are initially
measured at fair value and then are amortized on an accelerated method over
their estimated useful lives.
Other
Real Estate
Other
real estate owned and held for sale, included with other assets in the
accompanying consolidated balance sheets, includes properties acquired by the
Company through actual loan foreclosures. Other real estate owned is carried at
the lower of cost or fair value less estimated costs to sell. Fair value is the
amount that the Company could reasonably expect to receive in a current sale
between a willing buyer and a willing seller, other than in a forced or
liquidation sale. Fair value of assets is measured by the market value based on
comparable sales. If fair value declines subsequent to foreclosure, a valuation
allowance is recorded through expense. Costs after acquisition are expensed.
Other real estate owned included in the consolidated balance sheets was
$6,044,000 and $5,031,000 at December 31, 2007 and 2006,
respectively.
Income
Taxes
Income
tax expense is the total of current year income tax due or refundable and the
change in deferred tax assets and liabilities, except for the deferred tax
assets and liabilities related to business combinations or components of other
comprehensive income. Deferred income tax
assets and liabilities result from temporary differences between the tax basis
of assets and liabilities and their reported amounts in the consolidated
financial statements that will result in taxable or deductible amounts in future
years. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to
taxable income in years in which those temporary differences are expected to be
recovered or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through income tax expense.
The
Company files a consolidated federal income tax return with its subsidiaries.
Federal income tax expense or benefit has been allocated to subsidiaries on a
separate return basis.
Premises
and Equipment
Premises,
equipment, and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Depreciation is computed primarily on the
straight-line method over the estimated useful lives generally ranging from two
to seven years for furniture and equipment and generally ten to 50 years for
buildings and related components. Leasehold improvements are amortized over the
shorter of the estimated useful lives or terms of the related leases on the
straight-line method. Maintenance, repairs, and minor improvements are charged
to operating expenses as incurred and major improvements are capitalized. The
cost of assets sold or retired and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is included in
noninterest income. Land is carried at cost.
Company-owned
Life Insurance
The
Company has purchased life insurance policies on certain key employees with
their knowledge and written consent. Company-owned life insurance is recorded at
its cash surrender value, i.e. the amount that can be realized, on the
consolidated balance sheet. The related change in cash surrender value and
proceeds received under the policies are reported on the consolidated statement
of income under the caption “Income from company-owned life
insurance”.
53
Net
Income Per Common Share
Basic net
income per common share is determined by dividing net income by the weighted
average total number of shares of common stock outstanding. Diluted net income
per common share is determined by dividing net income by the total weighted
average number of shares of common stock outstanding, plus the total weighted
average number of shares that would be issued upon exercise of dilutive stock
options assuming proceeds are used to repurchase shares pursuant to the treasury
stock method. Net income per common share computations were as follows at
December 31, 2007, 2006, and 2005.
|
(In
thousands, except per share data)
Years
Ended December 31,
|
2007
|
2006
|
2005
|
|||||||||
|
Net
income, basic and diluted
|
$ | 15,627 | $ | 21,372 | $ | 15,772 | ||||||
|
Average
shares outstanding
|
7,706 | 7,511 | 6,831 | |||||||||
|
Effect
of dilutive stock options
|
15 | 33 | ||||||||||
|
Average
diluted shares outstanding
|
7,706 | 7,526 | 6,864 | |||||||||
|
Net
income per share, basic
|
$ | 2.03 | $ | 2.85 | $ | 2.31 | ||||||
|
Net
income per share, diluted
|
2.03 | 2.84 | 2.30 | |||||||||
|
Income
from continuing operations, basic and diluted
|
$ | 15,627 | $ | 13,665 | $ | 14,532 | ||||||
|
Income
per share from continuing operations, basic
|
$ | 2.03 | $ | 1.82 | $ | 2.13 | ||||||
|
Income
per share from continuing operations, diluted
|
2.03 | 1.82 | 2.12 |
|
Income
from discontinued operations, basic and diluted
|
$ | 0 | $ | 7,707 | $ | 1,240 | ||||||
|
Income
per share from discontinued operations, basic
|
$ | 0 | $ | 1.03 | $ | .18 | ||||||
|
Income
per share from discontinued operations, diluted
|
0 | 1.02 | .18 |
Stock
options for 62,621, 62,621, and 38,049 shares of common stock were not included
in the determination of dilutive earnings per share for 2007, 2006, and 2005
because they were antidilutive.
Comprehensive
Income
Comprehensive
income is defined as the change in equity (net assets) of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. For the Company this includes net income, the after tax effect
of changes in the net unrealized gains and losses on available for sale
investment securities, and the changes in the funded status of postretirement
benefit plans.
The
Company previously accounted for the purchase of its outstanding shares as
treasury stock using the cost method. Under this method, the cost of shares
purchased is shown as a single amount in shareholders’ equity. Since the
Commonwealth of Kentucky does not recognize the concept of treasury stock,
during the third quarter of 2007 the Company changed its previous presentation
to conform to its current presentation that displays purchased shares as
retired. The current presentation allocates a portion of the purchase price of
shares that are retired to each of the following balance sheet line items:
common stock, capital surplus, and retained earnings. The reclassification of
previous periods to their current presentation, including $42,399,000 in
cumulative stock repurchased at December 31, 2006, had no impact on net income
or total shareholders’ equity.
Dividend
Restrictions
Banking
regulations require maintaining certain capital levels and may limit the
dividends paid to the Company by its bank subsidiaries or by the Company to its
shareholders.
Trust Assets
Assets of
the Company’s trust departments, other than cash on deposit at our subsidiaries,
are not included in the accompanying financial statements because they are not
assets of the Company.
54
Stock-Based
Compensation
During
1997 the Company’s Board of Directors approved a nonqualified stock option plan
(the "Plan"), subsequently approved by the Company’s shareholders, that has
periodically provided for the granting of stock options to key employees and
officers of the Company. All stock options are awarded at a price
equal to the fair market value of the Company’s common stock at the date options
are granted and expire ten years from the grant date. Total options granted were
450,000, 54,000, and 40,049 in the years 1997, 2000, and 2004,
respectively.
Effective
January 1, 2006 the Company adopted SFAS No. 123(R), Share-based Payment, using
the modified prospective transition method. Accordingly, the Company has
recorded stock-based employee compensation cost using the fair value method
starting in 2006. For 2006, adopting this Standard resulted in a reduction of
income before taxes of $154,000, a reduction in net income of $100,000, and a
decrease in basic and diluted earnings per share (continuing operations) of
$.01.
Prior to
January 1, 2006, the Company accounted for its Plan under the recognition and
measurement provisions of APB Opinion No. 25 and related interpretations as
allowed by SFAS No. 123. Under the modified prospective transition method of
SFAS No. 123(R), prior year financial statement amounts are not restated. The
table below presents the effect on net income and earnings per share as if
expense was measured using the fair value recognition provisions of SFAS No. 123
for the year ended December 31, 2005.
|
(In
thousands, except per share data)
Years
Ended December 31,
|
2005
|
|||
|
Net
Income
|
||||
|
As
reported
|
$ | 15,772 | ||
|
Add: Stock-based
compensation expense included in reported net income
|
||||
|
Less: Stock-based
compensation expense determined under fair value based method for all
awards, net of related tax effects
|
(112 | ) | ||
|
Proforma
|
$ | 15,660 | ||
|
Net
Income Per Common Share
|
||||
|
Basic,
as reported
|
$ | 2.31 | ||
|
Basic,
proforma
|
2.29 | |||
|
Diluted,
as reported
|
2.30 | |||
|
Diluted,
proforma
|
2.28 | |||
|
Income
From Continuing Operations
|
||||
|
As
reported
|
$ | 14,532 | ||
|
Add: Stock-based
compensation expense included in reported net income
|
||||
|
Less: Stock-based
compensation expense determined under fair value based method for all
awards, net of related tax effects
|
(100 | ) | ||
|
Proforma
|
$ | 14,432 | ||
|
Income
Per Common Share From Continuing Operations
|
||||
|
Basic,
as reported
|
$ | 2.13 | ||
|
Basic,
proforma
|
2.11 | |||
|
Diluted,
as reported
|
2.12 | |||
|
Diluted,
proforma
|
2.10 | |||
|
Income
From Discontinued Operations
|
||||
|
As
reported
|
$ | 1,240 | ||
|
Add: Stock-based
compensation expense included in reported net income
|
||||
|
Less: Stock-based
compensation expense determined under fair value based method for all
awards, net of related tax effects
|
(12 | ) | ||
|
Proforma
|
$ | 1,228 | ||
|
Income
Per Common Share From Discontinued Operations
|
||||
|
Basic
and diluted, as reported
|
$ | .18 | ||
|
Basic
and diluted, proforma
|
.18 | |||
55
The fair
value of options granted is estimated as of the measurement date using the
Black-Scholes option pricing model. Following are the weighted average
assumptions used and estimated fair market value for the Employee Stock Purchase
Plan (“ESPP”).
|
ESPP
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Dividend
yield
|
3.97 | % | 3.88 | % | 3.82 | % | ||||||
|
Expected
volatility
|
15.3
|
14.0 | 13.0 | |||||||||
|
Risk-free
interest rate
|
4.75 | 4.70 | 2.98 | |||||||||
|
Expected
life (in years)
|
.25 | .25 | .25 | |||||||||
|
Fair
value
|
$ | 5.12 | $ | 5.75 | $ | 5.97 | ||||||
The Plan
provides for the granting of options to purchase up to 450,000 shares of the
Company’s common stock at a price equal to the fair market value of the
Company’s common stock on the date the option is granted. The term of the
options expires after ten years from the date on which the options are granted.
Options granted under the Plan vest ratably over various time periods ranging
from three to seven years. All options granted must be held for a minimum of one
year before they can be exercised. Forfeited options are available for the
granting of additional stock options under the Plan. Options forfeited from the
initial grant in 1997 were used to grant options during 2000 and 2004. At
December 31, 2007 there were 5,715 options available for future grants under the
Plan.
The
Company’s ESPP was approved by its shareholders at the Company’s 2004 annual
meeting. The purpose of the ESPP is to provide a means by which eligible
employees may purchase, at a discount, shares of common stock of the Company
through payroll withholding. The purchase price of the shares is equal to 85% of
their fair market value on specified dates as defined in the plan. The ESPP was
effective beginning July 1, 2004. There were 10,557, 8,161, and 6,883 shares
issued under the plan during 2007, 2006, and 2005, respectively. Compensation
expense related to the ESPP included in the accompanying statements of income
was $47,000 and $42,000 in 2007 and 2006, respectively. Compensation cost
related to the ESPP included in the proforma net income disclosure in the table
above was $25,000 for 2005.
Adoption
of New Accounting Standards
Effective
January 1, 2007 the Company adopted FASB Interpretation No. (“FIN”) 48 “Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109”. FIN 48
clarifies certain aspects of accounting for uncertain tax positions, including
issues related to the recognition and measurement of those tax positions taken
or expected to be taken in a tax return. A tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination presumed to occur. The
amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not meeting the “more
likely than not” test, no tax benefit is recorded. FIN 48 also provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. Adoption of FIN 48 did not have a material
impact on the Company’s results of operations and consolidated financial
condition.
Effective
January 1, 2007 the Company adopted SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments”, an amendment of SFAS No. 133 and SFAS No. 140.
