Form 10-Q, 9-30-06
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT
Pursuant
to Section 13 OR 15(d) of
The
Securities Exchange Act of 1934
For
the
quarterly period ended September 30, 2006
| |
|
|
| |
Farmers
Capital Bank Corporation
|
|
| |
(Exact
name of registrant as specified in its charter)
|
|
| |
Kentucky
|
|
0-14412
|
|
61-1017851
|
|
| |
(State
or other jurisdiction
|
|
(Commission
|
|
(IRS
Employer
|
|
| |
of
incorporation)
|
|
File
Number)
|
|
Identification
No.)
|
|
| |
P.O.
Box 309 Frankfort, KY
|
|
40602
|
|
| |
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
Registrant’s
telephone number, including area code - (502)-227-1668
| |
Not
Applicable
|
|
| |
(Former
name or former address, if changed since last report.)
|
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements
for
the past 90 days.
Yes x
No ¨
Indicate
by check mark whether the registrant 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):
Large
accelerated filer ¨ Accelerated
filer x Non-accelerated
filer ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Common
stock, par value $0.125 per share
7,877,768
shares outstanding at November 6, 2006
TABLE
OF
CONTENTS
|
PART
I - FINANCIAL INFORMATION
|
3
|
|
|
3
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
8
|
|
|
9
|
|
|
19
|
|
|
36
|
|
|
37
|
|
PART
II - OTHER INFORMATION
|
37
|
|
|
37
|
|
|
37
|
|
|
37
|
|
|
38
|
PART I - FINANCIAL INFORMATION
| |
|
September
30,
|
|
December
31,
|
|
|
(In thousands, except share data)
|
|
2006
|
|
2005
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
107,558
|
|
$
|
71,496
|
|
|
Interest
bearing deposits in other banks
|
|
|
2,698
|
|
|
2,565
|
|
|
Federal
funds sold and securities purchased under agreements to
resell
|
|
|
36,715
|
|
|
56,957
|
|
|
Total
cash and cash equivalents
|
|
|
146,971
|
|
|
131,018
|
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
Available
for sale, amortized cost of $268,112 (2006) and $317,759
(2005)
|
|
|
266,085
|
|
|
315,067
|
|
|
Held
to maturity, fair value of $9,977 (2006) and $13,815
(2005)
|
|
|
9,888
|
|
|
13,610
|
|
|
Total
investment securities
|
|
|
275,973
|
|
|
328,677
|
|
|
Loans,
net of unearned income
|
|
|
1,055,431
|
|
|
962,571
|
|
|
Allowance
for loan losses
|
|
|
(10,501
|
)
|
|
(11,069
|
)
|
|
Loans,
net
|
|
|
1,044,930
|
|
|
951,502
|
|
|
Premises
and equipment, net
|
|
|
32,870
|
|
|
28,832
|
|
|
Company-owned
life insurance
|
|
|
31,022
|
|
|
30,049
|
|
|
Goodwill
|
|
|
28,226
|
|
|
28,437
|
|
|
Other
intangibles, net
|
|
|
5,945
|
|
|
7,271
|
|
|
Assets
of discontinued operations
|
|
|
138,922
|
|
|
143,569
|
|
|
Other
assets
|
|
|
22,662
|
|
|
24,588
|
|
|
Total
assets
|
|
$
|
1,727,521
|
|
$
|
1,673,943
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest
bearing
|
|
$
|
212,043
|
|
$
|
183,248
|
|
|
Interest
bearing
|
|
|
1,023,786
|
|
|
1,008,403
|
|
|
Total
deposits
|
|
|
1,235,829
|
|
|
1,191,651
|
|
|
Federal
funds purchased and securities sold under agreements to
repurchase
|
|
|
74,311
|
|
|
71,336
|
|
|
Other
short-term borrowings
|
|
|
23,788
|
|
|
780
|
|
|
Subordinated
notes payable to unconsolidated trusts
|
|
|
25,774
|
|
|
25,774
|
|
|
Long-term
debt
|
|
|
50,438
|
|
|
49,516
|
|
|
Dividends
payable
|
|
|
2,442
|
|
|
2,244
|
|
|
Accrued
purchase price-Citizens Bancorp, Inc.
|
|
|
|
|
|
21,846
|
|
|
Liabilities
of discontinued operations
|
|
|
140,245
|
|
|
144,409
|
|
|
Other
liabilities
|
|
|
14,274
|
|
|
12,151
|
|
|
Total
liabilities
|
|
|
1,567,101
|
|
|
1,519,707
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
Common
stock, par value $.125 per share
|
|
|
|
|
|
|
|
|
9,608,000
shares authorized; 8,899,158 and 8,856,249
|
|
|
|
|
|
|
|
|
shares
issued at September 30, 2006 and December 31, 2005,
respectively
|
|
|
1,112
|
|
|
1,107
|
|
|
Capital
surplus
|
|
|
41,055
|
|
|
39,829
|
|
|
Retained
earnings
|
|
|
161,929
|
|
|
156,796
|
|
|
Treasury
stock, at cost; 1,490,351 and 1,467,351 shares
|
|
|
|
|
|
|
|
|
at
September 30, 2006 and December 31, 2005, respectively
|
|
|
(42,294
|
)
|
|
(41,579
|
)
|
|
Accumulated
other comprehensive loss
|
|
|
(1,382
|
)
|
|
(1,917
|
)
|
|
Total
shareholders’ equity
|
|
|
160,420
|
|
|
154,236
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
1,727,521
|
|
$
|
1,673,943
|
|
|
See
accompanying notes to unaudited consolidated financial
statements.
|
|
| |
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
| |
|
September
30,
|
|
September
30,
|
|
|
(In
thousands, except per share data)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$
|
19,446
|
|
$
|
13,195
|
|
$
|
54,839
|
|
$
|
37,872
|
|
|
Interest
on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
2,005
|
|
|
1,887
|
|
|
6,556
|
|
|
5,401
|
|
|
Nontaxable
|
|
|
896
|
|
|
920
|
|
|
2,758
|
|
|
2,768
|
|
|
Interest
on deposits in other banks
|
|
|
14
|
|
|
23
|
|
|
39
|
|
|
51
|
|
|
Interest
of federal funds sold and securities purchased under agreements to
resell
|
|
|
474
|
|
|
344
|
|
|
1,196
|
|
|
1,126
|
|
|
Total
interest income
|
|
|
22,835
|
|
|
16,369
|
|
|
65,388
|
|
|
47,218
|
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
8,133
|
|
|
4,834
|
|
|
22,219
|
|
|
13,491
|
|
|
Interest
on federal funds purchased and securities sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under
agreements to repurchase
|
|
|
1,212
|
|
|
640
|
|
|
3,206
|
|
|
1,814
|
|
|
Interest
on other borrowed funds
|
|
|
636
|
|
|
531
|
|
|
1,727
|
|
|
1,553
|
|
|
Interest
on subordinated notes payable to unconsolidated trusts
|
|
|
466
|
|
|
255
|
|
|
1,290
|
|
|
255
|
|
|
Total
interest expense
|
|
|
10,447
|
|
|
6,260
|
|
|
28,442
|
|
|
17,113
|
|
|
Net
interest income
|
|
|
12,388
|
|
|
10,109
|
|
|
36,946
|
|
|
30,105
|
|
|
Provision
for loan losses
|
|
|
253
|
|
|
348
|
|
|
172
|
|
|
367
|
|
|
Net
interest income after provision for loan losses
|
|
|
12,135
|
|
|
9,761
|
|
|
36,774
|
|
|
29,738
|
|
|
Noninterest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges and fees on deposits
|
|
|
2,317
|
|
|
2,184
|
|
|
6,639
|
|
|
6,507
|
|
|
Allotment
processing fees
|
|
|
621
|
|
|
659
|
|
|
1,957
|
|
|
1,957
|
|
|
Other
service charges, commissions, and fees
|
|
|
568
|
|
|
503
|
|
|
1,958
|
|
|
1,675
|
|
|
Data
processing income
|
|
|
439
|
|
|
440
|
|
|
1,323
|
|
|
1,376
|
|
|
Trust
income
|
|
|
456
|
|
|
397
|
|
|
1,374
|
|
|
1,223
|
|
|
Investment
securities losses, net
|
|
|
|
|
|
|
|
|
(195
|
)
|
|
(3
|
)
|
|
Gains
on sale of mortgage loans, net
|
|
|
146
|
|
|
169
|
|
|
464
|
|
|
505
|
|
|
Income
from company-owned life insurance
|
|
|
320
|
|
|
314
|
|
|
1,003
|
|
|
861
|
|
|
Other
|
|
|
148
|
|
|
186
|
|
|
539
|
|
|
1,097
|
|
|
Total
noninterest income
|
|
|
5,015
|
|
|
4,852
|
|
|
15,062
|
|
|
15,198
|
|
|
Noninterest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
6,780
|
|
|
5,743
|
|
|
20,238
|
|
|
16,741
|
|
|
Occupancy
expenses, net
|
|
|
866
|
|
|
670
|
|
|
2,629
|
|
|
1,976
|
|
|
Equipment
expenses
|
|
|
651
|
|
|
619
|
|
|
2,077
|
|
|
1,879
|
|
|
Data
processing and communication expenses
|
|
|
1,309
|
|
|
1,053
|
|
|
3,773
|
|
|
3,079
|
|
|
Bank
franchise tax
|
|
|
449
|
|
|
344
|
|
|
1,331
|
|
|
1,019
|
|
|
Correspondent
bank fees
|
|
|
177
|
|
|
214
|
|
|
515
|
|
|
688
|
|
|
Amortization
of intangibles
|
|
|
433
|
|
|
307
|
|
|
1,325
|
|
|
737
|
|
|
Other
|
|
|
2,236
|
|
|
1,553
|
|
|
5,954
|
|
|
5,303
|
|
|
Total
noninterest expense
|
|
|
12,901
|
|
|
10,503
|
|
|
37,842
|
|
|
31,422
|
|
|
Income
from continuing operations before income taxes
|
|
|
4,249
|
|
|
4,110
|
|
|
13,994
|
|
|
13,514
|
|
|
Income
tax expense from continuing operations
|
|
|
966
|
|
|
699
|
|
|
2,844
|
|
|
2,822
|
|
|
Income
from continuing operations
|
|
|
3,283
|
|
|
3,411
|
|
|
11,150
|
|
|
10,692
|
|
|
Income
from discontinued operations before income tax expense
|
|
|
713
|
|
|
656
|
|
|
1,878
|
|
|
1,544
|
|
|
Income
tax expense from discontinued operations
|
|
|
250
|
|
|
214
|
|
|
585
|
|
|
439
|
|
|
Income
from discontinued operations
|
|
|
463
|
|
|
442
|
|
|
1,293
|
|
|
1,105
|
|
|
Net
income
|
|
$
|
3,746
|
|
$
|
3,853
|
|
$
|
12,443
|
|
$
|
11,797
|
|
|
Net
Income Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations - basic
|
|
$
|
.45
|
|
$
|
.51
|
|
$
|
1.51
|
|
$
|
1.58
|
|
|
Income
from discontinued operations - basic
|
|
|
.06
|
|
|
.06
|
|
|
.17
|
|
|
.16
|
|
|
Net
income per common share - basic
|
|
|
.51
|
|
|
.57
|
|
|
1.68
|
|
|
1.74
|
|
|
Income
from continuing operations - diluted
|
|
|
.45
|
|
|
.50
|
|
|
1.51
|
|
|
1.57
|
|
|
Income
from discontinued operations - diluted
|
|
|
.06
|
|
|
.06
|
|
|
.17
|
|
|
.16
|
|
|
Net
income per common share - diluted
|
|
|
.51
|
|
|
.56
|
|
|
1.68
|
|
|
1.73
|
|
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,393
|
|
|
6,786
|
|
|
7,385
|
|
|
6,786
|
|
|
Diluted
|
|
|
7,412
|
|
|
6,821
|
|
|
7,404
|
|
|
6,824
|
|
|
See
accompanying notes to unaudited consolidated financial
statements.