This statement permits fair value re-measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation. It establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding derivatives or that
are hybrid financial instruments that contain an embedded derivative requiring
bifurcation. In addition, SFAS No. 155 clarifies which interest-only strips and
principal-only strips are not subject to the requirements of SFAS No. 133. It
also clarifies that concentrations of credit risk in the form of subordination
are not embedded derivatives. SFAS No. 155 amends SFAS No. 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. Adoption of SFAS No. 155 did not have a
material impact on the Company’s results of operations and consolidated
financial condition.
On
January 1, 2007 the Company adopted SFAS No. 156, "Accounting for Servicing of
Financial Assets”. This Statement amends SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", and
requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable and permits the
entities to elect either fair value measurement with changes in fair value
reflected in earnings or the amortization and impairment requirements of SFAS
No. 140 for subsequent measurement. The subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value
eliminates the necessity for entities that manage the risks inherent in
servicing assets and servicing liabilities with derivatives to qualify for hedge
accounting treatment and eliminates the characterization of declines in fair
value as impairments or direct write-downs. Adoption of SFAS No. 156 did not
have a material impact on the Company’s results of operations and consolidated
financial condition.
56
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”.
This Statement provides clarification of the definition of fair value, methods
used to measure fair value, and additional disclosures about fair value
measurements. This Standard is applicable in circumstances in which other
Standards require or permit assets or liabilities to be measured at fair value.
Therefore, this Standard does not require any new fair value measurements. This
Standard is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The
Company does not expect the adoption of this Statement on January 1, 2008 to
have a material impact on its results of operations and consolidated financial
condition.
On
February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities”. SFAS No. 159 allows companies to
record certain financial assets and financial liabilities at full fair value if
they so choose. SFAS No. 159 was issued to mitigate volatility in reported
earnings caused by an accounting model utilizing multiple measurement
attributes. The adoption of the fair value option is recorded as a
cumulative-effect adjustment to the opening balance of retained earnings, which
would be January 1 for the Company. Upon adoption, the difference between the
carrying amount and the fair value of the items chosen is included in the
cumulative-effect adjustment. Subsequent changes in fair value are recorded
through the income statement. SFAS No. 159 is effective as of the beginning of
the first fiscal year after November 15, 2007, which is January 1, 2008 for the
Company. The Company does not expect the adoption of this Statement to have a
material impact on its results of operations and consolidated financial
condition.
2.
Discontinued Operations
In June
2006, the Company announced that it had entered into a definitive agreement to
sell KBC, its wholly-owned bank subsidiary in Glasgow, Kentucky, in a cash
transaction valued at $20,000,000. The Company completed the sale on November
30, 2006 that resulted in a pretax gain of $9,400,000.
In August
2006, Farmers Georgetown entered into a definitive agreement to sell its
Owingsville and Sharpsburg branches in Bath County (the “Branches”). The sale,
which was completed on December 1, 2006, included deposits of $26,600,000, loans
of $9,600,000, fixed assets of $818,000, and other assets of $1,800,000. The
Company recorded a pretax gain on the sale of the Branches of
$431,000.
In
accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, the financial position and results of
operations of KBC and Farmers Georgetown’s Branches were removed from the
respective line items of the Company’s financial statements and presented
separately as discontinued operations. Following are condensed combined balance
sheets and statements of income for KBC and Farmers Georgetown’s Branches for
the period indicated.
Condensed
Combined Balance Sheets – Discontinued Operations
|
(In
thousands)
|
November
30, 2006
|
|||
|
Assets
|
||||
|
Cash
and cash equivalents
|
$ | 13,544 | ||
|
Investment
securities
|
32,276 | |||
|
Loans,
net
|
88,631 | |||
|
Premises
and equipment, net
|
4,978 | |||
|
Other
assets
|
5,118 | |||
|
Total
assets
|
$ | 144,547 | ||
|
Liabilities
|
||||
|
Deposits
|
$ | 146,208 | ||
|
Other
borrowed funds
|
1,459 | |||
|
Other
liabilities
|
921 | |||
|
Total
liabilities
|
148,588 | |||
|
Net
liabilities
|
$ | 4,041 | ||
57
Condensed
Combined Statements of Income – Discontinued Operations
|
(In
thousands)
|
Eleven
months ended
November
30, 2006
|
Year
ended
December
31, 2005
|
||||||
|
Interest
income
|
$ | 9,008 | $ | 8,443 | ||||
|
Interest
expense
|
3,696 | 3,370 | ||||||
|
Net
interest income
|
5,312 | 5,073 | ||||||
|
Provision
for loan losses
|
17 | 96 | ||||||
|
Noninterest
income
|
1,272 | 1,305 | ||||||
|
Noninterest
expense
|
4,597 | 4,559 | ||||||
|
Income
tax expense
|
679 | 483 | ||||||
|
Net
income
|
$ | 1,291 | $ | 1,240 | ||||
|
3.
Investment Securities
|
The
following summarizes the amortized cost and estimated fair values of the
securities portfolio at December 31, 2007. The summary is divided
into available for sale and held to maturity securities.
|
Amortized
|
Gross
|
Gross
|
Estimated
|
|||||||||||||
|
December
31, 2007 (In thousands)
|
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
||||||||||||
|
Available
For Sale
|
||||||||||||||||
|
Obligations
of U.S. government-sponsored entities
|
$ | 88,226 | $ | 332 | $ | 36 | $ | 88,522 | ||||||||
|
Obligations
of states and political subdivisions
|
93,430 | 1,165 | 414 | 94,181 | ||||||||||||
|
Mortgage-backed
securities
|
343,189 | 1,042 | 1,055 | 343,176 | ||||||||||||
|
U.S.
Treasury securities
|
863 | 863 | ||||||||||||||
|
Money
market mutual funds
|
1,396 | 1,396 | ||||||||||||||
|
Equity
securities
|
9,363 | 9,363 | ||||||||||||||
|
Other
|
5,792 | 660 | 5,132 | |||||||||||||
|
Total
securities – available for sale
|
$ | 542,259 | $ | 2,539 | $ | 2,165 | $ | 542,633 | ||||||||
|
Held
To Maturity
|
||||||||||||||||
|
Obligations
of states and political subdivisions
|
$ | 3,844 | $ | 19 | $ | 0 | $ | 3,863 | ||||||||
The
following summarizes the amortized cost and estimated fair values of the
securities portfolio at December 31, 2006.
|
Amortized
|
Gross
|
Gross
|
Estimated
|
|||||||||||||
|
December
31, 2006 (In thousands)
|
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
||||||||||||
|
Available
For Sale
|
||||||||||||||||
|
Obligations
of U.S. government-sponsored entities
|
$ | 142,128 | $ | 74 | $ | 370 | $ | 141,832 | ||||||||
|
Obligations
of states and political subdivisions
|
87,974 | 939 | 766 | 88,147 | ||||||||||||
|
Mortgage-backed
securities
|
88,607 | 87 | 1,978 | 86,716 | ||||||||||||
|
U.S.
Treasury securities
|
484 | 484 | ||||||||||||||
|
Money
market mutual funds
|
1,396 | 1,396 | ||||||||||||||
|
Equity
securities
|
7,910 | 7,910 | ||||||||||||||
|
Total
securities – available for sale
|
$ | 328,499 | $ | 1,100 | $ | 3,114 | $ | 326,485 | ||||||||
|
Held
To Maturity
|
||||||||||||||||
|
Obligations
of states and political subdivisions
|
$ | 7,788 | $ | 61 | $ | 0 | $ | 7,849 | ||||||||
The
amortized cost and estimated fair value of the securities portfolio at December
31, 2007, by contractual maturity, are detailed below. The summary is divided
into available for sale and held to maturity securities. Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties. Equity
securities in the available for sale portfolio consist primarily of restricted
FHLB and Federal Reserve Board stocks, which have no stated maturity and are not
included in the maturity schedule that follows.
58
Mortgage-backed
securities are stated separately due to the nature of payment and prepayment
characteristics of these securities, as principal is not due at a single
date.
|
Available
For Sale
|
Held
To Maturity
|
|||||||||||||||
|
Amortized
|
Estimated
|
Amortized
|
Estimated
|
|||||||||||||
|
December
31, 2007 (In thousands)
|
Cost
|
Fair
Value
|
Cost
|
Fair
Value
|
||||||||||||
|
Due
in one year or less
|
$ | 68,516 | $ | 68,527 | $ | 1,980 | $ | 1,995 | ||||||||
|
Due
after one year through five years
|
61,939 | 62,396 | 789 | 793 | ||||||||||||
|
Due
after five years through ten years
|
39,519 | 39,960 | ||||||||||||||
|
Due
after ten years
|
19,733 | 19,211 | 1,075 | 1,075 | ||||||||||||
|
Mortgage-backed
securities
|
343,189 | 343,176 | ||||||||||||||
|
Total
|
$ | 532,896 | $ | 533,270 | $ | 3,844 | $ | 3,863 | ||||||||
Gross
gains of $0, $26,000 and $5,000 in 2007, 2006, and 2005, respectively, were
realized on the sale of investment securities. Gross losses of $0, $221,000, and
$8,000 were realized during 2007, 2006, and 2005, respectively.
Investment
securities with a carrying value of $461,593,000 and $288,968,000 at December
31, 2007 and 2006 were pledged to secure public and trust deposits, repurchase
agreements, and for other purposes.
Investment
securities with unrealized losses at year-end 2007 and 2006 not recognized in
income are presented in the tables below. The tables segregate investment
securities that have been in a continuous unrealized loss position for less than
twelve months from those that have been in a continuous unrealized loss position
for twelve months or more. The table also includes the fair value of the related
securities.
|
Less
than 12 Months
|
12
Months or More
|
Total
|
||||||||||||||||||||||
|
December
31, 2007 (In thousands)
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||||||||||
|
Obligations
of U.S. government-sponsored entities
|
$ | 999 | $ | 4 | $ | 11,159 | $ | 33 | $ | 12,158 | $ | 36 | ||||||||||||
|
Obligations
of states and political subdivisions
|
7,734 | 82 | 21,323 | 331 | 29,057 | 414 | ||||||||||||||||||
|
Mortgage-backed
securities
|
11,004 | 46 | 45,740 | 1,009 | 56,744 | 1,055 | ||||||||||||||||||
|
Other
|
5,132 | 660 | 5,132 | 660 | ||||||||||||||||||||
|
Total
|
$ | 24,869 | $ | 792 | $ | 78,222 | $ | 1,373 | $ | 103,091 | $ | 2,165 | ||||||||||||
|
Less
than 12 Months
|
12
Months or More
|
Total
|
||||||||||||||||||||||
|
December
31, 2006 (In thousands)
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||||||||||
|
Obligations
of U.S. government-sponsored entities
|
$ | 25,591 | $ | 34 | $ | 34,949 | $ | 336 | $ | 60,540 | $ | 370 | ||||||||||||
|
Obligations
of states and political subdivisions
|
12,756 | 63 | 25,793 | 703 | 38,549 | 766 | ||||||||||||||||||
|
Mortgage-backed
securities
|
2,467 | 6 | 68,993 | 1,972 | 71,460 | 1,978 | ||||||||||||||||||
|
Total
|
$ | 40,814 | $ | 103 | $ | 129,735 | $ | 3,011 | $ | 170,549 | $ | 3,114 | ||||||||||||
Unrealized
losses included in the tables above have not been recognized in income since
they have been identified as temporary. The Company periodically evaluates
securities for other-than-temporary impairment. Consideration is given to 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 the intent
and ability of the Company to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair value. The
Company attributes the unrealized losses mainly to increases in market interest
rates over the yield available at the time the underlying securities were
purchased and does not expect to incur a loss unless the securities are sold.
Management has the intent and ability to hold these securities for the
foreseeable future. The fair value is expected to recover as the securities
approach their maturity or repricing date or if market yields for such
investments decline. The Company does not believe any of the securities are
impaired due to reasons of credit quality.
59
|
4.
Loans
|
Major
classifications of loans are summarized as follows.
|
December
31, (In thousands)
|
2007
|
2006
|
||||||
|
Commercial,
financial, and agricultural
|
$ | 154,015 | $ | 197,613 | ||||
|
Real
estate – construction
|
254,788 | 176,779 | ||||||
|
Real
estate mortgage – residential
|
405,992 | 381,081 | ||||||
|
Real
estate mortgage – farmland and other commercial
enterprises
|
394,900 | 351,793 | ||||||
|
Installment
loans
|
52,028 | 57,116 | ||||||
|
Lease
financing
|
34,109 | 37,522 | ||||||
|
Total
loans
|
1,295,832 | 1,201,904 | ||||||
|
Less
unearned income
|
(3,847 | ) | (4,068 | ) | ||||
|
Total
loans, net of unearned income
|
$ | 1,291,985 | $ | 1,197,836 | ||||
Loans to
directors, executive officers, and principal shareholders (including loans to
affiliated companies of which they are principal owners) and loans to members of
the immediate family of such persons were $29,275,000 and $25,903,000 at
December 31, 2007 and 2006, respectively. Such loans were made in the normal
course of business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other customers and did not involve more than the normal risk of collectibility.
An analysis of the activity with respect to these loans is presented in the
table below.
|
(In
thousands)
|
Amount
|
|||
|
Balance,
December 31, 2006
|
$ | 25,903 | ||
|
New
loans
|
21,442 | |||
|
Repayments
|
(16,440 | ) | ||
|
Loans
no longer meeting disclosure requirements, new loans meeting disclosure
requirements, and other adjustments
|
(1,630 | ) | ||
|
Balance,
December 31, 2007
|
$ | 29,275 | ||
|
5.
Allowance for Loan Losses
|
Activity
in the allowance for loan losses was as follows.
|
Years
Ended December 31, (In thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Balance,
beginning of year
|
$ | 11,999 | $ | 11,069 | $ | 11,043 | ||||||
|
Acquisition
of Citizens National Bancshares, Inc.
|
1,066 | |||||||||||
|
Acquisition
of Citizens Bancorp, Inc.
|
1,410 | |||||||||||
|
Provision
for loan losses
|
3,638 | 965 | 622 | |||||||||
|
Recoveries
|
733 | 678 | 439 | |||||||||
|
Loans
charged off
|
(2,154 | ) | (1,779 | ) | (2,445 | ) | ||||||
|
Balance,
end of year
|
$ | 14,216 | $ | 11,999 | $ | 11,069 | ||||||
The
Company's charge-off policy for impaired loans does not differ from the
charge-off policy for loans outside the definition of SFAS No. 114. Loans that
are delinquent in excess of 120 days are charged off unless the collateral
securing the debt is of such value that any loss appears to be
unlikely.
60
Individually
impaired loans were as follows for the dates indicated.
|
Years
Ended December 31, (In thousands)
|
2007
|
2006
|
||||||
|
Year-end
loans with no allocated allowance for loan losses
|
$ | 1,877 | $ | 3,153 | ||||
|
Year-end
loans with allocated allowance for loan losses
|
28,127 | 1,920 | ||||||
|
Total
|
$ | 30,004 | $ | 5,073 | ||||
|
Amount
of the allowance for loan losses allocated
|
$ | 1,834 | $ | 105 | ||||
|
Years
Ended December 31, (In thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Average
of individually impaired loans during year
|
$ | 13,037 | $ | 5,151 | $ | 768 | ||||||
|
Interest
income recognized during impairment
|
1,382 | 323 | ||||||||||
|
Cash-basis
interest income recognized
|
683 | |||||||||||
Nonperforming
loans were as follows.
|
December
31, (In thousands)
|
2007
|
2006
|
||||||
|
Nonaccrual
loans
|
$ | 18,073 | $ | 1,462 | ||||
|
Loans
past due 90 days or more and still accruing
|
2,977 | 2,856 | ||||||
|
Total
nonperforming loans
|
$ | 21,050 | $ | 4,318 | ||||
|
6.
Premises and Equipment
|
Premises
and equipment consist of the following.
|
December
31, (In thousands)
|
2007
|
2006
|
||||||
|
Land,
buildings, and leasehold improvements
|
$ | 48,767 | $ | 45,652 | ||||
|
Furniture
and equipment
|
20,180 | 21,470 | ||||||
|
Total
premises and equipment
|
68,947 | 67,122 | ||||||
|
Less
accumulated depreciation and amortization
|
(30,284 | ) | (29,347 | ) | ||||
|
Premises
and equipment, net
|
$ | 38,663 | $ | 37,775 | ||||
Depreciation
and amortization of premises and equipment was $3,938,000, $3,617,000, and
$3,140,000, in 2007, 2006, and 2005, respectively.
|
7.
Deposit Liabilities
|
At December 31, 2007 the scheduled
maturities of time deposits were as follows.
|
(In
thousands)
|
Amount
|
|||
|
2008
|
$ | 630,507 | ||
|
2009
|
90,041 | |||
|
2010
|
28,120 | |||
|
2011
|
11,565 | |||
|
2012
|
7,436 | |||
|
Thereafter
|
2,352 | |||
|
Total
|
$ | 770,021 | ||
Time
deposits of $100,000 or more at December 31, 2007 and 2006 were $252,503,000 and
$215,369,000, respectively. Interest expense on time deposits of
$100,000 or more was $11,869,000, $6,865,000, and $3,895,000 for 2007, 2006, and
2005, respectively.
Deposits
from directors, executive officers, and principal shareholders (including
deposits from affiliated companies of which they are principal owners) and
deposits from members of the immediate family of such persons were $40,751,000
and $39,403,000 at December 31, 2007 and 2006, respectively. Such deposits were
accepted in the normal course of business on substantially the same terms as
those prevailing at the time for comparable transactions with other
customers.
61
|
8.
Federal Funds Purchased and Other Short-term
Borrowings
|
Federal
funds purchased and other short-term borrowings represent borrowings with an
original maturity of less than one year. Substantially all of the total
short-term borrowings are made up of federal funds purchased and securities sold
under agreements to repurchase, which represents borrowings that generally
mature one business day following the date of the transaction. Information on
federal funds purchased and other short-term borrowings is as
follows.
|
December
31, (Dollars in thousands)
|
2007
|
2006
|
||||||
|
Federal
funds purchased and securities sold under agreement to
repurchase
|
$ | 80,315 | $ | 67,941 | ||||
|
FHLB
advances
|
8,000 | |||||||
|
Other
|
440 | 777 | ||||||
|
Total
short-term
|
$ | 80,755 | $ | 76,718 | ||||
|
Average
balance during the year
|
$ | 97,192 | $ | 97,489 | ||||
|
Maximum
month-end balance during the year
|
155,362 | 113,926 | ||||||
|
Average
interest rate during the year
|
4.63 | % | 4.80 | % | ||||
|
Average
interest rate at year-end
|
3.71 | 4.55 | ||||||
Long-term
securities sold under agreements to repurchase and other borrowings represent
borrowings with an original maturity of one year or more. The table below
displays a summary of the ending balance and average rate for borrowed funds on
the dates indicated.
|
Average
|
Average
|
|||||||||||||||
|
December
31, (Dollars in thousands)
|
2007
|
Rate
|
2006
|
Rate
|
||||||||||||
|
FHLB
advances
|
$ | 66,526 | 4.65 | % | $ | 61,174 | 4.51 | % | ||||||||
|
Subordinated
notes payable
|
48,970 | 6.71 | 25,774 | 6.96 | ||||||||||||
|
Securities
sold under agreements to repurchase
|
200,000 | 3.95 | ||||||||||||||
|
Other
|
813 | 2.32 | 1,044 | 2.32 | ||||||||||||
|
Total
long-term
|
$ | 316,309 | 4.52 | % | $ | 87,992 | 5.20 | % | ||||||||
Long-term
FHLB advances are made pursuant to several different credit programs, which have
their own interest rates and range of maturities. Interest rates on FHLB
advances are fixed and range between 3.84% and 6.90%, averaging 4.65%, over a
remaining maturity period of up to 13 years as of December 31, 2007.
Approximately $10.0 million of the total long-term advances from FHLB are
convertible to a floating interest rate. These advances may convert, at FHLB’s
option, to a floating interest rate indexed to LIBOR only if LIBOR equals or
exceeds 7%. At year-end 2007, three-month LIBOR was at 4.70%.
For FHLB
advances, the subsidiary banks pledge FHLB stock and fully disbursed, otherwise
unencumbered, 1-4 family first mortgage loans as collateral for these advances
as required by the FHLB. Based on this collateral and the Company’s holdings of
FHLB stock, the Company is eligible to borrow up to an additional $117,524,000
at year-end 2007. In addition, the Company has a $15.0 million unsecured line of
credit with an unrelated financial institution available for general corporate
purposes. This line of credit matures in June 2008 and bears interest at
three-month LIBOR plus 125 basis points.
During
2005 the Company completed two private offerings of trust preferred securities
through two separate Delaware statutory trusts sponsored by the
Company. Farmers Capital Bank Trust I (“Trust I”) sold $10,000,000 of
preferred securities and Farmers Capital Bank Trust II (“Trust II”) sold
$15,000,000 of preferred securities. The proceeds from the offerings
were used to fund the cash portion of the Citizens Bancorp
acquisition.
Farmers
Capital Bank Trust III (“Trust III”), a Delaware statutory trust sponsored by
the Company, was formed during 2007 for the purpose of financing the cost of
acquiring Company shares under a share repurchase program. Trust III sold
$22,500,000
of 6.60% (fixed through November 2012, thereafter at a variable rate of
interest, reset quarterly, equal to the 3-month LIBOR plus a predetermined
spread of 132 basis points) trust preferred securities to the public. The trust
preferred securities, which pay interest quarterly, mature on November 1, 2037,
or may be redeemed by the Trust at par any time on or after November 1, 2012.
Trust I, Trust II, and Trust III are hereafter collectively referred to as the
“Trusts”.
The
Trusts used the proceeds from the sale of preferred securities, plus capital
contributed to establish the trusts, to purchase the Company’s subordinated
notes in amounts and bearing terms that parallel the amounts and terms of the
respective preferred securities. The subordinated notes to Trust I
and Trust II mature in 2035 and in 2037 for Trust III, and bear a floating
interest rate (current three-
62
month
LIBOR plus 150 basis points in the case of the notes held by Trust I, current
three-month LIBOR plus 165 basis points in the case of the notes held by Trust
II, and current three-month LIBOR plus 132 basis points in the case of the notes
held by Trust III). Interest on the notes is payable
quarterly.