|
| |
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
| |
|
September
30,
|
|
September
30,
|
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
Net
Income
|
|
$
|
3,746
|
|
$
|
3,853
|
|
$
|
12,443
|
|
$
|
11,797
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gain (loss) on available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
arising during the period, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
$1,691, $(867), $267, and $(981), respectively
|
|
|
3,140
|
|
|
(1,610
|
)
|
|
495
|
|
|
(1,822
|
)
|
|
Reclassification
adjustment for prior period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized
loss recognized during current period,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax of $22 and $3
|
|
|
|
|
|
|
|
|
40
|
|
|
5
|
|
|
Other
comprehensive (loss) income
|
|
|
3,140
|
|
|
(1,610
|
)
|
|
535
|
|
|
(1,817
|
)
|
|
Comprehensive
Income
|
|
$
|
6,886
|
|
$
|
2,243
|
|
$
|
12,978
|
|
$
|
9,980
|
|
|
See
accompanying notes to unaudited consolidated financial
statements.
|
Unaudited
Consolidated Statements of Cash Flows
|
Nine
months ended September 30, (In thousands)
|
|
2006
|
|
2005
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
12,443
|
|
$
|
11,797
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,036
|
|
|
2,916
|
|
|
Net
amortization of investment security premiums and
(discounts):
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
(53
|
)
|
|
291
|
|
|
Held
to maturity
|
|
|
(18
|
)
|
|
(32
|
)
|
|
Provision
for loan losses
|
|
|
172
|
|
|
367
|
|
|
Noncash
compensation expense
|
|
|
102
|
|
|
|
|
|
Mortgage
loans originated for sale
|
|
|
(24,419
|
)
|
|
(27,359
|
)
|
|
Proceeds
from sale of mortgage loans
|
|
|
22,020
|
|
|
25,460
|
|
|
Deferred
income tax expense (benefit)
|
|
|
1,566
|
|
|
(419
|
)
|
|
Gains
on sale of mortgage loans, net
|
|
|
(464
|
)
|
|
(505
|
)
|
|
Gain
on sale of credit card portfolio
|
|
|
|
|
|
(700
|
)
|
|
Gain
on sale of premises and equipment, net
|
|
|
(93
|
)
|
|
(5
|
)
|
|
Loss
on sale of available for sale investment securities, net
|
|
|
195
|
|
|
3
|
|
|
Increase
in accrued interest receivable
|
|
|
(1,377
|
)
|
|
(840
|
)
|
|
Income
from company-owned life insurance
|
|
|
(973
|
)
|
|
(836
|
)
|
|
Decrease
(increase) in other assets
|
|
|
2,303
|
|
|
(1,039
|
)
|
|
Increase
in accrued interest payable
|
|
|
886
|
|
|
339
|
|
|
Increase
in other liabilities
|
|
|
968
|
|
|
1,061
|
|
|
Net
cash provided by discontinued operating activities
|
|
|
1,343
|
|
|
1,387
|
|
|
Net
cash provided by operating activities
|
|
|
18,637
|
|
|
11,886
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Proceeds
from maturities and calls of investment securities:
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
76,093
|
|
|
111,379
|
|
|
Held
to maturity
|
|
|
3,740
|
|
|
3,040
|
|
|
Proceeds
from sale of available for sale investment securities
|
|
|
19,122
|
|
|
3,038
|
|
|
Purchase
of available for sale investment securities
|
|
|
(45,709
|
)
|
|
(122,774
|
)
|
|
Loans
originated for investment, net of principal collected
|
|
|
(90,737
|
)
|
|
(23,802
|
)
|
|
Payment
of prior year accrued purchase price-Citizens Bancorp,
Inc.
|
|
|
(21,846
|
)
|
|
|
|
|
Purchase
price refinements-Citizens Bancorp, Inc.
|
|
|
211
|
|
|
|
|
|
Additions
to mortgage servicing rights, net
|
|
|
(41
|
)
|
|
|
|
|
Purchase
of premises and equipment
|
|
|
(7,006
|
)
|
|
(2,487
|
)
|
|
Proceeds
from sale of equipment
|
|
|
476
|
|
|
121
|
|
|
Net
cash provided by discontinued investing activities
|
|
|
14,225
|
|
|
21,977
|
|
|
Net
cash used in investing activities
|
|
|
(51,472
|
)
|
|
(9,508
|
)
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
44,178
|
|
|
69,541
|
|
|
Net
increase in securities sold under agreements to repurchase
|
|
|
2,975
|
|
|
154
|
|
|
Proceeds
from long-term debt issued to unconsolidated trusts
|
|
|
|
|
|
25,774
|
|
|
Proceeds
from other long-term debt
|
|
|
11,198
|
|
|
2,000
|
|
|
Repayments
of long-term debt
|
|
|
(10,276
|
)
|
|
(1,049
|
)
|
|
Net
increase (decrease) in other short-term borrowings
|
|
|
23,008
|
|
|
(999
|
)
|
|
Dividends
paid
|
|
|
(7,112
|
)
|
|
(6,709
|
)
|
|
Purchase
of common stock
|
|
|
(715
|
)
|
|
(526
|
)
|
|
Shares
issued under Employee Stock Purchase Plan
|
|
|
173
|
|
|
147
|
|
|
Stock
options exercised
|
|
|
927
|
|
|
455
|
|
|
Net
cash used in discontinued financing activities
|
|
|
(5,123
|
)
|
|
(17,103
|
)
|
|
Net
cash provided by financing activities
|
|
|
59,233
|
|
|
71,685
|
|
|
Net
increase in cash and cash equivalents
|
|
|
26,398
|
|
|
74,063
|
|
|
Less:
net increase in cash and cash equivalents of discontinued
operations
|
|
|
(10,445
|
)
|
|
(6,261
|
)
|
|
Net
increase in cash and cash equivalents from continuing
operations
|
|
|
15,953
|
|
|
67,802
|
|
|
Cash
and cash equivalents from continuing activities at beginning of
year
|
|
|
131,018
|
|
|
77,802
|
|
|
Cash
and cash equivalents from continuing activities at end of
period
|
|
$
|
146,971
|
|
$
|
145,604
|
|
|
Supplemental
Disclosures
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
30,484
|
|
$
|
19,105
|
|
|
Income
taxes
|
|
|
4,050
|
|
|
2,000
|
|
|
Transfers
from loans to repossessed assets
|
|
|
1,184
|
|
|
2,599
|
|
|
Cash
dividend declared and unpaid
|
|
|
2,442
|
|
|
2,241
|
|
See
accompanying notes to unaudited consolidated financial
statements.
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Other
|
|
Total
|
|
|
Nine
months ended
|
|
Common
Stock
|
|
Capital
|
|
Retained
|
|
Treasury
Stock
|
|
Comprehensive
|
|
Shareholders’
|
|
|
September
30, 2006 and 2005
|
|
Shares
|
|
Amount
|
|
Surplus
|
|
Earnings
|
|
Shares
|
|
Amount
|
|
Income
|
|
Equity
|
|
|
Balance
at January 1, 2006
|
|
|
8,856
|
|
$
|
1,107
|
|
$
|
39,829
|
|
$
|
156,796
|
|
|
1,467
|
|
$
|
(41,579
|
)
|
$
|
(1,917
|
)
|
$
|
154,236
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
12,443
|
|
|
|
|
|
|
|
|
|
|
|
12,443
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
535
|
|
|
535
|
|
|
Cash
dividends declared, $.99 per share
|
|
|
|
|
|
|
|
|
|
|
|
(7,310
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,310
|
)
|
|
Purchase
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
(715
|
)
|
|
|
|
|
(715
|
)
|
|
Stock
options exercised, including related tax benefits
|
|
|
37
|
|
|
4
|
|
|
929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
933
|
|
|
Shares
issued pursuant to Employee Stock Purchase Plan
|
|
|
6
|
|
|
1
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173
|
|
|
Noncash
compensation expense attributed to stock option and Employee Stock
Purchase Plan grants
|
|
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
Balance
at September 30, 2006
|
|
|
8,899
|
|
$
|
1,112
|
|
$
|
41,055
|
|
$
|
161,929
|
|
|
1,490
|
|
$
|
(42,294
|
)
|
$
|
(1,382
|
)
|
$
|
160,420
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2005
|
|
|
8,234
|
|
$
|
1,029
|
|
$
|
20,744
|
|
$
|
149,985
|
|
|
1,450
|
|
$
|
(41,008
|
)
|
$
|
700
|
|
$
|
131,450
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
11,797
|
|
|
|
|
|
|
|
|
|
|
|
11,797
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,817
|
)
|
|
(1,817
|
)
|
|
Cash
dividends declared, $.99 per share
|
|
|
|
|
|
|
|
|
|
|
|
(6,718
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,718
|
)
|
|
Purchase
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
(526
|
)
|
|
|
|
|
(526
|
)
|
|
Stock
options exercised, including related tax benefits
|
|
|
18
|
|
|
2
|
|
|
456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
458
|
|
|
Shares
issued pursuant to Employee Stock Purchase Plan
|
|
|
6
|
|
|
1
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
Balance
at September 30, 2005
|
|
|
8,258
|
|
$
|
1,032
|
|
$
|
21,346
|
|
$
|
155,064
|
|
|
1,466
|
|
$
|
(41,534
|
)
|
$
|
(1,117
|
)
|
$
|
134,791
|
|
|
See
accompanying notes to unaudited consolidated financial
statements.
|
Notes
to Unaudited Consolidated Financial
Statements
|
1.
|
Basis
of Presentation 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”) and its wholly-owned
subsidiary Pro Mortgage Partners, LLC (“Pro Mortgage”), a mortgage brokerage
company established in May 2004 offering a variety of fixed rate loan products;
First Citizens Bank in Elizabethtown, KY; United Bank & Trust Co. in
Versailles, KY; Lawrenceburg National Bank in Harrodsburg, KY; Citizens Bank
of
Northern Kentucky, Inc. in Newport, KY (“Citizens Northern”); and Kentucky
Banking Centers, Inc. in Glasgow, KY (“KBC”). The accounts of KBC and certain
branch locations of Farmers Georgetown have been presented separately in the
financial statements as discontinued operations as discussed in Note 7.
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 banks. 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 with the exception of KBC, which is
presented as discontinued operations.
Including
KBC, the Company provides financial services through its 38 locations in 25
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.
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 as of 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
financial information presented as of any date other than December 31 has been
prepared from the books and records without audit. The accompanying consolidated
financial statements have been prepared in accordance with the instructions
to
Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the
information and the footnotes required by accounting principles generally
accepted in the United States of America for complete statements. In the opinion
of management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of such financial statements, have been
included. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the
year ended December 31, 2005.
Certain
reclassifications have been made to the consolidated financial statements of
prior periods to conform to the current period presentation. These
reclassifications do not affect net income or total shareholders’ equity as
previously reported.
|
3.
|
Recently
Issued Accounting
Standards
|
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised
2004), “Share-Based
Payment”,
that
requires the cost resulting from stock options be measured at fair value and
recognized in earnings. This Statement replaces SFAS No. 123, “Accounting
for Stock-Based Compensation”
and
supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting
for Stock Issued to Employees,”
which
permitted the recognition of compensation expense using the intrinsic value
method. The Company’s Employee Stock Purchase Plan (“ESPP”) is considered an
option plan under SFAS No. 123(R). The Company adopted SFAS No. 123(R)
on January 1, 2006 using the modified-prospective application. Under the
modified-prospective application, compensation costs for unvested awards are
based on the grant-date fair value as calculated for pro forma disclosures
under
SFAS No. 123, as originally issued. All new awards and awards that are modified,
repurchased, or cancelled after the date of adoption are accounted for under
the
provisions of SFAS No. 123(R). As a result of adopting SFAS No. 123(R), the
Company’s income before income taxes for the three and nine months ended
September 30, 2006 includes stock option compensation cost of $42 thousand
and
$125 thousand, respectively. Prior periods have not been revised. See Note
5,
Stock-Based Compensation, for additional information.