The
subordinated notes are redeemable in whole or in part, without penalty, at the
Company’s option on or after September 30, 2010 and mature on September 30, 2035
with respect to Trust I and Trust II. For Trust III, the subordinated
notes are redeemable in whole or in part, with out penalty, at the Company’s
option on or after November 1, 2012. The notes are junior in right of payment of
all present and future senior indebtedness. At December 31, 2007 the balance of
the subordinated notes payable to Trust I, Trust II, and Trust III was
$10,310,000, $15,464,000, and $23,196,000, respectively. The interest rates in
effect as of the last determination date in 2007 were 6.73%, 6.88%, and 6.60%
for Trust I, Trust II, and Trust III, respectively. For 2006 these rates were
6.87% and 7.02% for Trust I and Trust II, respectively.
Under
FASB Interpretation No. 46 (revised), “Consolidation of Variable Interest
Entities”, the Company does not consolidate the Trusts into its financial
statements. Accordingly, the Company does not report the securities
issued by the Trusts as liabilities, but instead reports as liabilities the
subordinated notes issued by the Company and held by the Trusts. The
Company, which owns all of the common securities of the Trusts, accounts for its
investment in each of the Trusts as assets. The Company records
interest expense on the corresponding notes issued to the Trusts on its
statement of income.
The
subordinated notes may be included in Tier 1 capital (with certain limitations
applicable) under current regulatory capital guidelines and
interpretations. The amount of subordinated notes in excess of the
limit may be included in Tier 2 capital, subject to restrictions.
During
2007, the Company entered into a balance sheet leverage transaction whereby it
borrowed $200,000,000 in multiple fixed rate repurchase agreements with an
initial weighted average cost of 3.95% and invested the proceeds in Government
National Mortgage Association (“GNMA”) bonds, which were pledged as collateral.
The Company is required to secure the borrowed funds by GNMA bonds valued at
106% of the outstanding principal balance. The borrowings have original maturity
dates ranging from three to 10 years, with a weighted average maturity of 6.5
years and are callable quarterly after time periods ranging from one to five
years. The repurchase agreements are held by each of the Company’s subsidiary
banks and are guaranteed by the Parent Company.
Maturities
of long-term borrowings at December 31, 2007 are as follows.
|
(In
thousands)
|
Amount
|
|||
|
2008
|
$ | 10,802 | ||
|
2009
|
13,787 | |||
|
2010
|
50,783 | |||
|
2011
|
5,613 | |||
|
2012
|
61,486 | |||
|
Thereafter
|
173,838 | |||
|
Total
|
$ | 316,309 | ||
63
10.
Income Taxes
The
components of income tax expense are as follows.
Continuing
Operations
|
December
31, (In thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Currently
payable
|
$ | 6,094 | $ | 5,208 | $ | 3,985 | ||||||
|
Deferred
|
(1,807 | ) | (1,848 | ) | (194 | ) | ||||||
|
Total
applicable to continuing operations
|
4,287 | 3,360 | 3,791 | |||||||||
|
Deferred
tax (credited) charged to components of shareholders’
equity:
|
||||||||||||
|
Unfunded
status of postretirement benefits
|
(139 | ) | 1,664 | |||||||||
|
Net
unrealized securities gains (losses)
|
836 | 237 | (1,362 | ) | ||||||||
|
Total
income taxes from continuing operations
|
$ | 4,984 | $ | 5,261 | $ | 2,429 | ||||||
Discontinued
Operations
|
December
31, (In thousands)
|
2006
|
2005
|
||||||
|
Currently
payable
|
$ | 4,287 | $ | 294 | ||||
|
Deferred
|
(152 | ) | 189 | |||||
|
Total
applicable to discontinued operations
|
4,135 | 483 | ||||||
|
Deferred
tax charged to components of shareholders’ equity:
|
||||||||
|
Net
unrealized securities gains (losses)
|
90 | (47 | ) | |||||
|
Total
income taxes from discontinued operations
|
$ | 4,225 | $ | 436 | ||||
An
analysis of the difference between the effective income tax rates and the
statutory federal income tax rate follows.
Continuing
Operations
|
December
31,
|
2007
|
2006
|
2005
|
|||||||||
|
Federal
statutory rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Changes
from statutory rates resulting from:
|
||||||||||||
|
Tax-exempt
interest
|
(8.1 | ) | (9.7 | ) | (8.3 | ) | ||||||
|
Nondeductible
interest to carry tax-exempt obligations
|
1.1 | 1.2 | .7 | |||||||||
|
Tax
credits
|
(2.7 | ) | (3.8 | ) | (3.6 | ) | ||||||
|
Premium
income not subject to tax
|
(1.9 | ) | (2.4 | ) | (.2 | ) | ||||||
|
Company-owned
life insurance
|
(2.1 | ) | (2.4 | ) | (1.9 | ) | ||||||
|
Other,
net
|
.2 | 1.8 | (1.0 | ) | ||||||||
|
Effective
tax rate on pretax income from continuing operations
|
21.5 | % | 19.7 | % | 20.7 | % | ||||||
Discontinued
Operations
|
December
31,
|
2006
|
2005
|
||||||
|
Federal
statutory rate
|
35.0 | % | 35.0 | % | ||||
|
Changes
from statutory rates resulting from:
|
||||||||
|
Tax-exempt
interest
|
(.7 | ) | (5.4 | ) | ||||
|
Nondeductible
interest to carry tax-exempt obligations
|
.1 | .6 | ||||||
|
Company-owned
life insurance
|
(.2 | ) | (1.1 | ) | ||||
|
Other,
net
|
.7 | (1.1 | ) | |||||
|
Effective
tax rate on pretax income from discontinued operations
|
34.9 | % | 28.0 | % | ||||
64
The tax
effects of the significant temporary differences that comprise deferred tax
assets and liabilities at December 31, 2007 and 2006 follows.
|
December
31, (In thousands)
|
2007
|
2006
|
||||||
|
Assets
|
||||||||
|
Allowance
for loan losses
|
$ | 4,891 | $ | 4,122 | ||||
|
Unrealized
losses on available for sale investment securities, net
|
705 | |||||||
|
Deferred
directors’ fees
|
242 | 131 | ||||||
|
Postretirement
benefit obligations
|
3,894 | 3,251 | ||||||
|
Stock
options
|
35 | 513 | ||||||
|
Commissions
|
12 | |||||||
|
Self-funded
insurance
|
269 | 279 | ||||||
|
Paid
time off
|
614 | 455 | ||||||
|
Other
|
7 | 157 | ||||||
|
Total
deferred tax assets
|
9,952 | 9,625 | ||||||
|
Liabilities
|
||||||||
|
Depreciation
|
533 | 925 | ||||||
|
Unrealized
gains on available for sale investment securities, net
|
131 | |||||||
|
Prepaid
expenses
|
636 | 590 | ||||||
|
Discount
on investment securities
|
1,012 | 1,040 | ||||||
|
Deferred
loan fees
|
1,197 | 1,000 | ||||||
|
Lease
financing operations
|
1,502 | 1,942 | ||||||
|
Intangibles
|
2,577 | 2,874 | ||||||
|
Total
deferred tax liabilities
|
7,588 | 8,371 | ||||||
|
Net
deferred tax asset
|
$ | 2,364 | $ | 1,254 | ||||
In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences at December
31, 2007.
The
Company had no unrecognized tax benefits as of January 1, 2007 and did not
recognize any increase in unrecognized benefits during 2007 relative to any tax
positions taken in 2007. Should the accrual of any interest or penalties
relative to unrecognized tax benefits be necessary, it is the Company’s policy
to record such accruals in its income tax expense accounts; no such accruals
existed as of December 31, 2007. The Company files U.S. federal and various
state income tax returns. The Company is no longer subject to income tax
examinations by taxing authorities for the years before 2004.
11. Retirement
Plans
The
Company maintains a salary savings plan that covers substantially all employees.
The Company matches all eligible voluntary tax deferred employee contributions
up to 6% of the participant's compensation. The Company may, at the discretion
of the Board, contribute an additional amount based upon a percentage of covered
employees' salaries. The Company made a 2% discretionary contribution to the
plan during 2007 and a 4% discretionary contribution in 2006 and 2005.
Discretionary contributions are allocated among participants in the ratio that
each participant’s compensation bears to all participants’ compensation.
Eligible employees are presented with various investment alternatives related to
the salary savings plan. Those alternatives include various stock and bond
mutual funds that vary from traditional growth funds to more stable income
funds. Company shares are not an available investment alternative in the salary
savings plan.
The
Company previously maintained an Employee Stock Ownership Plan (“ESOP”) for its
employees. During 2007, the Company terminated the ESOP. Participants in the
ESOP had various options upon termination of the plan, including liquidating
Company stock and rolling over the proceeds into the Company’s salary savings
plan. There were no contributions to the ESOP in any of the years in the
three-year period ended December 31, 2007. The fair market value of Company
shares held by the ESOP at the date of termination was $2,173,000. The fair
market value of Company shares held by the ESOP at year-end 2006 was
$2,459,000.
65
In
connection with the acquisition of Citizens Northern, the Company acquired a
nonqualified supplemental retirement plan for certain key employees. Benefits
provided under this plan are unfunded, and payments to plan participants are
made by the Company.
The
following schedules set forth a reconciliation of the changes in the plans
benefit obligation and funded status for the years ended December 31, 2007 and
2006.
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Change
in Benefit Obligation
|
||||||||
|
Obligation
at beginning of year
|
$ | 561 | $ | 374 | ||||
|
Service
cost
|
31 | 41 | ||||||
|
Interest
cost
|
32 | 22 | ||||||
|
Actuarial
(gain) loss
|
(157 | ) | 124 | |||||
|
Benefit
payments
|
(5 | ) | ||||||
|
Obligation
at end of year
|
$ | 462 | $ | 561 | ||||
The
following table provides disclosure of the net periodic benefit cost as of
December 31 for the years indicated.
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Service
cost
|
$ | 31 | $ | 41 | ||||
|
Interest
cost
|
32 | 21 | ||||||
|
Recognized
net actuarial loss
|
22 | 17 | ||||||
|
Net
periodic benefit cost
|
$ | 85 | $ | 79 | ||||
|
Major
assumptions:
|
||||||||
|
Discount
rate
|
5.75 | % | 5.75 | % | ||||
The
following table presents estimated future benefit payments in the period
indicated.
|
(In
thousands)
|
Supplemental
Retirement Plan |
||||
|
2008
|
$ | 5 | |||
|
2009
|
5 | ||||
|
2010
|
5 | ||||
|
2011
|
5 | ||||
|
2012
|
5 | ||||
|
2013-2017
|
|
134 | |||
|
Total
|
$ | 159 | |||
Amounts
recognized in accumulated other comprehensive loss as of December 31, 2007 and
2006 are as follows.
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Unrecognized
net actuarial loss
|
$ | 125 | $ | 304 | ||||
|
Total
|
$ | 125 | $ | 304 | ||||
The
estimated costs that will be amortized from accumulated other comprehensive loss
into net periodic cost over the next fiscal year are as follows.
|
(In
thousands)
|
Supplemental
Retirement Plan
|
|||
|
Unrecognized
net actuarial loss
|
$ | 8 | ||
|
Total
|
$ | 8 | ||
The total
retirement plan expense for 2007, 2006, and 2005 was $1,486,000, $1,427,000, and
1,012,000, respectively.
66
12. Common
Stock Options
A summary
of the activity in the Company’s stock option plan for 2007 is presented
below.
|
2007
|
||||||||
|
Weighted
|
||||||||
|
Average
|
||||||||
|
Shares
|
Price
|
|||||||
|
Outstanding
at January 1
|
125,522 | $ | 28.62 | |||||
|
Exercised
|
(62,901 | ) | 24.61 | |||||
|
Outstanding
at December 31
|
62,621 | $ | 32.66 | |||||
|
Options
exercisable at year-end
|
62,621 | $ | 32.66 | |||||
Options
outstanding at year-end 2007 were as follows.
|
Outstanding
|
Exercisable
|
||||||||||||||||||||
|
Weighted
Average
|
|||||||||||||||||||||
|
Remaining
Contractual
|
Weighted
Average
|
Weighted
Average
|
|||||||||||||||||||
|
Exercise
Price
|
Number
|
Life
(Years)
|
Exercise
Price
|
Number
|
Exercise
Price
|
||||||||||||||||
| $29.75 | 26,572 | 2.00 | $ | 29.75 | 26,572 | $ | 29.75 | ||||||||||||||
| $34.80 | 36,049 | 6.83 | 34.80 | 36,049 | 34.80 | ||||||||||||||||
|
Outstanding
at year-end
|
62,621 | 4.78 | $ | 32.66 | 62,621 | $ | 32.66 | ||||||||||||||
The
aggregate intrinsic value for options outstanding and options exercisable at
December 31, 2007 was zero since the exercise price of all options was in excess
of the market price of the Company’s stock.
The
following table presents further information regarding the Company’s stock
option Plan during each of the years indicated.
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Tax
benefit realized from options exercised
|
$ | 123 | $ | 168 | $ | 109 | ||||||
|
Total
intrinsic value of options exercised
|
353 | 479 | 311 | |||||||||
|
Cash
received from options exercised
|
1,546 | 1,529 | 771 | |||||||||
There
were no modifications or cash paid to settle stock option awards during 2007,
2006, or 2005.
|
13.
Postretirement Medical Benefits
|
Prior to
2003, the Company provided lifetime medical and dental benefits upon retirement
for certain employees meeting the eligibility requirements as of December 31,
1989 (Plan 1). During 2003, the Company implemented an additional postretirement
health insurance program (Plan 2). Under Plan 2, any employee meeting the
service requirement of 20 years of full time service to the Company and is at
least age 55 years of age upon retirement is eligible to continue their health
insurance coverage. Under both plans, retirees not yet eligible for Medicare
have coverage identical to the coverage offered to active employees. Under both
plans, Medicare-eligible retirees are provided with a Medicare Advantage plan.
The Company pays 100% of the cost of Plan 1. The Company and the retirees each
pay 50% of the cost under Plan 2. Both plans are unfunded.
67
The
following schedules set forth a reconciliation of the changes in the plans
benefit obligation and funded status for the years ended December 31, 2007 and
2006.
|
(In
thousands)
|
2007
|
2006 | 1 | |||||
|
Change
in Benefit Obligation
|
||||||||
|
Obligation
at beginning of year
|
$ | 11,164 | $ | 9,437 | ||||
|
Service
cost
|
441 | 258 | ||||||
|
Interest
cost
|
632 | 415 | ||||||
|
Prior
service cost
|
299 | |||||||
|
Actuarial
(gain) loss
|
(981 | ) | 1,091 | |||||
|
Participant
contributions
|
55 | 32 | ||||||
|
Benefit
payments
|
(308 | ) | (368 | ) | ||||
|
Obligation
at end of year
|
$ | 11,003 | $ | 11,164 | ||||
1During
the fourth quarter of 2007, the Company learned that an actuarial error caused
the amount recorded to accumulated other comprehensive income upon adoption of
SFAS No. 158 for its postretirement benefit plans at year-end 2006 to be
incorrect. Certain disclosures for 2006 have been revised as a result of the
actuarial error. For further information, please refer to the caption “Revised 2006 Balance Sheet and Statement of Changes in
Shareholders’ Equity” in Note 1.
The
following table provides disclosure of the net periodic benefit cost as of
December 31 for the years indicated.
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Service
cost
|
$ | 441 | $ | 258 | ||||
|
Interest
cost
|
632 | 415 | ||||||
|
Amortization
of transition obligation
|
101 | 102 | ||||||
|
Recognized
prior service cost
|
299 | 268 | ||||||
|
Recognized
net actuarial loss
|
162 | 21 | ||||||
|
Net
periodic benefit cost
|
$ | 1,635 | $ | 1,064 | ||||
|
Major
assumptions:
|
||||||||
|
Discount
rate
|
5.75 | % | 5.75 | % | ||||
|
Retiree
participation rate (Plan 1)
|
100.00 | 100.00 | ||||||
|
Retiree
participation rate (Plan 2)
|
72.00 | 80.00 | ||||||
Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plans. For measurement purposes, the rate of increase in
pre-Medicare medical care claims costs was 9% in 2008 grading down by 1% to 7%
for 2010, then by .5% to 5% for 2014 and thereafter. For dental claims cost, it
was 5% for 2008 and thereafter. A 1% change in the assumed health care cost
trend rates would have the following incremental effects:
|
(In
thousands)
|
1%
Increase
|
1%
Decrease
|
||||||
|
Effect
on total of service and interest cost components of net periodic
postretirement health care benefit cost
|
$ | 239 | $ | (185 | ) | |||
|
Effect
on accumulated postretirement benefit obligation
|
1,928 | (1,539 | ) | |||||
The
following table presents estimated future benefit payments in the period
indicated.
|
(In
thousands)
|
Postretirement
Medical Benefits |
|||||
|
2008
|
$ | 356 | ||||
|
2009
|
393 | |||||
|
2010
|
420 | |||||
|
2011
|
436 | |||||
|
2012
|
448 | |||||
| 2013-2017 | 2,718 | |||||
|
Total
|
$ | 4,771 | ||||
68
Amounts
recognized in accumulated other comprehensive loss as of December 31, 2007 and
2006 are as follows.
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Unrecognized
net actuarial loss
|
$ | 2,554 | $ | 3,698 | ||||
|
Unrecognized
transition obligation
|
507 | 609 | ||||||
|
Unrecognized
prior service cost
|
1,966 | 2,265 | ||||||
|
Total
|
$ | 5,027 | $ | 6,572 | ||||
The
estimated costs that will be amortized from accumulated other comprehensive loss
into net periodic cost over the next fiscal year are as follows:
|
(In
thousands)
|
Postretirement
Medical Benefits
|
|||
|
Unrecognized
net actuarial loss
|
$ | 92 | ||
|
Transition
obligation
|
101 | |||
|
Unrecognized
prior service cost
|
299 | |||
|
Total
|
$ | 492 | ||
14.
Leases
The
Company leases certain branch sites and certain banking equipment under various
operating leases. All of the branch site leases have renewal options of varying
lengths and terms. In addition, the Company leases certain data processing
equipment that meets the capitalization criteria of SFAS No. 13, “Accounting for Leases”, as
amended, and has been recorded as an asset in premises and equipment and a
liability in other long-term debt on the balance sheet. The following table
presents estimated future minimum rental commitments under these leases for the
period indicated.
|
(In
thousands)
|
Operating
Leases
|
Capital
Lease
|
||||||
|
2008
|
$ | 596 | $ | 254 | ||||
|
2009
|
525 | 254 | ||||||
|
2010
|
437 | 254 | ||||||
|
2011
|
374 | 84 | ||||||
|
2012
|
282 | |||||||
|
Thereafter
|
1,692 | |||||||
|
Total
|
$ | 3,906 | 846 | |||||
|
Less:
amount representing interest
|
34 | |||||||
|
Long-term
obligation under capital lease
|
$ | 812 | ||||||
The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. The
financial instruments include commitments to extend credit and standby letters
of credit.
These
financial instruments involve to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
balance sheets. The contract amounts of these instruments reflect the extent of
involvement the Company has in particular classes of financial
instruments.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require the
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amount does not necessarily represent
future cash requirements. Total commitments to extend credit were $233,498,000
and $217,285,000 at December 31, 2007 and 2006, respectively. The Company
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained upon extension of credit, if deemed necessary by the
Company, is based on management's credit evaluation of the counter-party.
Collateral held varies, but may include accounts
receivable, marketable securities, inventory, premises and equipment,
residential real estate, and income producing commercial
properties.
Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party. Since many of the commitments
are expected to expire without being drawn upon, the total commitment amount
does not necessarily represent future cash requirements. The credit risk
involved in issuing letters of credit is essentially the same as that
69
received
when extending credit to customers. The fair value of these instruments is not
considered material for disclosure under FIN 45. The Company had $18,337,000 and
$16,863,000 in irrevocable letters of credit outstanding at December 31, 2007
and 2006, respectively.
The
contractual amount of financial instruments with off-balance sheet risk was as
follows at year-end.
|
December
31,
|
2007
|
2006
|
||||||||||||||
|
(In
thousands)
|
Fixed
Rate
|
Variable
Rate
|
Fixed
Rate
|
Variable
Rate
|
||||||||||||
|
Commitments
to extend credit
|
$ | 75,053 | $ | 158,445 | $ | 84,590 | $ | 132,695 | ||||||||
|
Standby
letters of credit
|
14,982 | 3,355 | 15,102 | 1,761 | ||||||||||||
|
Total
|
$ | 90,035 | $ | 161,800 | $ | 99,692 | $ | 134,456 | ||||||||
16.
Concentration of Credit Risk
The
Company's bank subsidiaries actively engage in lending, primarily in their home
counties and adjacent areas. Collateral is received to support these loans when
deemed necessary. The more significant categories of collateral include cash on
deposit with the Company's banks, marketable securities, income producing
property, commercial real estate, home mortgages, and consumer durables. Loans
outstanding, commitments to make loans, and letters of credit range across a
large number of industries and individuals. The obligations are significantly
diverse and reflect no material concentration in one or more areas, other than
most of the Company’s loans are in the Commonwealth of Kentucky.
|
17.
Loss Contingencies
|
Loss
contingencies, including claims and legal actions arising in the ordinary course
of business, are recorded as liabilities when the likelihood of loss is probable
and an amount or range of loss can be reasonably estimated. As of December 31,
2007, there were various pending legal actions and proceedings against the
Company arising from the normal course of business and in which claims for
damages are asserted. Management, after discussion with legal counsel, believes
that these actions are without merit and that the ultimate liability resulting
from these legal actions and proceedings, if any, will not have a material
effect upon the consolidated financial statements of the Company.
Payment
of dividends by the Company's subsidiary banks is subject to certain regulatory
restrictions as set forth in national and state banking laws and regulations.
Generally, capital distributions are limited to undistributed net income for the
current and prior two years, subject to the capital requirements described
below. At December 31, 2007, combined retained earnings of the subsidiary banks
were $46,416,000 of which $12,563,000 was available for the payment of dividends
in 2008 without obtaining prior approval from bank regulatory
agencies.
Included
in cash and due from banks is certain noninterest bearing deposits that are held
at the Federal Reserve Bank and correspondent banks in accordance with
regulatory reserve requirements specified by the Federal Reserve Board of
Governors. The reserve requirement was $16,872,000 and $16,897,000 at December
31, 2007 and 2006, respectively.
The
Company and its subsidiary banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements will initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the banks must meet specific capital guidelines that involve quantitative
measures of the banks’ assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The Company and its
subsidiary banks’ capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and its subsidiary banks to maintain minimum amounts and ratios (set
forth in the tables below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). The Company and each of the subsidiary banks meet
all capital adequacy requirements to which they are subject as of December 31,
2007.