In
November 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 123(R)-3,
“Transition
Election to Accounting for the Tax Effects of Share-Based Payment
Awards”.
This
FSP provides a simplified method to calculate the Company’s hypothetical
additional paid-in capital (“APIC”) pool for the beginning balance of excess tax
benefits and the method of determining the subsequent impact on the pool of
option awards that are outstanding and fully or partially vested upon adoption
of SFAS 123(R). This FSP allows companies up to one year from the later of
the
adoption date of SFAS 123(R) or November 10, 2005 to evaluate the available
transition alternatives and make a one-time election. The Company is currently
evaluating the impact, if any, of the new method provided by this guidance
on
the Company’s results of operations and financial condition.
In
February 2006, the FASB issued 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 155 clarifies which interest-only strips and principal-only
strips are not subject to the requirements of Statement 133. It also clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives. SFAS 155 amends Statement 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. This Statement is effective for all financial instruments acquired
or issued after the beginning of an entity's first fiscal year that begins
after
September 15, 2006. The Company is evaluating the impact, if any, of the
adoption of this Statement on the Company’s result of operations and financial
condition.
In
October 2006, the FASB approved a staff recommendation that would change SFAS
No. 133 by removing from its scope embedded derivatives that are tied to the
prepayment risk of the underlying prepayable financial asset to fair value
accounting through the income statement. The proposed rule is currently in
a
30-day public comment period. If approved, the change will take effect after
the
beginning of a company’s first fiscal year after September 15, 2006
In
March
2006, the FASB issued 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.
This Statement is effective as of the beginning of an entity’s first fiscal year
that begins after September 15, 2006. The
Company is evaluating the impact, if any, of the adoption of this Statement
on
the Company’s result of operations and financial condition.
In
June
2006, the FASB issued FASB Interpretation No. (“FIN”) 48 “Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
109”,
to
clarify 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. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. This interpretation is effective for fiscal
years beginning after December 15, 2006. The Company is in the process of
evaluating the impact, if any, of the adoption of this interpretation on the
Company’s results of operations and financial condition.
In
September 2006, the United States Securities and Exchange Commission’s (“SEC”)
Office of the Chief Accountant and Divisions of Corporation Finance and
Investment Management released Staff Accounting Bulletin (“SAB”) 108,
“Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements”.
SAB 108
was issued in order to eliminate the diversity of practice surrounding how
public companies quantify financial statement misstatements. SAB 108 provides
interpretive guidance on how the effects of the carryover or reversal of prior
year misstatements should be considered in quantifying a current year
misstatement.
SAB
108
identifies two approaches that have been widely used by public companies for
quantifying the effects of financial statement misstatements: the “rollover” and
“iron curtain” approaches. With the rollover approach, companies quantify the
impact of misstatements based on the amount of the error originating in the
current year income statement, thus ignoring the carryover effect of prior
year
misstatements. This approach can lead to the accumulation of misstatements
on
the balance sheet. The iron curtain approach focuses on the effect of correcting
the period-end balance sheet, regardless of the misstatement’s year of
origination. The Company currently uses the rollover method for quantifying
identified financial statement misstatements.
In
SAB
108 the SEC staff establishes a dual approach that requires quantification
of
financial statement errors based on the effects of the error on each of the
Company’s financial statements and the related financial statement disclosures.
The dual approach requires quantification of misstatements under both the
rollover and iron curtain methods. Companies adopting the dual approach are
permitted to record a one-time cumulative effect adjustment to the carrying
values of assets and liabilities with an offsetting adjustment recorded to
retained earnings as of the beginning of the fiscal year of adoption to correct
errors existing in prior years that previously had been considered immaterial
based on appropriate use of their previous approach. The Company is in the
process of evaluating the impact, if any, of the adoption of this SAB on the
Company’s results of operations and financial condition.
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
is
in the process of evaluating the impact, if any, of the adoption of this
Statement on the Company’s results of operations and financial
condition.
In
September 2006, the FASB issued SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106, and 132(R).”
SFAS No.
158 requires an employer to recognize the funded status of defined benefit
postretirement plans as an asset or a liability on its balance sheet. The funded
status is measured as the difference between plan assets at fair value and
the
benefit obligation. The Company has two unfunded postretirement benefit plans
(the “Plans”) that are subject to the provisions of SFAS No. 158. For these
Plans, the funded status is represented by the accumulated postretirement
benefit obligation. SFAS No. 158 also requires the Company to measure the funded
status of its Plans’ assets and obligations that determine its funded status as
of the balance sheet date and to recognize those changes in the year in which
the changes occur as a component of other comprehensive income, net of taxes.
SFAS
No.
158
has no impact on how postretirement benefits are accounted for and reported
in
the income statement. The adoption of SFAS No. 158 is effective December 31,
2006 and is expected to result in a charge to other comprehensive income, net
of
tax, estimated between $3.0 million and $5.0 million.
|
4.
|
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
September 30, 2006 and 2005.
| |
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
(In
thousands, except per share data)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income, basic and diluted
|
|
$
|
3,746
|
|
$
|
3,853
|
|
$
|
12,443
|
|
$
|
11,797
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding
|
|
|
7,393
|
|
|
6,786
|
|
|
7,385
|
|
|
6,786
|
|
|
Effect
of dilutive stock options
|
|
|
19
|
|
|
35
|
|
|
19
|
|
|
38
|
|
|
Average
diluted shares outstanding
|
|
|
7,412
|
|
|
6,821
|
|
|
7,404
|
|
|
6,824
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share, basic
|
|
$
|
.51
|
|
$
|
.57
|
|
$
|
1.68
|
|
$
|
1.74
|
|
|
Net
income per share, diluted
|
|
|
.51
|
|
|
.56
|
|
|
1.68
|
|
|
1.73
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations, basic and diluted
|
|
$
|
3,283
|
|
$
|
3,411
|
|
$
|
11,150
|
|
$
|
10,692
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding
|
|
|
7,393
|
|
|
6,786
|
|
|
7,385
|
|
|
6,786
|
|
|
Effect
of dilutive stock options
|
|
|
19
|
|
|
35
|
|
|
19
|
|
|
38
|
|
|
Average
diluted shares outstanding
|
|
|
7,412
|
|
|
6,821
|
|
|
7,404
|
|
|
6,824
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share from continuing operations, basic
|
|
$
|
.45
|
|
$
|
.51
|
|
$
|
1.51
|
|
$
|
1.58
|
|
|
Income
per share from continuing operations, diluted
|
|
|
.45
|
|
|
.50
|
|
|
1.51
|
|
|
1.57
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations, basic and diluted
|
|
$
|
463
|
|
$
|
442
|
|
$
|
1,293
|
|
$
|
1,105
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding
|
|
|
7,393
|
|
|
6,786
|
|
|
7,385
|
|
|
6,786
|
|
|
Effect
of dilutive stock options
|
|
|
19
|
|
|
35
|
|
|
19
|
|
|
38
|
|
|
Average
diluted shares outstanding
|
|
|
7,412
|
|
|
6,821
|
|
|
7,404
|
|
|
6,824
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share from discontinued operations, basic
|
|
$
|
.06
|
|
$
|
.06
|
|
$
|
.17
|
|
$
|
.16
|
|
|
Income
per share from discontinued operations, diluted
|
|
|
.06
|
|
|
.06
|
|
|
.17
|
|
|
.16
|
|
5. Stock-Based
Compensation
During
1997, the Company’s Board of Directors and shareholders approved a nonqualified
stock option plan (the "Plan") 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 the options are granted and expire ten years from the date
of
the grant. Total options granted were 450,000, 54,000, and 40,049 in the years
1997, 2000, and 2004, respectively. As of September 30, 2006 the Plan allows
for
additional option grants of up to 8,544 shares.
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. Effective January 1, 2006, the Company adopted the
fair
value recognition provisions of SFAS No. 123(R) applying the
modified-prospective application. Under the modified-prospective application,
prior year amounts are not restated. The following table presents the effect
on
net income and earnings per share prior to adoption as if expense was measured
using the fair value recognition provisions of SFAS No. 123(R).
|
(In
thousands, except per share data)
|
|
Three
Months Ended
September
30, 2005
|
|
Nine
Months Ended
September
30, 2005
|
|
|
Net
Income
|
|
|
|
|
|
|
As
reported
|
|
$
|
3,853
|
|
$
|
11,797
|
|
|
Less:
Stock-based compensation expense determined under fair value based
method
for all awards, net of related tax effects
|
|
|
(15
|
)
|
|
(95
|
)
|
|
Proforma
|
|
$
|
3,838
|
|
$
|
11,702
|
|
|
Net
Income Per Common Share
|
|
|
|
|
|
|
|
|
Basic,
as reported
|
|
$
|
.57
|
|
$
|
1.74
|
|
|
Basic,
proforma
|
|
|
.57
|
|
|
1.72
|
|
| |
|
|
|
|
|
|
|
|
Diluted,
as reported
|
|
|
.56
|
|
|
1.73
|
|
|
Diluted,
proforma
|
|
|
.56
|
|
|
1.71
|
|
|
Income
From Continuing Operations
|
|
|
As
reported
|
|
$
|
3,411
|
|
$
|
10,692
|
|
|
Less:
Stock-based compensation expense determined under fair value based
method
for all awards, net of related tax effects
|
|
|
(14
|
)
|
|
(93
|
)
|
|
Proforma
|
|
$
|
3,397
|
|
$
|
10,599
|
|
|
Income
Per Common Share From Continuing Operations
|
|
|
|
|
|
|
|
|
Basic,
as reported
|
|
$
|
.51
|
|
$
|
1.58
|
|
|
Basic,
proforma
|
|
|
.51
|
|
|
1.56
|
|
| |
|
|
|
|
|
|
|
|
Diluted,
as reported
|
|
|
.50
|
|
|
1.57
|
|
|
Diluted,
proforma
|
|
|
.50
|
|
|
1.55
|
|
|
Income
From Discontinued Operations
|
|
|
As
reported
|
|
$
|
442
|
|
$
|
1,105
|
|
|
Less:
Stock-based compensation expense determined under fair value based
method
for all awards, net of related tax effects
|
|
|
(1
|
)
|
|
(2
|
)
|
|
Proforma
|
|
$
|
441
|
|
$
|
1,103
|
|
|
Income
Per Common Share From Discontinued Operations
|
|
|
|
|
|
|
|
|
Basic,
as reported
|
|
$
|
.06
|
|
$
|
.16
|
|
|
Basic,
proforma
|
|
|
.06
|
|
|
.16
|
|
| |
|
|
|
|
|
|
|
|
Diluted,
as reported
|
|
|
.06
|
|
|
.16
|
|
|
Diluted,
proforma
|
|
|
.06
|
|
|
.16
|
|
On
March
16, 2005 the Compensation Committee of the Company's Board of Directors acted
to
approve an immediate and full acceleration of the vesting on options granted
during 2004. As a result, options to purchase 40,049 unvested and
"out-of-the-money" shares of the Company's common stock became immediately
exercisable as of March 16, 2005. The exercise price of these options remains
unchanged at $34.80 per share. The closing price of the Company's shares was
$34.50 on March 15, 2005. None of the accelerated options are granted to
directors or executive officers of the Company. The purpose of the accelerated
vesting was to allow the Company to reduce anticipated future compensation
expense attributed to its stock option grants pursuant to SFAS No.
123(R).