As of
December 31, 2007, the most recent notification from the FDIC categorized the
banks as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the banks must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the tables. There are no conditions or events since that notification that
management believes have changed the institutions’ category.
70
The
capital amounts and ratios of the consolidated Company and the banks are
presented in the following tables.
|
To
Be Well Capitalized
|
||||||||||||||||||
|
For
Capital
|
Under
Prompt Corrective
|
|||||||||||||||||
|
Actual
|
Adequacy
Purposes
|
Action
Provisions
|
||||||||||||||||
|
December
31, 2007 (Dollars in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||
|
Tier
1 Capital (to Risk-Weighted Assets)
|
||||||||||||||||||
|
Consolidated
|
$ | 157,146 | 11.55 | % | $ | 54,405 | 4.00 | % | N/A | N/A | ||||||||
|
Farmers
Bank & Capital Trust Co.
|
34,058 | 9.90 | 13,764 | 4.00 | $ | 20,646 | 6.00 | % | ||||||||||
|
Farmers
Bank and Trust Company
|
25,337 | 9.46 | 10,711 | 4.00 | 16,066 | 6.00 | ||||||||||||
|
The
Lawrenceburg Bank & Trust Co.
|
11,211 | 9.30 | 4,820 | 4.00 | 7,230 | 6.00 | ||||||||||||
|
First
Citizens Bank
|
16,929 | 10.01 | 6,767 | 4.00 | 10,151 | 6.00 | ||||||||||||
|
United
Bank & Trust Co.
|
12,703 | 9.24 | 5,500 | 4.00 | 8,250 | 6.00 | ||||||||||||
|
Citizens
Bank of Jessamine County
|
12,572 | 9.59 | 5,241 | 4.00 | 7,862 | 6.00 | ||||||||||||
|
Citizens
Bank of Northern Kentucky
|
17,891 | 9.86 | 7,256 | 4.00 | 10,884 | 6.00 | ||||||||||||
|
Total
Capital (to Risk-Weighted Assets)
|
||||||||||||||||||
|
Consolidated
|
$ | 171,362 | 12.60 | % | $ | 108,809 | 8.00 | % | N/A | N/A | ||||||||
|
Farmers
Bank & Capital Trust Co.
|
38,342 | 11.14 | 27,528 | 8.00 | $ | 34,410 | 10.00 | % | ||||||||||
|
Farmers
Bank and Trust Company
|
28,213 | 10.54 | 21,421 | 8.00 | 26,776 | 10.00 | ||||||||||||
|
The
Lawrenceburg Bank & Trust Co.
|
12,570 | 10.43 | 9,640 | 8.00 | 12,050 | 10.00 | ||||||||||||
|
First
Citizens Bank
|
18,334 | 10.84 | 13,534 | 8.00 | 16,918 | 10.00 | ||||||||||||
|
United
Bank & Trust Co.
|
14,198 | 10.33 | 11,000 | 8.00 | 13,750 | 10.00 | ||||||||||||
|
Citizens
Bank of Jessamine County
|
13,913 | 10.62 | 10,482 | 8.00 | 13,103 | 10.00 | ||||||||||||
|
Citizens
Bank of Northern Kentucky
|
19,347 | 10.67 | 14,512 | 8.00 | 18,140 | 10.00 | ||||||||||||
|
Tier
1 Capital (to Average Assets)
|
||||||||||||||||||
|
Consolidated
|
$ | 157,146 | 8.08 | % | $ | 77,828 | 4.00 | % | N/A | N/A | ||||||||
|
Farmers
Bank & Capital Trust Co.
|
34,058 | 5.56 | 24,511 | 4.00 | $ | 30,639 | 5.00 | % | ||||||||||
|
Farmers
Bank and Trust Company
|
25,337 | 7.43 | 13,641 | 4.00 | 17,051 | 5.00 | ||||||||||||
|
The
Lawrenceburg Bank & Trust Co.
|
11,211 | 5.87 | 7,635 | 4.00 | 9,544 | 5.00 | ||||||||||||
|
First
Citizens Bank
|
16,929 | 7.09 | 9,548 | 4.00 | 11,934 | 5.00 | ||||||||||||
|
United
Bank & Trust Co.
|
12,703 | 6.18 | 8,217 | 4.00 | 10,272 | 5.00 | ||||||||||||
|
Citizens
Bank of Jessamine County
|
12,572 | 6.85 | 7,339 | 4.00 | 9,174 | 5.00 | ||||||||||||
|
Citizens
Bank of Northern Kentucky
|
17,891 | 7.98 | 8,964 | 4.00 | 11,205 | 5.00 | ||||||||||||
71
|
To
Be Well Capitalized
|
||||||||||||||||||
|
For
Capital
|
Under
Prompt Corrective
|
|||||||||||||||||
|
Actual
|
Adequacy
Purposes
|
Action
Provisions
|
||||||||||||||||
|
December
31, 2006 (Dollars in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||
|
Tier
1 Capital (to Risk-Weighted Assets)
|
||||||||||||||||||
|
Consolidated
|
$ | 155,264 | 12.23 | % | $ | 50,793 | 4.00 | % | N/A | N/A | ||||||||
|
Farmers
Bank & Capital Trust Co.
|
38,411 | 10.94 | 14,046 | 4.00 | $ | 21,069 | 6.00 | % | ||||||||||
|
Farmers
Bank and Trust Company
|
26,975 | 11.04 | 9,771 | 4.00 | 14,656 | 6.00 | ||||||||||||
|
The
Lawrenceburg Bank & Trust Co.
|
11,888 | 10.78 | 4,413 | 4.00 | 6,619 | 6.00 | ||||||||||||
|
First
Citizens Bank
|
18,072 | 11.62 | 6,223 | 4.00 | 9,335 | 6.00 | ||||||||||||
|
United
Bank & Trust Co.
|
14,084 | 11.19 | 5,034 | 4.00 | 7,552 | 6.00 | ||||||||||||
|
Citizens
Bank of Jessamine County
|
11,429 | 9.50 | 4,813 | 4.00 | 7,220 | 6.00 | ||||||||||||
|
Citizens
Bank of Northern Kentucky
|
17,345 | 10.05 | 6,902 | 4.00 | 10,353 | 6.00 | ||||||||||||
|
Total
Capital (to Risk-Weighted Assets)
|
||||||||||||||||||
|
Consolidated
|
$ | 167,263 | 13.17 | % | $ | 101,587 | 8.00 | % | N/A | N/A | ||||||||
|
Farmers
Bank & Capital Trust Co.
|
41,931 | 11.94 | 28,092 | 8.00 | $ | 35,115 | 10.00 | % | ||||||||||
|
Farmers
Bank and Trust Company
|
28,839 | 11.81 | 19,541 | 8.00 | 24,427 | 10.00 | ||||||||||||
|
The
Lawrenceburg Bank & Trust Co.
|
13,269 | 12.03 | 8,825 | 8.00 | 11,032 | 10.00 | ||||||||||||
|
First
Citizens Bank
|
19,341 | 12.43 | 12,447 | 8.00 | 15,559 | 10.00 | ||||||||||||
|
United
Bank & Trust Co.
|
15,332 | 12.18 | 10,069 | 8.00 | 12,586 | 10.00 | ||||||||||||
|
Citizens
Bank of Jessamine County
|
12,673 | 10.53 | 9,626 | 8.00 | 12,033 | 10.00 | ||||||||||||
|
Citizens
Bank of Northern Kentucky
|
18,657 | 10.81 | 13,804 | 8.00 | 17,255 | 10.00 | ||||||||||||
|
Tier
1 Capital (to Average Assets)
|
||||||||||||||||||
|
Consolidated
|
$ | 155,264 | 8.47 | % | $ | 73,314 | 4.00 | % | N/A | N/A | ||||||||
|
Farmers
Bank & Capital Trust Co.
|
38,411 | 6.55 | 23,449 | 4.00 | $ | 29,312 | 5.00 | % | ||||||||||
|
Farmers
Bank and Trust Company
|
26,975 | 8.05 | 13,406 | 4.00 | 16,757 | 5.00 | ||||||||||||
|
The
Lawrenceburg Bank & Trust Co.
|
11,888 | 6.86 | 6,935 | 4.00 | 8,669 | 5.00 | ||||||||||||
|
First
Citizens Bank
|
18,072 | 8.41 | 8,594 | 4.00 | 10,743 | 5.00 | ||||||||||||
|
United
Bank & Trust Co.
|
14,084 | 7.90 | 7,128 | 4.00 | 8,910 | 5.00 | ||||||||||||
|
Citizens
Bank of Jessamine County
|
11,429 | 7.61 | 6,005 | 4.00 | 7,507 | 5.00 | ||||||||||||
|
Citizens
Bank of Northern Kentucky
|
17,345 | 8.17 | 8,489 | 4.00 | 10,611 | 5.00 | ||||||||||||
19.
Fair Value of Financial Instruments
The
following table presents the estimated fair values of the Company’s financial
instruments made in accordance with the requirements of SFAS No. 107, Disclosures About Fair Value of
Financial Instruments. This Statement requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet for which it is practicable to estimate that value. The estimated
fair value amounts have been determined by the Company using available market
information and present value or other valuation techniques. These derived fair
values are subjective in nature, involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision. SFAS
No. 107 excludes certain financial instruments and all nonfinancial instruments
from the disclosure requirements. Accordingly, the aggregate fair value amounts
presented are not intended to represent the underlying value of the
Company.
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value.
Cash and
Cash Equivalents, Accrued Interest Receivable, and Accrued Interest
Payable
The
carrying amount is a reasonable estimate of fair value.
Investment
Securities
Fair
value equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
Loans
The fair
value of loans is estimated by discounting the future cash flows using current
discount rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
72
Deposit Liabilities
The fair
value of demand deposits, savings accounts, and certain money market deposits is
the amount payable on demand at the reporting date. The fair value of fixed
maturity certificates of deposit is estimated by discounting the future cash
flows using the rates currently offered for certificates of deposit with similar
remaining maturities.
Federal
Funds Purchased and other Short-term Borrowings
The
Carrying amount is the estimated fair value for these borrowings that reprice
frequently in the near term.
Securities
Sold Under Agreements to Repurchase, Subordinated Notes Payable, and Other
Long-term Borrowings
The fair
value of these borrowings is estimated based on rates currently available for
debt with similar terms and remaining maturities.
Commitments
to Extend Credit and Standby Letters of Credit
Pricing
of these financial instruments is based on the credit quality and relationship,
fees, interest rates, probability of funding, compensating balance, and other
covenants or requirements. Loan commitments generally have fixed expiration
dates, variable interest rates and contain termination and other clauses that
provide for relief from funding in the event there is a significant
deterioration in the credit quality of the customer. Many loan commitments are
expected to, and typically do, expire without being drawn upon. The rates and
terms of the Company's commitments to lend and standby letters of credit are
competitive with others in the various markets in which the Company operates.
There are no unamortized fees relating to these financial instruments, as such
the carrying value and fair value are both zero.
The
estimated fair values of the Company's financial instruments are as
follows.
|
December
31,
|
2007
|
2006
|
||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
(In
thousands)
|
Amount
|
Value
|
Amount
|
Value
|
||||||||||||
|
Assets
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 79,140 | $ | 79,140 | $ | 156,828 | $ | 156,828 | ||||||||
|
Investment
securities:
|
||||||||||||||||
|
Available
for sale
|
542,633 | 542,633 | 326,485 | 326,485 | ||||||||||||
|
Held
to maturity
|
3,844 | 3,863 | 7,788 | 7,849 | ||||||||||||
|
Loans,
net
|
1,277,769 | 1,275,746 | 1,185,837 | 1,161,656 | ||||||||||||
|
Accrued
interest receivable
|
13,337 | 13,337 | 11,735 | 11,735 | ||||||||||||
|
Liabilities
|
||||||||||||||||
|
Deposits
|
1,474,097 | 1,475,010 | 1,454,820 | 1,452,129 | ||||||||||||
|
Federal
funds purchased and other short-term borrowings
|
80,755 | 80,755 | 76,718 | 76,718 | ||||||||||||
|
Securities
sold under agreements to repurchase and other long-term
borrowings
|
267,339 | 272,396 | 62,218 | 71,019 | ||||||||||||
|
Subordinated
notes payable to unconsolidated trusts
|
48,970 | 37,857 | 25,774 | 25,774 | ||||||||||||
|
Accrued
interest payable
|
6,445 | 6,445 | 4,773 | 4,773 | ||||||||||||
73
20. Parent
Company Financial Statements
Condensed
Balance Sheets
|
December
31, (In thousands)
|
2007
|
2006 | 1 | |||||
|
Assets
|
||||||||
|
Cash
on deposit with subsidiaries
|
$ | 14,974 | $ | 11,103 | ||||
|
Investment
in subsidiaries
|
197,422 | 191,109 | ||||||
|
Other
assets
|
11,115 | 11,625 | ||||||
|
Total
assets
|
$ | 223,511 | $ | 213,837 | ||||
|
Liabilities
|
||||||||
|
Dividends
payable
|
$ | 2,436 | $ | 3,472 | ||||
|
Subordinated
notes payable to unconsolidated trusts
|
48,970 | 25,774 | ||||||
|
Other
liabilities
|
3,614 | 7,528 | ||||||
|
Total
liabilities
|
55,020 | 36,774 | ||||||
|
Shareholders’
Equity
|
||||||||
|
Common
stock
|
923 | 988 | ||||||
|
Capital
surplus
|
48,176 | 53,201 | ||||||
|
Retained
earnings
|
122,498 | 128,652 | ||||||
|
Accumulated
other comprehensive loss
|
(3,106 | ) | (5,778 | ) | ||||
|
Total
shareholders’ equity
|
168,491 | 177,063 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 223,511 | $ | 213,837 | ||||
|
|
1Certain
amounts have been revised related to the Company’s postretirement benefits
plans and equity accounts. Please refer to Note 1 under the captions “Revised 2006 Balance Sheet and Statement of Changes in
Shareholders’ Equity” and “Treasury
Stock”.
|
Condensed
Statements of Income
|
Years
Ended December 31, (In thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Income
|
||||||||||||
|
Dividends
from subsidiaries
|
$ | 22,616 | $ | 9,086 | $ | 7,490 | ||||||
|
Interest
income
|
64 | 74 | 85 | |||||||||
|
Gain
on sale of discontinued operations
|
9,442 | |||||||||||
|
Other
noninterest income
|
3,170 | 2,732 | 2,110 | |||||||||
|
Total
income
|
25,850 | 21,334 | 9,685 | |||||||||
|
Expense
|
||||||||||||
|
Interest
expense-subordinated notes payable to unconsolidated
trusts
|
2,394 | 1,747 | 623 | |||||||||
|
Interest
expense on other borrowed funds
|
20 | 186 | ||||||||||
|
Noninterest
expense
|
4,391 | 4,021 | 3,290 | |||||||||
|
Total
expense
|
6,805 | 5,954 | 3,913 | |||||||||
|
Income
before income tax benefit and equity in undistributed income of
subsidiaries
|
19,045 | 15,380 | 5,772 | |||||||||
|
Income
tax (benefit) expense
|
(1,375 | ) | 2,321 | (772 | ) | |||||||
|
Income
before equity in undistributed income of subsidiaries
|
20,420 | 13,059 | 6,544 | |||||||||
|
Equity
in undistributed income of subsidiaries1
|
(4,793 | ) | 8,313 | 9,228 | ||||||||
|
Net
income
|
$ | 15,627 | $ | 21,372 | $ | 15,772 | ||||||
1Includes
$1,290 and $1,240 related to discontinued operations during 2006 and 2005,
respectively.
74
Condensed
Statements of Cash Flows
|
Years
Ended December 31, (In thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Cash
Flows From Operating Activities
|
||||||||||||
|
Net
income
|
$ | 15,627 | $ | 21,372 | $ | 15,772 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Gain
on sale of discontinued operations
|
(9,442 | ) | ||||||||||
|
Equity
in undistributed income of subsidiaries
|
4,793 | (8,313 | ) | (9,228 | ) | |||||||
|
Noncash
stock option expense
|
13 | 52 | ||||||||||
|
Change
in other assets and liabilities, net
|
(3,767 | ) | 3,925 | (793 | ) | |||||||
|
Deferred
income tax expense (benefit)
|
555 | (742 | ) | 8 | ||||||||
|
Net
cash provided by operating activities
|
17,221 | 6,852 | 5,759 | |||||||||
|
Cash
Flows From Investing Activities
|
||||||||||||
|
Proceeds
from disposal of discontinued operations
|
19,875 | |||||||||||
|
Investment
in unconsolidated trusts
|
(629 | ) | (774 | ) | ||||||||
|
Investment
in nonbank subsidiaries
|
(285 | ) | ||||||||||
|
Investment
in bank subsidiary
|
(8,000 | ) | (629 | ) | (581 | ) | ||||||
|
Payment
of prior year accrued purchase price-Citizens Bancorp,
Inc.
|
(21,846 | ) | ||||||||||
|
Purchase
of Citizens National Bancshares, Inc.
|
(15,041 | ) | ||||||||||
|
Purchase
price refinements of previous acquisitions
|
50 | (29 | ) | (2 | ) | |||||||
|
Purchase
of company-owned life insurance
|
(1,579 | ) | ||||||||||
|
Net
cash used in investing activities
|
(8,579 | ) | (19,249 | ) | (1,642 | ) | ||||||
|
Cash
Flows From Financing Activities
|
||||||||||||
|
Proceeds
from short-term borrowings
|
2,500 | 15,000 | ||||||||||
|
Repayment
of short-term borrowings
|
(2,500 | ) | (15,000 | ) | ||||||||
|
Dividends
paid
|
(11,118 | ) | (9,553 | ) | (8,949 | ) | ||||||
|
Purchase
of common stock
|
(18,649 | ) | (820 | ) | (571 | ) | ||||||
|
Shares
issued under Employee Stock Purchase Plan
|
254 | 223 | 187 | |||||||||
|
Stock
options exercised
|
1,546 | 1,529 | 771 | |||||||||
|
Proceeds
from long-term debt issued to unconsolidated trusts
|
23,196 | 25,774 | ||||||||||
|
Net
cash (used in) provided by financing activities
|
(4,771 | ) | (8,621 | ) | 17,212 | |||||||
|
Net
increase (decrease) in cash and cash equivalents
|
3,871 | (21,018 | ) | 21,329 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
11,103 | 32,121 | 10,792 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 14,974 | $ | 11,103 | $ | 32,121 | ||||||
|
21.
Quarterly Financial Data
(Unaudited)
|
|
(In
thousands, except per share data)
|
||||||||||||||||
|
Quarters
Ended 2007
|
March
31
|
June
30
|
Sept.
30
|
Dec.
313
|
||||||||||||
|
Interest
income
|
$ | 27,402 | $ | 28,511 | $ | 28,494 | $ | 29,850 | ||||||||
|
Interest
expense
|
13,307 | 13,661 | 13,872 | 15,199 | ||||||||||||
|
Net
interest income
|
14,095 | 14,850 | 14,622 | 14,651 | ||||||||||||
|
Provision
for loan losses
|
(496 | ) | 330 | 595 | 3,209 | |||||||||||
|
Net
interest income after provision for loan losses
|
14,591 | 14,520 | 14,027 | 11,442 | ||||||||||||
|
Noninterest
income
|
5,667 | 6,108 | 6,119 | 6,263 | ||||||||||||
|
Noninterest
expense
|
14,338 | 14,309 | 14,356 | 15,820 | ||||||||||||
|
Income
before income taxes
|
5,920 | 6,319 | 5,790 | 1,885 | ||||||||||||
|
Income
tax expense
|
1,310 | 1,407 | 1,633 | (63 | ) | |||||||||||
|
Net
income
|
$ | 4,610 | $ | 4,912 | $ | 4,157 | $ | 1,948 | ||||||||
|
Net
income per common share – basic and diluted
|
$ | .58 | $ | .62 | $ | .54 | $ | .26 | ||||||||
|
Weighted
average shares outstanding, basic
|
7,893 | 7,884 | 7,672 | 7,382 | ||||||||||||
|
Weighted
average shares outstanding, diluted
|
7,908 | 7,892 | 7,672 | 7,382 | ||||||||||||
75
|
(In
thousands, except per share data)
|
||||||||||||||||
|
Quarters
Ended 2006
|
March
31
|
June
30
|
Sept.
30
|
Dec.
31
|
||||||||||||
|
Interest
income
|
$ | 20,883 | $ | 21,669 | $ | 22,835 | $ | 26,953 | ||||||||
|
Interest
expense
|
8,567 | 9,427 | 10,447 | 12,991 | ||||||||||||
|
Net
interest income
|
12,316 | 12,242 | 12,388 | 13,962 | ||||||||||||
|
Provision
for loan losses
|
(34 | ) | (46 | ) | 253 | 792 | ||||||||||
|
Net
interest income after provision for loan losses
|
12,350 | 12,288 | 12,135 | 13,170 | ||||||||||||
|
Noninterest
income
|
5,056 | 4,991 | 5,015 | 5,397 | ||||||||||||
|
Noninterest
expense
|
12,507 | 12,434 | 12,901 | 15,535 | ||||||||||||
|
Income
from continuing operations before income taxes
|
4,899 | 4,845 | 4,249 | 3,032 | ||||||||||||
|
Income
tax expense from continuing operations
|
910 | 967 | 966 | 517 | ||||||||||||
|
Income
from continuing operations
|
3,989 | 3,878 | 3,283 | 2,515 | ||||||||||||
|
Income
from discontinued operations before income taxes1
|
567 | 599 | 713 | 9,963 | ||||||||||||
|
Income
tax expense from discontinued operations2
|
165 | 171 | 250 | 3,549 | ||||||||||||
|
Income
from discontinued operations
|
402 | 428 | 463 | 6,414 | ||||||||||||
|
Net
income
|
$ | 4,391 | $ | 4,306 | $ | 3,746 | $ | 8,929 | ||||||||
|
Income
from continuing operations – basic and diluted
|
$ | .54 | $ | .52 | $ | .45 | $ | .32 | ||||||||
|
Income
from discontinued operations – basic and diluted
|
.05 | .06 | .06 | .81 | ||||||||||||
|
Net
income per common share, basic and diluted
|
.59 | .58 | .51 | 1.13 | ||||||||||||
|
Weighted
average shares outstanding, basic
|
7,385 | 7,378 | 7,393 | 7,884 | ||||||||||||
|
Weighted
average shares outstanding, diluted
|
7,413 | 7,400 | 7,412 | 7,904 | ||||||||||||
1Includes
gain on disposals of $9,873 during the quarter ended December 31,
2006.