Option
activity under the Plan for the three and nine-month periods ended September
30,
2006 is presented in the following table.
| |
|
Three
Months Ended
September
30, 2006
|
|
Nine
Months Ended
September
30, 2006
|
|
| |
|
|
|
Weighted
|
|
|
|
Weighted
|
|
| |
|
|
|
Average
|
|
|
|
Average
|
|
| |
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
|
Outstanding
at beginning of period
|
|
|
178,304
|
|
$
|
27.75
|
|
|
189,447
|
|
$
|
27.67
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
(2,000
|
)
|
|
34.80
|
|
|
Exercised
|
|
|
(27,364
|
)
|
|
25.65
|
|
|
(36,507
|
)
|
|
25.36
|
|
|
Outstanding
at September 30
|
|
|
150,940
|
|
$
|
28.13
|
|
|
150,940
|
|
$
|
28.13
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at September 30
|
|
|
144,083
|
|
$
|
28.05
|
|
|
144,083
|
|
$
|
28.05
|
|
Options
outstanding at September 30, 2006 were as follows.
| |
|
Outstanding
|
|
Exercisable
|
|
| |
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
| |
|
|
|
Remaining
Contractual
|
|
Weighted
Average
|
|
|
|
Weighted
Average
|
|
|
Range
of Exercise Prices
|
|
Number
|
|
Life
(Years)
|
|
Exercise
Price
|
|
Number
|
|
Exercise
Price
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 24.50
|
|
|
81,319
|
|
|
1.00
|
|
$
|
24.50
|
|
|
81,319
|
|
$
|
24.50
|
|
|
$ 29.75
|
|
|
33,572
|
|
|
3.25
|
|
|
29.75
|
|
|
26,715
|
|
|
29.75
|
|
|
$ 34.80
|
|
|
36,049
|
|
|
8.08
|
|
|
34.80
|
|
|
36,049
|
|
|
34.80
|
|
|
Outstanding
at September 30, 2006
|
|
|
150,940
|
|
|
8.19
|
|
$
|
28.13
|
|
|
144,083
|
|
$
|
28.05
|
|
The
aggregate intrinsic value for options outstanding and options exercisable at
September 30, 2006 was $900,000 and $872,000, respectively. There was $39,000
in
total compensation cost related to unvested options not recognized at September
30, 2006, with a weighted-average period of four months over which the cost
is
expected to be recognized. There were no modifications or cash paid to settle
stock option awards during the nine months ended September 30,
2006.
The
following table presents further information regarding the Company’s stock
option Plan for the periods indicated.
| |
|
Three
months ended September 30,
|
|
Nine
months ended September 30,
|
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
Compensation
expense recognized for stock options
|
|
$
|
29
|
|
|
|
|
$
|
88
|
|
|
|
|
|
Related
tax benefit recognized
|
|
|
65
|
|
$
|
38
|
|
|
88
|
|
$
|
74
|
|
|
Weighted
average grant date fair value of options granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
intrinsic value of options exercised
|
|
|
186
|
|
|
110
|
|
|
252
|
|
|
212
|
|
|
Total
fair value of options vested
|
|
|
|
|
|
|
|
|
63
|
|
|
135
|
|
|
Cash
received from options exercised
|
|
|
702
|
|
|
272
|
|
|
926
|
|
|
453
|
|
The
fair
value of options awarded is estimated on the date of the grant using the
Black-Scholes option pricing model. The assumptions used in the valuations
are
summarized in the table below. The assumptions related to the 1997 Grant are
not
included since all of these options were fully vested during 2004.
| |
|
Options
|
|
| |
|
2000
Grant
|
|
2004
Grant
|
|
| |
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
3.12
|
%
|
|
3.80
|
%
|
|
Expected
volatility
|
|
|
29.6
|
|
|
10.5
|
|
|
Risk-free
interest rate
|
|
|
6.71
|
|
|
2.78
|
|
|
Expected
life (in years)
|
|
|
7
|
|
|
3
|
|
| |
|
|
|
|
|
|
|
|
Fair
value
|
|
$
|
9.25
|
|
$
|
1.79
|
|
|
6.
|
Employee
Stock Purchase Plan
|
The
Company’s 2004 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 July 1, 2004. There were 6,406 and 5,245 shares issued under the
plan
during the first nine months of 2006 and 2005, respectively. Compensation cost
related to the ESPP included in the proforma net income disclosure in the table
in Note 5 above was $6,500 and $20,800 for the three and nine-month periods
ended September 30, 2005. The
Company recorded $13,000
and $39,000,
respectively, in compensation expense related to its ESPP during the three
and
nine months ended September 30, 2006.
The
fair
value of ESPP shares awarded is estimated on the grant date using the
Black-Scholes option pricing model. The assumptions used to determine
compensation expense under SFAS 123(R) are summarized in the table below. The
offering period, purchase period, and vesting of options under the ESPP occur
during each calendar quarter; therefore, the amounts displayed in the table
for
the nine-month periods represent an average amount for each of the first three
quarters for the year indicated.
| |
|
ESPP
|
|
| |
|
Three
Months Ended
September
30, 2006
|
|
Three
Months Ended
September
30, 2005
|
|
Nine
Months Ended
September
30, 2006
|
|
Nine
Months Ended
September
30, 2005
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
3.83
|
%
|
|
3.85
|
%
|
|
3.85
|
%
|
|
3.80
|
%
|
|
Expected
volatility
|
|
|
13.6
|
|
|
13.1
|
|
|
13.8
|
|
|
12.6
|
|
|
Risk-free
interest rate
|
|
|
5.08
|
|
|
3.17
|
|
|
4.64
|
|
|
2.76
|
|
|
Expected
life (in years)
|
|
|
.25
|
|
|
.25
|
|
|
.25
|
|
|
.25
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value
|
|
$
|
5.69
|
|
$
|
5.31
|
|
$
|
5.51
|
|
$
|
6.00
|
|
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 $20.0 million. The Company anticipates it will record
a
pretax gain on this transaction of approximately $10.0 million, incur $3.5
million in federal income tax liability, and realize a net gain of $6.5 million.
This transaction is expected to close during the fourth quarter of 2006.
In
August
2006, Farmers Georgetown entered into a definitive agreement to sell its
Owingsville and Sharpsburg branches in Bath County (the “Branches”). The sale
includes deposits of $25.5 million, loans of $11.7 million, fixed assets of
$936
thousand, and other assets of $1.5 million. The Company anticipates it will
record a pretax gain on this transaction of approximately $425 thousand. This
transaction is expected to close during the fourth quarter of 2006.
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 are removed from the detail line items of the Company’s financial
statements and presented separately as discontinued operations. Following are
condensed balance sheets and statements of income for KBC and Farmers
Georgetown’s Branches for the periods indicated.
Condensed
Balance Sheets - KBC
|
(In
thousands)
|
|
September
30, 2006
|
|
December
31, 2005
|
|
| |
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
12,512
|
|
$
|
3,348
|
|
|
Investment
securities
|
|
|
24,044
|
|
|
36,027
|
|
|
Loans,
net
|
|
|
80,301
|
|
|
80,646
|
|
|
Premises
and equipment, net
|
|
|
4,158
|
|
|
4,186
|
|
|
Other
assets
|
|
|
3,368
|
|
|
3,032
|
|
|
Total
assets
|
|
$
|
124,383
|
|
$
|
127,239
|
|
| |
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
112,391
|
|
$
|
115,277
|
|
|
Other
borrowed funds
|
|
|
1,547
|
|
|
2,368
|
|
|
Other
liabilities
|
|
|
782
|
|
|
451
|
|
|
Total
liabilities
|
|
|
114,720
|
|
|
118,096
|
|
| |
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
9,663
|
|
|
9,143
|
|
| |
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
124,383
|
|
$
|
127,239
|
|
Condensed
Statements of Income - KBC
| |
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
2,121
|
|
$
|
1,841
|
|
$
|
6,092
|
|
$
|
5,324
|
|
|
Interest
expense
|
|
|
862
|
|
|
695
|
|
|
2,463
|
|
|
2,057
|
|
|
Net
interest income
|
|
|
1,259
|
|
|
1,146
|
|
|
3,629
|
|
|
3,267
|
|
|
Provision
for loan losses
|
|
|
45
|
|
|
(11
|
)
|
|
(39
|
)
|
|
65
|
|
|
Noninterest
income
|
|
|
273
|
|
|
269
|
|
|
832
|
|
|
819
|
|
|
Noninterest
expense
|
|
|
953
|
|
|
933
|
|
|
3,040
|
|
|
2,758
|
|
|
Income
tax expense
|
|
|
189
|
|
|
159
|
|
|
443
|
|
|
344
|
|
|
Net
income
|
|
$
|
345
|
|
$
|
334
|
|
$
|
1,017
|
|
$
|
919
|
|
Condensed
Balance Sheets - Farmers Georgetown’s Branches
|
(In
thousands)
|
|
September
30, 2006
|
|
December
31, 2005
|
|
| |
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
371
|
|
$
|
370
|
|
|
Loans,
net
|
|
|
11,727
|
|
|
13,397
|
|
|
Premises
and equipment, net
|
|
|
936
|
|
|
978
|
|
|
Other
assets
|
|
|
1,504
|
|
|
1,584
|
|
|
Total
assets
|
|
$
|
14,538
|
|
$
|
16,329
|
|
| |
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
25,525
|
|
$
|
26,312
|
|
| |
|
|
|
|
|
|
|
|
Net
liabilities
|
|
$
|
(10,987
|
)
|
$
|
(9,983
|
)
|
Condensed
Statements of Income - Farmers Georgetown’s Branches
| |
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
491
|
|
$
|
386
|
|
$
|
1,211
|
|
$
|
938
|
|
|
Interest
expense
|
|
|
191
|
|
|
143
|
|
|
511
|
|
|
408
|
|
|
Net
interest income
|
|
|
300
|
|
|
243
|
|
|
700
|
|
|
530
|
|
|
Provision
for loan losses
|
|
|
(19
|
)
|
|
(90
|
)
|
|
(119
|
)
|
|
(248
|
)
|
|
Noninterest
income
|
|
|
68
|
|
|
57
|
|
|
202
|
|
|
167
|
|
|
Noninterest
expense
|
|
|
209
|
|
|
227
|
|
|
604
|
|
|
664
|
|
|
Income
tax expense
|
|
|
61
|
|
|
55
|
|
|
142
|
|
|
96
|
|
|
Net
income
|
|
$
|
117
|
|
$
|
108
|
|
$
|
275
|
|
$
|
185
|
|
8. Subsequent
Event - Citizens National Bancshares, Inc.
On
October 1, 2006 the Company announced that the required approvals from the
appropriate regulatory authorities were received and that the acquisition of
100% of the outstanding common shares of Citizens National Bancshares, Inc.
(“Citizens National”) had been completed. Citizens National is a one-bank
holding company headquartered in Nicholasville, Kentucky and the parent
corporation of Citizens National Bank of Jessamine County (“Citizens
Jessamine”). The results presented in the consolidated financial statements
herein do not include any results related to this acquisition since it occurred
during the fourth quarter of 2006.
The
aggregate purchase price of Citizens National was $30.3 million, including
$15.3
million (50.4% of purchase price) in cash and $15.0 million (49.6% of purchase
price) in common stock. The $32.30 per share value of the 464
thousand
shares of common stock issued was determined based on the average of the daily
closing prices of the Company’s common stock for the 15 consecutive days when
the stock markets are open for trading ending on the fifteenth day prior to
the
closing of the merger. The purchase price resulted in approximately $14.6
million in goodwill and $4.5 million in a core deposit intangible asset. The
core deposit asset is being amortized over a life of 9.4 years under a declining
amortization schedule through the year 2014 with the remaining 10% to be
amortized in year 2015. Goodwill is not subject to periodic amortization in
the
consolidated financial statements. As with prior acquisitions, minor adjustments
to the total purchase price allocation, and thus goodwill, are likely as
execution costs are finalized. The following table summarizes the estimated
fair
value of assets acquired and liabilities assumed at the date of
acquisition.
|
(In
thousands)
|
|
October
1, 2006
|
|
| |
|
|
|
|
|
Assets
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
16,307
|
|
|
Investment
securities
|
|
|
13,391
|
|
|
Loans,
net of unearned income and allowance for loan losses
|
|
|
119,659
|
|
|
Premises
and equipment, net
|
|
|
3,424
|
|
|
Goodwill
|
|
|
14,596
|
|
|
Core
deposit intangible
|
|
|
4,524
|
|
|
Other
assets
|
|
|
4,407
|
|
|
Total
assets
|
|
$
|
176,308
|
|
| |
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Deposits
|
|
$
|
139,441
|
|
|
Short-term
borrowings
|
|
|
2,880
|
|
|
Other
liabilities
|
|
|
3,724
|
|
|
Total
liabilities
|
|
|
146,045
|
|
| |
|
|
|
|
|
Net
Assets Acquired
|
|
$
|
30,263
|
|
| |
|
|
|
|
9. Subsequent
Event - Special Dividend
On
October 23, 2006 the Company’s Board of Directors declared a special one-time
$0.11 per share cash dividend in addition to its regular quarterly cash dividend
of $0.33 per share. Both dividends are payable on January 1, 2007 to
shareholders of record at the close of business on December 1,
2006.
10. Subsequent
Event - Acquisition of Military Allotment Operation
On
November 2, 2006 the Company announced that First Citizens Bank (“First
Citizens”) had signed a definitive agreement to acquire the Military Allotment
operation of PNC Bank, National Association in a cash transaction for $13.7
million. First Citizens will acquire intangible assets in the form of a customer
list and goodwill. It will also record a core deposit intangible in connection
with receiving approximately $12.0 million in deposits from PNC in the
transaction. First Citizens will integrate the acquired Military Allotment
operation into its existing allotment operations, which specializes in the
processing of federal benefit payments and military allotments. The results
presented herein do not include any results related to this acquisition, which
is expected to close in January 2007.
FORWARD-LOOKING
STATEMENTS
This
report contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties. 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);
competition for the Company’s customers from other providers of financial
services; government legislation and regulation (which changes from time to
time
and over which the Company has no control); changes in interest rates; material
unforeseen changes in the liquidity, results of operations, or financial
condition of the Company’s customers; the impact of new accounting
pronouncements; and other risks 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 our opinions or expectations.
DISCONTINUED
OPERATIONS
In
June
2006, the Company announced that it had entered into a definitive agreement
to
sell its wholly-owned subsidiary, Kentucky Banking Centers, Inc. (“KBC”), 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”). 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 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.
RESULTS
OF OPERATIONS
Third Quarter 2006 vs. Third Quarter 2005
The
Company reported net income of $3.8 million, a decrease of $107 thousand or
2.8%
compared to $3.9 million for the same period in 2005. Basic and diluted net
income per share was $.51 for the current three months, $.06 lower (basic)
and
$.05 lower (diluted) compared to $.57 and $.56 in the same period a year ago.
Income
from continuing operations was $3.3 million, a decrease of $128 thousand or
3.8%
compared to $3.4 million for the same period in 2005. Basic and diluted income
per share from continuing operations was $.45 for the current three months,
a
decrease of $.06 or 11.8% on a basic per share basis and $.05 or 10.0 % on
a
diluted per share basis compared to the same period a year ago.
The
percentage change in net income in the comparable periods is not proportional
to
the percentage change in per share earnings due mainly to the effect of an
additional 584 thousand shares issued in connection with the December 6, 2005
acquisition of Citizens Bancorp, Inc. (“Citizens Bancorp”). The operating
results related to Citizens Bancorp generally increased reported income and
expense line items in the current three and nine-month periods compared to
a
year ago since there are no operating results attributed to Citizens Bancorp
in
the comparable period. Net loans and deposits acquired from Citizens Bancorp
on
the date of purchase were $149.0 million and $173.0 million, respectively.
An
increase in net interest income, which was fueled by the Citizens Bancorp
acquisition, had a significant impact on net income for the three months ended
September 30, 2006. Net interest income was $12.4 million in the current
three-month period ended September 30, 2006. This represents an increase of
$2.3
million or 22.5% compared to the same period a year ago. The increase in net
interest income is primarily due to higher interest on loans of $6.3 million
or
47.4%, partially offset by $3.3 million or 68.2% higher interest expense on
deposits. The Citizens Bancorp acquisition accounted for $1.8 million of the
increase in net interest income in the comparison, including $3.0 million higher
interest from loans partially offset by $1.4 million higher interest expense
on
deposits.
The
provision for loan losses decreased $95 thousand or 27.3% in the three-month
comparison. The decrease in the provision for loan losses is reflective of
a
still-improving trend in credit quality of the Company’s loan portfolio. This
improvement is attributed to lower delinquent and classified loans from year-end
2005, lower annualized net charge-offs as a percentage of average loans
outstanding, and lower historical loss ratios.
Noninterest
income, boosted by the Citizens Bancorp acquisition, was $5.0 million in the
current quarter. This represents an increase of $163 thousand or 3.4% in the
quarterly comparison.
Noninterest
expenses increased $2.4 million or 22.8% for the current three-month period
compared to the same period a year earlier. The increase in noninterest expenses
occurred across a broad range of line items and is generally attributed to
the
Citizens Bancorp acquisition.
Income
from discontinued operations was $463 thousand for the three-month period ended
September 30, 2006. This represents an increase of $21 thousand or 4.8% in
the
comparable periods. As previously disclosed, the Company has entered into a
definitive agreement to sell its KBC subsidiary and the Bath County branches
of
Farmers Georgetown. Both of these transactions are expected to close during
the
fourth quarter of 2006.
The
return on average assets (“ROA”) was .84% for the current quarter, a decrease of
20 basis points compared to 1.04% reported for the same period in 2005. The
decrease in ROA is mainly attributed to a lower contribution from noninterest
income and noninterest expenses, which negatively impacted ROA by 10 basis
points and 21 basisi points, respectively. This was partially offset by a 10
basis point increase in net interest margin to 3.72% from 3.62%. Return on
average equity (“ROE”) was 8.31% for the third quarter of 2006 compared to
10.09% in the same period of 2005. This represents a decrease of 178 basis
points and is attributed to the reported decrease in net income and higher
average equity outstanding.
Net Interest Income
The
trend
of the general interest rate environment in the current three months compared
to
a year earlier has been generally upward primarily as a result of short-term
interest rate increases by the Board of Governors of the Federal Reserve Board
(the “Fed”). The Fed has increased short-term interest rates by 150 basis points
in six equal increments of 25 basis points since September 30, 2005. The effects
of these rate increases by the Fed has generally led to higher average rates
earned and paid on interest earning assets and interest bearing liabilities
with
a faster increase in the average rates earned on earning assets, particularly
loans and temporary investments, due to their repricing characteristics combined
with new loan originations in a rising rate environment.
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 tables that follow this discussion represent 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%.
The
Company’s tax equivalent (“TE”) yield on earning assets for the current three
months was 6.7%, an increase of 96 basis points from 5.8% in the same period
a
year ago. The cost of funds for the current three months was 3.4%, an increase
of 91 basis points compared to 2.5% in the same period a year earlier. A goal
of
the Company in the current interest rate environment is to increase earning
assets while maintaining the current relatively low interest rates paid on
interest bearing liabilities. The Company strives to accomplish this goal while
providing excellent service, offering competitive rates to its customers, and
maintaining its core deposit base. Maintaining the relatively low cost of funds
is becoming increasingly difficult due to the upward trend in general interest
rates and competitive market forces. Average earning assets were $1.4 billion
for the current quarter, an increase of 218 million or 18.8% compared to $1.2
billion a year ago. As a percentage of total average assets, earning assets
decreased 64 basis points to 88.6% from 89.3%. The lower earning asset ratio
decreased ROA by three basis points in the quarterly comparison.
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 the third quarter of 2006 was $22.8 million,
an increase of $6.5 million or 39.5% compared to the comparable period in the
previous year. The growth in interest income was mainly attributed to higher
interest income on loans of $6.3 million or 47.4%. Interest income on loans
increased as a result of higher average loan balances outstanding resulting
from
the Citizens Bancorp acquisition, higher internally generated loan growth,
and a
93 basis point increase in the average rate earned on loans. The Citizens
Bancorp acquisition accounted for $3.0 million of the increase in interest
income on loans.
Interest
and fees on loans was $19.4 million, an increase of $6.3 million or 47.4%
compared to a year earlier. Average loans increased $236 million or 29.4% to
$1.0 billion in the comparison due mainly to a $159 million higher average
balance outstanding from the acquisition of Citizens Bancorp and, to a lesser
extent, higher loan demand. Interest income on loans was also boosted by a
93
basis point increase in the tax equivalent yield to 7.5% from 6.5% in the
quarterly comparison. Interest on taxable securities was $2.0 million, an
increase of $118 thousand or 6.3% due to a 70 basis point increase in the
average rate earned that offset a $23.5 million or 11.2% lower average balance
outstanding. Interest on nontaxable securities declined 2.6% to $896 thousand
due to a 24 basis point drop in the average rate and, to a lesser extent, a
$775
thousand decline in the average balance. Interest on short-term investments,
including time deposits in other banks, federal funds sold, and securities
purchased under agreements to resell, increased $121 thousand or 33.0% due
to an
increase in both the average rate earned of 48 basis points and the average
balances outstanding $6.8 million.
Interest
expense results from incurring interest on interest bearing liabilities, which
primarily include interest bearing deposits, federal funds purchased and
securities sold under agreements to repurchase, and other 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 $10.4 million for third quarter of 2006, an increase of $4.2 million
or 66.9% from the same period in the prior year. Interest expense increased
mainly as a result of higher interest expense on deposits of $3.3 million or
68.2%. Interest expense on deposits increased as a result of higher deposit
balances outstanding from the Citizens Bancorp acquisition, higher deposits
generated internally, and higher rates paid on interest bearing deposits
throughout the entire deposit portfolio. The Company’s cost of funds was 3.4%
for the third quarter of 2006, an increase of 91 basis points from 2.5% for
the
prior year. The percentage increase in cost of funds was led by a 138 basis
point increase in federal funds purchased and securities sold under agreements
to repurchase, which generally reprice more quickly than other interest bearing
sources of funds and correlates with the increase in general short-term market
interest rates.
Interest
expense on time deposits, the largest component of total interest expense,
increased $2.4 million or 64.7% to $6.2 million. The increase is due to a 99
basis point increase in the average rate paid to 4.3% from 3.3% combined with
a
$121 million or 26.5% higher average balance outstanding, which was $577 million
at the end of the current quarter compared to $456 million in the same quarter
a
year earlier. The growth in average time deposits outstanding was fueled by
an
additional $82.5 million of time deposits related to the Citizens Bancorp
acquisition.
Interest
expense on savings deposits and interest bearing demand deposits increased
$375
thousand or 57.4% and $479 thousand or 119%, respectively. The increase in
interest expense on savings deposits was due to a 62 basis point increase in
the
average rates paid to 2.1% from 1.5% and, to a lesser extent, an increase in
the
average balance outstanding of $18.2 million or 10.2% to $197 million from
$179
million. The Citizens Bancorp acquisition contributed an additional $31.8
million in average savings deposits with higher average rates than existing
savings deposits in the comparison. Interest on interest bearing demand deposits
increased due mainly to a higher average rate paid of 63 basis points to 1.4%
and, to a lesser extent, an increase in the average balance outstanding of
$44.6
million or 22.2%. Excluding the $45.8 million additional average interest
bearing demand deposits attributed to the Citizens Bancorp acquisition, average
interest bearing demand deposits for the Company declined $1.2 million or .6%
in
the comparison. The increase in average rates paid for deposits follows the
trend of increasing general short-term market interest rates between the
comparable periods.
Interest
expense on federal funds purchased and securities sold under agreements to
repurchase increased $572 thousand or 89.4% due to a 138 basis point increase
in
the average rate paid to 4.7% from 3.4% a year ago coupled with a $26.0 million
or 34.4% increase in the average balance outstanding. Interest expense on other
borrowed funds consists primarily of Federal Home Loan Bank (“FHLB”) borrowings
and subordinated notes payable to unconsolidated trusts. Interest expense on
other borrowed funds increased $316 thousand or 40.2% and is due mainly to
an
increase in interest expense related to the notes payable to unconsolidated
trusts of $211 thousand. The Company issued $25.0 million of subordinated notes
payable in connection with its trust preferred securities offering during the
third quarter of 2005. The variable rate on these notes have repriced higher
in
the comparable periods.