2Includes
income tax expense of $3,456 during the quarter ended December 31, 2006 related
to gain on disposals.
3The
reduction in net income in the fourth quarter of 2007 was due to an increase in
the provision for loans losses associated with trends in the credit markets in
that period (see Managements Discussion and Analysis under Item
7 of this Form 10-K).
22.
Business Combination – Military Allotment Operation, PNC Bank, National
Association
In
January 2007, First Citizens completed its transaction to acquire the Military
Allotment operation of PNC Bank, National Association in a cash transaction.
First Citizens acquired intangible assets in the form of a customer list and
goodwill. It also recorded a core deposit intangible in connection with
receiving approximately $10,870,000 in deposits from PNC in the transaction.
First Citizens merged the acquired Military Allotment operation into its
existing allotment operations, which specializes in the processing of federal
benefit payments and military allotments.
The total
cost related to this acquisition, which was paid entirely in cash, was
$12,812,000. The customer list and core deposit intangible assets of $1,275,000
and $1,874,000 at acquisition are being amortized over a life of 7 years under a
declining amortization schedule through year 2013. Goodwill is not subject to
periodic amortization in the consolidated financial statements, but will be
deductible for federal income tax purposes over a period of 15 years. The
following table summarizes the estimated fair value of assets acquired and
liabilities assumed at the date of acquisition.
|
(In
thousands)
|
January
12, 2007
|
|||
|
Assets
|
||||
|
Cash
|
$ | 10,870 | ||
|
Customer
list intangible
|
1,275 | |||
|
Core
deposit intangible
|
1,874 | |||
|
Goodwill
|
9,663 | |||
|
Total
Assets
|
$ | 23,682 | ||
|
Liabilities
|
||||
|
Deposits
|
$ | 10,870 | ||
|
Net
Assets Acquired
|
$ | 12,812 | ||
76
23. Goodwill
and Intangible Assets
Goodwill
The
change in balance for goodwill is as follows.
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Beginning
of year
|
$ | 42,822 | $ | 28,437 | ||||
|
Purchase
price refinements of prior years’ acquisitions
|
(77 | ) | 211 | |||||
|
Acquired
goodwill
|
9,663 | 14,174 | ||||||
|
End
of year
|
$ | 52,408 | $ | 42,822 | ||||
Acquired
Intangible Assets
Acquired
core deposit and customer relationship intangible assets were as follows as of
December 31 of the year indicated.
|
2007
|
2006
|
|||||||||||||||
|
Amortized
Intangible Assets
(In
thousands)
|
Gross
Amount
|
Accumulated
Amortization
|
Gross
Amount
|
Accumulated
Amortization
|
||||||||||||
|
Core
deposit intangibles
|
$ | 12,765 | $ | 5,274 | $ | 10,890 | $ | 2,541 | ||||||||
|
Other
customer relationship intangibles
|
3,689 | 1,637 | 2,414 | 1,008 | ||||||||||||
|
Total
|
$ | 16,454 | $ | 6,911 | $ | 13,304 | $ | 3,549 | ||||||||
Aggregate
amortization expense of core deposit and customer relationship intangible assets
was $3,362,000 and $2,009,000 for 2007 and 2006, respectively. Estimated
amortization expense for each of the next five years is as follows.
|
(In
thousands)
|
Amount
|
|||
|
2008
|
$ | 2,602 | ||
|
2009
|
1,952 | |||
|
2010
|
1,437 | |||
|
2011
|
1,143 | |||
|
2012
|
1,014 | |||
None.
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this report, an evaluation was carried out under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).
Based on their evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures and internal
control over financial reporting are, to the best of their knowledge, effective
to ensure that information required to be disclosed by us in reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms.
Our Chief
Executive Officer and Chief Financial Officer have also concluded that there
were no changes in our internal control over financial reporting or in other
factors that occurred during our most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting or any corrective actions with regard to significant
deficiencies and material weaknesses in internal control over financial
reporting.
Management’s
Report on Internal Control Over Financial Reporting
Management
Responsibility. The management
of Farmers Capital Bank Corporation is responsible for establishing and
maintaining adequate internal control over financial reporting. The Company’s
internal control system is designed to provide reasonable assurance
77
to the
Company’s management and Board of Directors regarding the reliability of
financial reporting and the presentation of published financial statements.
However, all internal control systems, no matter how well designed, have
inherent limitations.
General
Description of Internal Control over Financial Reporting. Internal control
over financial reporting refers to a process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer and
effected by the Company’s Board of Directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:
|
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of Company
assets;
|
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that Company’s receipts and expenditures are
being made only in accordance with the authorization of Company’s
management and members of the Company’s Board of Directors;
and
|
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisitions, uses or dispositions of Company assets that
could have a material effect on the Company’s financial
statements.
|
Inherent
Limitations in Internal Control over Financial Reporting. Internal control
over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures. Internal
control over financial reporting also can be circumvented or overridden by
collusion or other improper activities. Because of such limitations,
there is a risk that material misstatements may not be prevented or detected on
a timely basis by internal control over financial reporting. However,
these inherent limitations are known features of the financial reporting
process, and it is possible to design into the process safeguards to reduce,
though not eliminate, this risk.
Management’s
Assessment of the Company’s Internal Control over Financial
Reporting. We assessed the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2007. In making this assessment, we used the criteria
for effective internal control over financial reporting set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
“Internal Control-Integrated Framework.”
As a
result of our assessment of the Company’s internal control over financial
reporting, we conclude that the Company’s internal control over financial
reporting was effective as of December 31, 2007 to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms.
None.
|
Positions
and
|
Years
of Service
|
||
|
Offices
With
|
With
the
|
||
|
Executive
Officer1
|
Age
|
the
Registrant
|
Registrant
|
|
G.
Anthony Busseni
|
59
|
President
and CEO, Director2
|
23*
|
|
Allison
B. Gordon
|
44
|
Senior
Vice President3
|
21*
|
The
Company has adopted a Code of Ethics that applies to the Company’s directors,
officers and employees, including the Company’s chief executive officer and
chief financial officer. The Company makes available its Code of
Ethics on its Internet website at www.farmerscapital.com.
Additional
information required by Item 10 is hereby incorporated by reference from the
Company's definitive proxy statement in connection with its annual meeting of
shareholders scheduled for May 13, 2008, which will be filed with the Commission
on or about April 1, 2008, pursuant to Regulation 14A.
78
|
*
|
Includes
years of service with the Company and its
subsidiaries.
|
|
1
|
For
Regulation O purposes, Frank W. Sower, Jr., Chairman of the Company’s
board of directors, is considered an executive officer in name
only.
|
|
2
|
Also
a director of Farmers Bank, Citizens Jessamine, Farmers Georgetown, United
Bank, The Lawrenceburg Bank and Trust, First Citizens, Citizens Northern,
FCB Services, Farmers Insurance (Chairman), Leasing One (Chairman),
Kentucky General (Chairman), FFKT Insurance, Kentucky Home Life Insurance
Company, and an administrative trustee of Farmers Capital Bank Trust I,
Farmers Capital Bank Trust II, and Farmers Capital Bank Trust
III.
|
|
3
|
Also
a director of Farmers Bank, Farmers Georgetown, FCB Services, and an
administrative trustee of Farmers Capital Bank Trust I, Farmers Capital
Bank Trust II, and Farmers Capital Bank Trust
III.
|
The
information required by Items 11 through 14 is hereby incorporated by reference
from the Company's definitive proxy statement in connection with its annual
meeting of shareholders scheduled for May 13, 2008, which will be filed with the
Commission on or about April 1, 2008, pursuant to Regulation 14A.
PART
IV
|
(a)1.
|
Financial
Statements
|
The
following consolidated financial statements and report of independent registered
accounting firm of the Company is included in Part II, Item
8 on pages 42 through 77:
|
(a)2.
|
Financial Statement
Schedules
|
All
schedules are omitted for the reason they are not required, or are not
applicable, or the required information is disclosed elsewhere in the financial
statements and related notes thereto.
79
|
(a)3.
|
Exhibits:
|
|
|
3.1
|
Amended
and Restated Articles of Incorporation of the Registrant (incorporated by
reference to Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2006).
|
|
|
3.2
|
Amended
and Restated Bylaws of the Registrant (incorporated by reference to Annual
Report of Form 10-K for the fiscal year ended December 31,
1997).
|
|
|
3.3
|
Amendments
to Bylaws of the Registrant (incorporated by reference to Quarterly Report
of Form 10-Q for the quarterly period ended March 31,
2003).
|
|
|
4
|
Articles
of Incorporation and Bylaws of the Registrant (incorporated by reference
to Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2006, the Annual Report on Form 10-K for the fiscal year ended December
31, 1997, and the Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2003).
|
80
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.
|
FARMERS
CAPITAL BANK CORPORATION
|
|||
|
By:
|
/s/ G. Anthony Busseni
|
||
|
G.
Anthony Busseni
|
|||
|
President
and Chief Executive Officer
|
|||
|
Date:
|
March
7, 2008
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
/s/
G. Anthony Busseni
|
President,
Chief Executive Officer
|
March
7, 2008
|
|
G.
Anthony Busseni
|
and
Director (principal executive
|
|
|
officer
of the Registrant)
|
||
|
/s/ Frank W. Sower,
Jr.
|
Chairman
|
February
25,2008
|
|
Frank
W. Sower, Jr.
|
||
|
/s/
Frank R. Hamilton, Jr
|
Director
|
February 27, 2008
|
|
Frank
R. Hamilton, Jr.
|
||
|
/s/
Lloyd C. Hillard, Jr.
|
Director
|
February
25, 2008
|
|
Lloyd
C. Hillard, Jr.
|
||
|
/s/
R. Terry Bennett
|
Director
|
March 5, 2008
|
|
R.
Terry Bennett
|
||
|
/s/
Shelley S. Sweeney
|
Director
|
March 3, 2008
|
|
Shelley
S. Sweeney
|
||
|
/s/
Dr. Donald J. Mullineaux
|
Director
|
February 27, 2008
|
|
Dr.
Donald J. Mullineaux
|
||
|
/s/
Dr. Donald A. Saelinger
|
Director
|
February
24, 2008
|
|
Dr.
Donald A. Saelinger
|
||
|
Director
|
||
|
Dr.
John D. Sutterlin
|
||
|
/s/
Michael M. Sullivan
|
Director
|
February
27, 2008
|
|
Michael
M. Sullivan
|
||
|
/s/
J. Barry Banker
|
Director
|
February
25, 2008
|
|
J.
Barry Banker
|
||
|
/s/
Robert Roach, Jr.
|
Director
|
February
26, 2008
|
|
Robert
Roach, Jr.
|
||
|
/s/
C. Douglas Carpenter
|
Senior
Vice President, Secretary
|
March
10, 2008
|
|
C.
Douglas Carpenter
|
and
CFO (principal financial and
|
|
|
accounting
officer)
|
81
|
Exhibit
|
Page
|
|
|
21
|
83
|
|
|
23
|
84
|
|
|
31.1
|
85
|
|
|
31.2
|
86
|
|
|
32
|
87
|
82