The
net
interest margin (TE) increased 10 basis points to 3.72% during the third quarter
of 2006 compared to 3.62% in the same quarter of 2005. The higher net interest
margin is attributed to a 5 basis point increase in the spread between rates
earned on earning assets and the rates paid on interest bearing liabilities
to
3.28% in the current quarter from 3.23% in the comparable quarter of 2005.
The
remaining 5 basis point increase in margin is attributed to the impact of
noninterest bearing sources of funds. The impact of noninterest bearing sources
of funds on net interest margin typically increases in a rising rate
environment.
The
following tables present an analysis of net interest income for the quarterly
periods ended September 30.
Distribution
of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest
Differential
|
Quarter
Ended September 30,
|
|
2006
|
|
2005
|
|
|
(In
thousands)
|
|
Average
Balance
|
|
Interest4
|
|
Average
Rate
|
|
Average
Balance
|
|
Interest4
|
|
Average
Rate
|
|
|
Earning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
186,769
|
|
$
|
2,005
|
|
|
4.26
|
%
|
$
|
210,249
|
|
$
|
1,887
|
|
|
3.56
|
%
|
|
Nontaxable1
|
|
|
89,434
|
|
|
1,330
|
|
|
5.90
|
|
|
90,209
|
|
|
1,395
|
|
|
6.14
|
|
|
Time
deposits with banks, federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
funds
sold and securities purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under
agreements to resell
|
|
|
65,403
|
|
|
488
|
|
|
2.96
|
|
|
58,610
|
|
|
367
|
|
|
2.48
|
|
|
Loans1,2,3
|
|
|
1,038,458
|
|
|
19,547
|
|
|
7.47
|
|
|
802,827
|
|
|
13,232
|
|
|
6.54
|
|
|
Total
earning assets
|
|
|
1,380,064
|
|
$
|
23,370
|
|
|
6.72
|
%
|
|
1,161,895
|
|
$
|
16,881
|
|
|
5.76
|
%
|
|
Allowance
for loan losses
|
|
|
(10,602
|
)
|
|
|
|
|
|
|
|
(10,136
|
)
|
|
|
|
|
|
|
|
Total
earning assets, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
allowance
for loan losses
|
|
|
1,369,462
|
|
|
|
|
|
|
|
|
1,151,759
|
|
|
|
|
|
|
|
|
Nonearning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
69,615
|
|
|
|
|
|
|
|
|
68,028
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
31,581
|
|
|
|
|
|
|
|
|
22,529
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
86,669
|
|
|
|
|
|
|
|
|
59,404
|
|
|
|
|
|
|
|
|
Assets
of discontinued operations
|
|
|
141,479
|
|
|
|
|
|
|
|
|
144,485
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,698,806
|
|
|
|
|
|
|
|
$
|
1,446,205
|
|
|
|
|
|
|
|
|
Interest
Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand
|
|
$
|
245,623
|
|
$
|
883
|
|
|
1.43
|
%
|
$
|
201,062
|
|
$
|
404
|
|
|
.80
|
%
|
|
Savings
|
|
|
196,897
|
|
|
1,028
|
|
|
2.07
|
|
|
178,724
|
|
|
653
|
|
|
1.45
|
|
|
Time
|
|
|
576,626
|
|
|
6,222
|
|
|
4.28
|
|
|
455,765
|
|
|
3,777
|
|
|
3.29
|
|
|
Federal
funds purchased and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
sold under agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
repurchase
|
|
|
101,489
|
|
|
1,212
|
|
|
4.74
|
|
|
75,485
|
|
|
640
|
|
|
3.36
|
|
|
Other
borrowed funds
|
|
|
83,901
|
|
|
1,102
|
|
|
5.21
|
|
|
70,903
|
|
|
786
|
|
|
4.40
|
|
|
Total
interest bearing liabilities
|
|
|
1,204,536
|
|
$
|
10,447
|
|
|
3.44
|
%
|
|
981,939
|
|
$
|
6,260
|
|
|
2.53
|
%
|
|
Noninterest
Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth
of Kentucky deposits
|
|
|
34,459
|
|
|
|
|
|
|
|
|
34,913
|
|
|
|
|
|
|
|
|
Other
demand deposits
|
|
|
146,724
|
|
|
|
|
|
|
|
|
140,611
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
13,461
|
|
|
|
|
|
|
|
|
12,183
|
|
|
|
|
|
|
|
|
Liabilities
of discontinued operations
|
|
|
142,979
|
|
|
|
|
|
|
|
|
142,502
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,542,159
|
|
|
|
|
|
|
|
|
1,312,148
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
156,647
|
|
|
|
|
|
|
|
|
134,057
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
|
|
$
|
1,698,806
|
|
|
|
|
|
|
|
$
|
1,446,205
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
12,923
|
|
|
|
|
|
|
|
|
10,621
|
|
|
|
|
|
TE
basis adjustment
|
|
|
|
|
|
(535
|
)
|
|
|
|
|
|
|
|
(512
|
)
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
12,388
|
|
|
|
|
|
|
|
$
|
10,109
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
3.28
|
%
|
|
|
|
|
|
|
|
3.23
|
%
|
|
Impact
of noninterest bearing sources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
funds
|
|
|
|
|
|
|
|
|
.44
|
|
|
|
|
|
|
|
|
.39
|
|
|
Net
interest margin
|
|
|
|
|
|
|
|
|
3.72
|
%
|
|
|
|
|
|
|
|
3.62
|
%
|
1Income
and yield stated at a fully tax equivalent basis using the marginal corporate
Federal tax rate of 35%.
2Loan
balances include principal balances on nonaccrual loans.
3Loan
fees
included in interest income amounted to $338 thousand and $400 thousand in
2006
and 2005, respectively.
4Exludes
the interest income and interest expense of discontinued
operations.
Analysis
of Changes in Net Interest Income (tax equivalent basis)
|
(In
thousands)
|
|
Variance
|
|
Variance
Attributed to
|
|
|
Quarter
Ended September 30,
|
|
2006/20051,3
|
|
Volume
|
|
Rate
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
investment securities
|
|
$
|
118
|
|
$
|
(1,024
|
)
|
$
|
1,142
|
|
|
Nontaxable
investment securities2
|
|
|
(65
|
)
|
|
(12
|
)
|
|
(53
|
)
|
|
Time
deposits with banks, federal funds sold and securities purchased
under
agreements to resell
|
|
|
121
|
|
|
45
|
|
|
76
|
|
|
Loans2
|
|
|
6,315
|
|
|
4,254
|
|
|
2,061
|
|
|
Total
interest income
|
|
|
6,489
|
|
|
3,263
|
|
|
3,226
|
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand deposits
|
|
|
479
|
|
|
105
|
|
|
374
|
|
|
Savings
deposits
|
|
|
375
|
|
|
72
|
|
|
303
|
|
|
Time
deposits
|
|
|
2,445
|
|
|
1,145
|
|
|
1,300
|
|
|
Federal
funds purchased and securities sold under agreements to
repurchase
|
|
|
572
|
|
|
261
|
|
|
311
|
|
|
Other
borrowed funds
|
|
|
316
|
|
|
158
|
|
|
158
|
|
|
Total
interest expense
|
|
|
4,187
|
|
|
1,741
|
|
|
2,446
|
|
|
Net
interest income
|
|
$
|
2,302
|
|
|
1,522
|
|
$
|
780
|
|
|
Percentage
change
|
|
|
100.0
|
%
|
|
66.1
|
%
|
|
33.9
|
%
|
1The
changes that 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.
2Income
stated at fully tax equivalent basis using the marginal corporate Federal tax
rate of 35%.
3Exludes
the interest income and interest expense of discontinued
operations.
Noninterest Income
Noninterest
income was $5.0 million for the third quarter of 2006, an increase of $163
thousand or 3.4% compared to the same period in the prior year. Noninterest
income represents 18.0% of total revenue for the current quarter, a decrease
of
485 basis points from 22.9% for the same period last year. The decrease in
noninterest income as a percentage of total revenue is due primarily to the
composition of the revenue streams from Citizens Bancorp, which is more heavily
weighted toward interest income.
Service
charges and fees on deposits increased $133 thousand or 6.1% in the quarterly
comparison. Lower fees of $38 thousand from the Commonwealth of Kentucky and
lower dormant account fees of $50 thousand were offset by additional service
charges of $316 thousand attributed to the Citizens Bancorp acquisition. Income
from company-owned life insurance was relatively unchanged at $320 thousand.
Allotment processing fees decreased $38 thousand or 5.8% due to procedural
changes and volume losses related to Hurricane Katrina beginning late in the
third quarter of 2005. Non-deposit related service charges, commissions, and
fees were $568 thousand, an increase of $65 thousand or 12.9% driven mainly
by
$69 thousand and $35 thousand of additional custodial safekeeping fees and
loan
servicing fees, respectively. The increase in the loan servicing fees is
attributed to the Citizens Bancorp acquisition.
Trust
income is up $59 thousand or 14.9%, led by an increase of $25 thousand
attributed to the Citizens Bancorp acquisition. Gains on the sale of mortgage
loans were $146 thousand, a decline of $23 thousand or 13.6% due to a $2.5
million or 27.8% decrease in mortgage loans sold in the comparison. Other
noninterest income was $148 thousand, a decline of $38 thousand or 20.4%
compared to $186 thousand a year earlier due to lower check order fees of $44
thousand and lower income related to the Company’s investment in Kentucky Home
Life Insurance Company of $38 thousand.
Noninterest Expense
Total
noninterest expenses were $12.9 million for the three months ended September
30,
2006, an increase of $2.4 million or 22.8% compared to $10.5 million for the
same period in 2005. The increase in noninterest expenses is reflected across
a
broad range of line items. A significant factor contributing to the higher
expenses is the Citizens Bancorp acquisition during December 2005. The largest
increases in noninterest expenses are attributed to salaries and employee
benefits, which jumped $1.0 million or 18.1%, data processing and communication
expenses of $256 thousand or 24.3%, and net occupancy expenses of $196 thousand
or 29.3%.
The
increase in salaries and employee benefits resulted from the addition of 82
average full time equivalent employees (70 from the Citizens Bancorp
acquisition), normal salary increases for existing employees, and an increase
in
benefits. Salaries and related payroll taxes increased $956 thousand or 21.3%,
with Citizens Bancorp accounting for $655 thousand of the increase. Benefit
expenses grew $48 thousand or 3.8%. Noncash compensation expense related to
the
Company’s nonqualified stock option plan and employee stock purchase plan was
$37 thousand. There was no such expense recorded in the comparable period last
year since the current year includes the initial recognition of such costs
pursuant to SFAS No. 123(R).
Occupancy
expense, net of rental income, increased $196 thousand or 29.3% and totaled
$866
thousand for the three months ended September 30, 2006. The increase was led
by
$177 thousand attributed to the Citizens Bancorp acquisition along with normal
operating increases. Equipment expenses were up $32 thousand or 5.2% to $651
thousand led by a $25 thousand increase attributed to Citizens Bancorp. Data
processing and communications expense rose $256 thousand or 24.3% to $1.3
million. The increase is attributed to the Citizens Bancorp acquisition, which
added $239 thousand of expense for the current quarter. A significant portion
of
this amount is related to data processing, which is expected to decline once
Citizens Bancorp’s processing system is converted to the Company’s processing
system. Bank franchise taxes increased $105 thousand or 30.5% led by $70
thousand attributed to Citizens Bancorp. Correspondent bank fees declined $37
thousand or 17.3% and is correlated to the decline in service charges and fees
on deposits related to the Commonwealth of Kentucky noted in the previous
section of this report. An additional $269 thousand of core deposit amortization
from Citizens Bancorp resulted in an overall increase in intangible amortization
of $218 thousand. Other noninterest expenses were $2.2 million, an increase
of
$591 thousand or 35.9% driven mainly by the addition of Citizens
Bancorp.
Income Taxes
Income
tax expense for the third quarter of 2006 was $966 thousand, an increase of
$267
thousand or 38.2% compared to the same period a year earlier. The effective
federal income tax rate increased 573 basis points to 22.7% from 17.0% in the
comparison. The change in the effective tax rate is due to the relatively large
increase in taxable revenue expected later in this calendar year from the
pending sale of discontinued operations.
Income
From Discontinued Operations
Income
from discontinued operations was $463 thousand for the current three months
ended September 30, 2006. This represents an increase of $21 thousand or 4.8%
compared to $442 thousand in the same period a year earlier. Basic and diluted
income per share from discontinued operations was $.06 for the current quarter,
unchanged from a year earlier.
First
Nine Months of 2006 vs. First Nine Months of 2005
Net
income for the nine months ended September 30, 2006 was $12.4 million, an
increase of $646 thousand or 5.5% compared to $11.8 million for the same period
in 2005. Basic and diluted net income per share was $1.68 for the current nine
months, a decrease of $.06 or 3.4% (basic) and $.05 or 2.9% (diluted) compared
to $1.74 and $1.73 a year earlier.
Income
from continuing operations was $11.2 million, an increase of $458 thousand
or
4.3% compared to $10.7 million for the same period in 2005. Basic and diluted
income per share from continuing operations was $1.51 for the current nine
months, a decrease of $.07 or 4.4% on a basic per share basis and $.06 or 3.8
%
on a diluted per share basis compared to the same period a year ago.
The
percentage change in net income in the comparable periods is not proportional
to
the percentage change in per share earnings due mainly to the effect of an
additional 584 thousand shares issued in connection with the December 6, 2005
acquisition of Citizens Bancorp. The operating results related to Citizens
Bancorp generally increased reported income and expense line items in the
current three and nine-month periods compared to a year ago since there are
no
operating results attributed to Citizens Bancorp in the comparable period.
Net
loans and deposits acquired from Citizens Bancorp on the date of purchase were
$149.0 million and $173.0 million, respectively.
An
increase in net interest income, which was fueled by the Citizens Bancorp
acquisition, had a significant impact on net income for the nine months ended
September 30, 2006. Net interest income was $36.9 million in the current
nine-month period ended September 30, 2006. This represents an increase of
$6.8
million or 22.7% compared to the same period a year ago. The increase in net
interest income is primarily due to higher interest on loans of $17.0 million
or
44.8%, partially offset by $8.7 million or 64.7% higher interest expense on
deposits. The Citizens Bancorp acquisition accounted for $5.5 million of the
increase in net interest income in the comparison, including $8.7 million higher
interest from loans partially offset by $3.9 million higher interest expense
on
deposits.
The
provision for loan losses decreased $195 thousand or 53.1% in the nine-month
comparison. The decrease in the provision for loan losses is reflective of
a
still-improving trend in credit quality of the Company’s loan portfolio. This
improvement is attributed to lower delinquent and classified loans from year-end
2005, lower annualized net charge-offs as a percentage of average loans
outstanding, and lower historical loss ratios.
Noninterest
income, which was helped by the Citizens Bancorp acquisition, declined $136
thousand or .9% to $15.1 million for the current nine months compared to a
year
ago. The decline in the year-to-date period was due primarily to a one-time
gain
of $700 thousand on the sale of the Company’s $3.2 million credit card portfolio
recorded in the first quarter of 2005. Excluding the effect of the one-time
gain
on the credit card portfolio in the prior year, noninterest income grew $564
thousand or 3.9% in the nine-month comparison.
Noninterest
expenses increased $6.4 million or 20.4% for the current nine-month period
compared to the same period a year earlier. The increase in noninterest expenses
occurred across a broad range of line items and is generally attributed to
the
Citizens Bancorp acquisition.
Income
from discontinued operations was $1.3 million for the nine-month period ended
September 30, 2006. This represents an increase of $188 thousand or 17.0% in
the
comparable period. As previously disclosed, the Company has entered into a
definitive agreement to sell its KBC subsidiary and the Bath County branches
of
Farmers Georgetown. Both of these transactions are expected to close during
the
fourth quarter of 2006.
The
return on average assets (“ROA”) was .97% for the current year to date period, a
decrease of 13 basis points compared to 1.10% reported for the same period
in
2005. The decrease in ROA was driven by noninterest expenses, which negatively
impacted ROA by 27 basis points. This was partially offset by a 12 basis point
increase in net interest margin to 3.79% from 3.67%. Return on average equity
(“ROE”) was 9.61% for the first nine months of 2006 compared to 10.79% in the
same period of 2005. This represents a decrease of 121 basis points and is
attributed mainly to the higher average equity outstanding, which increased
at a
faster pace than net income.
Net
Interest Income
The
trend
of the general interest rate environment in the current nine months compared
to
a year earlier has been generally upward primarily as a result of short-term
interest rate increases by the Board of Governors of the Federal Reserve Board
(the “Fed”). The Fed has increased short-term interest rates by 150 basis points
in six equal increments of 25 basis points since September 30, 2005. The effects
of these rate increases by the Fed has generally led to higher average rates
earned and paid on interest earning assets and interest bearing liabilities
with
a faster increase in the average rates earned on earning assets, particularly
loans and temporary investments, due to their repricing characteristics combined
with new loan originations in a rising rate environment.
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 tables that follow this discussion represent 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%.
The
Company’s tax equivalent (“TE”) yield on earning assets for the current nine
months was 6.6%, an increase of 93 basis points from 5.7% in the same period
a
year ago. The cost of funds for the current three months was 3.2%, an increase
of 86 basis points compared to 2.3% in the same period a year earlier. A goal
of
the Company in the current interest rate environment is to increase earning
assets while maintaining the current relatively low interest rates paid on
interest bearing liabilities. The Company strives to accomplish this goal while
providing excellent service, offering competitive rates to its customers, and
maintaining its core deposit base. Maintaining the relatively low cost of funds
is becoming increasingly difficult due to the upward trend in general interest
rates and competitive market forces. Average earning assets were $1.4 billion
for the current nine months, an increase of 209 million or 18.2% compared to
$1.2 billion a year ago. As a percentage of total average assets, earning assets
decreased 75 basis points to 88.1% from 88.9%. The lower earning asset ratio
decreased ROA by four basis points in the nine-month comparison.
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 the nine-month period ended September 30,
2006
was $65.4 million, an increase of $18.2 million or 38.5% compared to the
comparable period in the previous year. The growth in interest income was mainly
attributed to higher interest income on loans of $17.0 million or 44.8%.
Interest income on loans increased as a result of higher average loan balances
outstanding resulting from the Citizens Bancorp acquisition, higher internally
generated loan growth, and a 90 basis point increase in the average rate earned
on loans. The Citizens Bancorp acquisition accounted for $8.7 million of the
increase in interest income on loans.
Interest
and fees on loans was $54.8 million, an increase of $17.0 million or 44.8%
compared to a year earlier. Average loans increased $214 million or 27.1% to
$1.0 billion in the comparison due mainly to a $158 million higher average
balance outstanding from the acquisition of Citizens Bancorp and, to a lesser
extent, higher loan demand. Interest income on loans was also boosted by a
90
basis point increase in the tax equivalent yield to 7.3% from 6.4% in the
nine-month comparison. Interest on taxable securities was $6.6 million, an
increase of $1.2 million or 21.4% due mainly to a 60 basis point increase in
the
average rate earned along with a $7.7 million or 3.8% higher average balance
outstanding. Interest on nontaxable securities was unchanged at $2.8 million.
Interest on short-term investments, including time deposits in other banks,
federal funds sold, and securities purchased under agreements to resell,
increased $58 thousand or 4.9% due to an increase in the average rate earned
of
83 basis points to 3.2%, which more than offset a $14.5 million decline in
the
average balances outstanding to $51.1 million from $65.7 million.
Interest
expense results from incurring interest on interest bearing liabilities, which
primarily include interest bearing deposits, federal funds purchased and
securities sold under agreements to repurchase, and other 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 $28.4 million for first nine months of 2006, an increase of $11.3
million or 66.2% from the same period in the prior year. Interest expense
increased mainly as a result of higher interest expense on deposits of $8.7
million or 64.7%. Interest expense on deposits increased as a result of higher
deposit balances outstanding from the Citizens Bancorp acquisition, higher
deposits generated internally, and higher rates paid on interest bearing
deposits throughout the entire deposit portfolio. The Company’s cost of funds
was 3.2% for the current nine-month period, an increase of 86 basis points
from
2.3% for the same period a year earlier. The percentage increase in cost of
funds was led by a 184 basis point increase in federal funds purchased and
securities sold under agreements to repurchase, which generally reprice more
quickly than other interest bearing sources of funds and correlates with the
increase in general short-term market interest rates.
Interest
expense on time deposits, the largest component of total interest expense,
increased $6.0 million or 57.1% to $16.5 million. The increase is nearly equally
attributed to an 82 basis point increase in the average rate paid to 4.0% from
3.2% combined with a $109 million or 24.4% higher average balance outstanding,
which was $554 million for the current nine-month period compared to $446
million in the same period last year. The growth in average time deposits
outstanding was fueled by an additional $76.9 million of time deposits related
to the Citizens Bancorp acquisition.
Interest
expense on savings deposits and interest bearing demand deposits increased
$1.3
million or 72.8% and $1.5 million or 117%, respectively. The increase in
interest expense on savings deposits was due to a 65 basis point increase in
the
average rates paid to 2.0% from 1.3% and, to a lesser extent, an increase in
the
average balance outstanding of $27.8 million or 15.7% to $205 million from
$177
million. The Citizens Bancorp acquisition contributed an additional $31.0
million in average savings deposits with higher average rates than existing
savings deposits in the comparison. Interest on interest bearing demand deposits
increased due mainly to a higher average rate paid of 62 basis points to 1.4%
and, to a lesser extent, an increase in the average balance outstanding of
$47.3
million or 22.3%. Excluding the $50.8 million additional average interest
bearing demand deposits attributed to the Citizens Bancorp acquisition, average
interest bearing demand deposits for the Company declined $3.6 million or 1.7%
in the comparison. The increase in average rates paid for deposits follows
the
trend of increasing general short-term market interest rates between the
comparable periods.
Interest
expense on federal funds purchased and securities sold under agreements to
repurchase increased $1.4 million or 76.7% due to a 184 basis point increase
in
the average rate paid to 4.8% from 2.9% a year ago and, to a smaller degree,
a
$6.9 million or 8.3% increase in the average balance outstanding. Interest
expense on other borrowed funds consists primarily of FHLB borrowings and
subordinated notes payable to unconsolidated trusts. Interest expense on other
borrowed funds increased $1.2 million or 66.9% and is due mainly to an increase
in interest expense related to the notes payable to unconsolidated trusts of
$1.0 million. The Company issued $25.0 million of subordinated notes payable
in
connection with its trust preferred securities offering during the third quarter
of 2005. The variable rate on these notes has also repriced higher in the
comparable periods.
The
net
interest margin (TE) increased 12 basis points to 3.79% during the first nine
months of 2006 compared to 3.67% in the same period of 2005. The higher net
interest margin is attributed to a 7 basis point increase in the spread between
rates earned on earning assets and the rates paid on interest bearing
liabilities to 3.39% in the current period from 3.32% in the same period a
year
earlier. The remaining 5 basis point increase in margin is attributed to the
impact of noninterest bearing sources of funds. The impact of noninterest
bearing sources of funds on net interest margin typically increases in a rising
rate environment.
The
following tables present an analysis of net interest income for the nine months
ended September 30.
Distribution
of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest
Differential
|
Nine
Months Ended September 30,
|
|
2006
|
|
2005
|
|
|
(In
thousands)
|
|
Average
Balance
|
|
Interest4
|
|
Average
Rate
|
|
Average
Balance
|
|
Interest4
|
|
Average
Rate
|
|
|
Earning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
210,978
|
|
$
|
6,556
|
|
|
4.15
|
%
|
$
|
203,290
|
|
$
|
5,401
|
|
|
3.55
|
%
|
|
Nontaxable1
|
|
|
91,504
|
|
|
3,988
|
|
|
5.83
|
|
|
90,236
|
|
|
4,059
|
|
|
6.01
|
|
|
Time
deposits with banks, federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
funds
sold and securities purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under
agreements to resell
|
|
|
51,113
|
|
|
1,235
|
|
|
3.23
|
|
|
65,651
|
|
|
1,177
|
|
|
2.40
|
|
|
Loans1,2,3
|
|
|
1,005,865
|
|
|
55,202
|
|
|
7.34
|
|
|
791,370
|
|
|
38,111
|
|
|
6.44
|
|
|
Total
earning assets
|
|
|
1,359,460
|
|
$
|
66,981
|
|
|
6.59
|
%
|
|
1,150,547
|
|
$
|
48,748
|
|
|
5.66
|
%
|
|
Allowance
for loan losses
|
|
|
(10,930
|
)
|
|
|
|
|
|
|
|
(10,684
|
)
|
|
|
|
|
|
|
|
Total
earning assets, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
allowance
for loan losses
|
|
|
1,348,530
|
|
|
|
|
|
|
|
|
1,139,863
|
|
|
|
|
|
|
|
|
Nonearning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
78,047
|
|
|
|
|
|
|
|
|
75,257
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
30,376
|
|
|
|
|
|
|
|
|
22,356
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
86,136
|
|
|
|
|
|
|
|
|
57,393
|
|
|
|
|
|
|
|
|
Assets
of discontinued operations
|
|
|
141,708
|
|
|
|
|
|
|
|
|
149,949
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,684,797
|
|
|
|
|
|
|
|
$
|
1,444,818
|
|
|
|
|
|
|
|
|
Interest
Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand
|
|
$
|
259,045
|
|
$
|
2,728
|
|
|
1.41
|
%
|
$
|
211,778
|
|
$
|
1,259
|
|
|
.79
|
%
|
|
Savings
|
|
|
205,253
|
|
|
3,015
|
|
|
1.96
|
|
|
177,428
|
|
|
1,745
|
|
|
1.31
|
|
|
Time
|
|
|
554,419
|
|
|
16,476
|
|
|
3.97
|
|
|
445,666
|
|
|
10,487
|
|
|
3.15
|
|
|
Federal
funds purchased and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
sold under agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
repurchase
|
|
|
90,069
|
|
|
3,206
|
|
|
4.76
|
|
|
83,136
|
|
|
1,814
|
|
|
2.92
|
|
|
Other
borrowed funds
|
|
|
80,085
|
|
|
3,017
|
|
|
5.04
|
|
|
58,768
|
|
|
1,808
|
|
|
4.11
|
|
|
Total
interest bearing liabilities
|
|
|
1,188,871
|
|
$
|
28,442
|
|
|
3.20
|
%
|
|
976,776
|
|
$
|
17,113
|
|
|
2.34
|
%
|
|
Noninterest
Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth
of Kentucky deposits
|
|
|
39,004
|
|
|
|
|
|
|
|
|
38,689
|
|
|
|
|
|
|
|
|
Other
demand deposits
|
|
|
150,086
|
|
|
|
|
|
|
|
|
137,559
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
8,593
|
|
|
|
|
|
|
|
|
11,482
|
|
|
|
|
|
|
|
|
Liabilities
of discontinued operations
|
|
|
143,109
|
|
|
|
|
|
|
|
|
147,851
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,529,663
|
|
|
|
|
|
|
|
|
1,312,357
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
155,134
|
|
|
|
|
|
|
|
|
132,461
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
|
|
$
|
1,684,797
|
|
|
|
|
|
|
|
$
|
1,444,818
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
38,539
|
|
|
|
|
|
|
|
|
31,635
|
|
|
|
|
|
TE
basis adjustment
|
|
|
|
|
|
(1,593
|
)
|
|
|
|
|
|
|
|
(1,530
|
)
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
36,946
|
|
|
|
|
|
|
|
$
|
30,105
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
3.39
|
%
|
|
|
|
|
|
|
|
3.32
|
%
|
|
Impact
of noninterest bearing sources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
funds
|
|
|
|
|
|
|
|
|
.40
|
|
|
|
|
|
|
|
|
.35
|
|
|
Net
interest margin
|
|
|
|
|
|
|
|
|
3.79
|
%
|
|
|
|
|
|
|
|
3.67
|
%
|
1Income
and yield stated at a fully tax equivalent basis using the marginal corporate
Federal tax rate of 35%.
2Loan
balances include principal balances on nonaccrual loans.
3Loan
fees
included in interest income amounted to $1.5 million and $1.4 million in 2006
and 2005, respectively.
4Excludes
the interest income and interest expense of discontinued
operations.
Analysis
of Changes in Net Interest Income (tax equivalent basis)
|
(In
thousands)
|
|
Variance
|
|
Variance
Attributed to
|
|
|
Nine
Months Ended September 30,
|
|
2006/20051,3
|
|
Volume
|
|
Rate
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
investment securities
|
|
$
|
1,155
|
|
$
|
211
|
|
$
|
944
|
|
|
Nontaxable
investment securities2
|
|
|
(71
|
)
|
|
81
|
|
|
(152
|
)
|
|
Time
deposits with banks, federal funds sold and securities purchased
under
agreements to resell
|
|
|
58
|
|
|
(403
|
)
|
|
461
|
|
|
Loans2
|
|
|
17,091
|
|
|
11,277
|
|
|
5,814
|
|
|
Total
interest income
|
|
|
18,233
|
|
|
11,166
|
|
|
7,067
|
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand deposits
|
|
|
1,469
|
|
|
325
|
|
|
1,144
|
|
|
Savings
deposits
|
|
|
1,270
|
|
|
305
|
|
|
965
|
|
|
Time
deposits
|
|
|
5,989
|
|
|
2,898
|
|
|
3,091
|
|
|
Federal
funds purchased and securities sold under agreements to
repurchase
|
|
|
1,392
|
|
|
162
|
|
|
1,230
|
|
|
Other
borrowed funds
|
|
|
1,209
|
|
|
744
|
|
|
465
|
|
|
Total
interest expense
|
|
|
11,329
|
|
|
4,434
|
|
|
6,895
|
|
|
Net
interest income
|
|
$
|
6,904
|
|
$
|
6,732
|
|
$
|
172
|
|
|
Percentage
change
|
|
|
100.0
|
%
|
|
97.5
|
%
|
|
2.5
|
%
|
1The
changes that 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.
2Income
stated at fully tax equivalent basis using the marginal corporate Federal tax
rate of 35%.
3Excludes
the interest income and interest expense of discontinued
operations.
Noninterest
Income
Noninterest
income was $15.1 million for the nine months ended September 30, 2006, a
decrease of $136 thousand or less than 1.0% compared to the same period in
the
prior year. Noninterest income represents 18.7% of total revenue for the current
nine months, a decrease of 563 basis points from 24.3% for the same period
last
year. The decrease in noninterest income as a percentage of total revenue is
due
primarily to the composition of the revenue streams from Citizens Bancorp,
which
is more heavily weighted toward interest income. Excluding the effect of the
one-time gain on the sale of the Company’s $3.2 million credit card portfolio in
the prior year, noninterest income increased $564 thousand or 3.9% in the
comparable periods.
Income
items that showed net increases primarily as a result of the Citizens Bancorp
acquisition were as follows: service charges and fees on deposits of $132
thousand or 2.0%; non-deposit service charges, commissions, and fees of $283
thousand or 16.9%; and trust income of $151 thousand or 12.3%. The $132 thousand
increase in service charges and fees on deposits includes an additional $678
thousand related to Citizens Bancorp which offset a decline in fees of $241
thousand attributed to the Commonwealth of Kentucky and $167 thousand lower
dormant account fees. The decline in fees from the Commonwealth of Kentucky
is
closely relates to the lower correspondent bank fees discussed in the next
section of this report. Allotment processing fees were unchanged at $2.0
million. Income from company-owned life insurance was up $142 thousand or 16.5%
due to higher crediting rates and additional amounts outstanding attributed
to
the purchase of Citizens Bancorp.
Data
processing fees were $1.3 million, a decline of $53 thousand or 3.9% mainly
due
to an increasing percentage of electronic transactions versus paper
transactions, which are less costly and result in lower revenue for the Company.
The Company sold investment securities during the current period for a net
loss
of $195 thousand to better position its balance sheet for asset and liability
management purposes. Gains on the sale of mortgage loan were $464 thousand,
a
decline of $41 thousand or 8.1% due to a $3.4 million or 13.6% decrease in
mortgage loans sold in the comparison. Other noninterest income was $539
thousand, a decrease of $558 thousand compared to $1.1 million a year earlier.
The decrease in other noninterest income is attributable to the $700 thousand
one-time gain recorded in the prior year on the sale of the Company’s credit
card portfolio. Excluding the one-time gain,
other
noninterest income grew $142 thousand or 35.8% due mainly to gain on the sale
of
a vacant office building of $125 thousand.
Noninterest
Expense
Total
noninterest expenses were $37.8 million for the nine months ended September
30,
2006, an increase of $6.4 million or 20.4% compared to $31.4 million for the
same period in 2005. The increase in noninterest expenses is reflected across
a
broad range of line items. A significant factor contributing to the higher
expenses is the Citizens Bancorp acquisition during December 2005. The largest
increase in noninterest expenses is attributed to salaries and employee
benefits, which grew $3.5 million or 20.9%, net occupancy expenses of $653
thousand or 33.0%, amortization of intangibles of $680 thousand or 105%, and
data processing and communication expenses of $694 thousand or
22.5%.
The
$3.5
million increase in salaries and employee benefits resulted from the addition
of
72 average full time equivalent employees (66 from the Citizens Bancorp
acquisition), normal salary increases for existing employees, and an increase
in
benefit costs. Salaries and related payroll taxes increased $2.5 million or
18.6%, with Citizens Bancorp accounting for $1.9 million of the increase.
Benefit expenses increased $907 thousand or 27.2%, a sharp increase that was
boosted by $468 thousand related to Citizens Bancorp. The increase in benefit
expenses is mainly attributed to higher health care costs in the current
nine-month period compared to the same period a year ago. Employee health care
claims have increased during the current period compared to the same period
a
year earlier. Within specified contractual limits, benefit costs move in tandem
with their related claims. Noncash compensation expense related to the Company’s
nonqualified stock option plan and employee stock purchase plan was $102
thousand. There was no such expense recorded in the comparable period last
year
since the current period includes the initial recognition of such costs pursuant
to SFAS No. 123(R).
Occupancy
expense, net of rental income, increased $653 thousand or 33.0% and totaled
$2.6
million at September 30, 2006. The increase was led by $395 thousand attributed
to the Citizens Bancorp acquisition along with normal operating increases.
Equipment expenses were up $198 thousand or 10.5% to $2.1 million led by a
$221
thousand increase attributed to Citizens Bancorp. Data processing and
communications expense was up $694 thousand or 22.5% to $3.8 million. The
increase is primarily attributed to the Citizens Bancorp acquisition, which
added $553 thousand of expense for the current nine-month period. A significant
portion of this amount is related to data processing, which is expected to
decline once Citizens Bancorp’s processing system is converted to the Company’s
processing system. Bank franchise taxes increased $312 thousand or 30.6% led
by
$214 thousand attributed to Citizens Bancorp. Correspondent bank fees declined
$173 thousand or 25.1% and is correlated to the decline in service charges
and
fees on deposits related to the Commonwealth of Kentucky noted in the previous
section of this report. Amortization of intangibles was up $680 thousand to
$1.3
million with an increase of $807 thousand resulting from additional core deposit
intangible amortization at Citizens Bancorp. Other noninterest expenses were
$6.0 million, an increase of $559 thousand or 10.4% compared to the same
nine-month period a year earlier. The increase in other noninterest expenses
was
mainly attributed to the Citizens Bancorp acquisition.
Income
Taxes
Income
tax expense for the nine months ended September 30, 2006 was $2.8 million,
an
increase of $22 thousand or less than 1% compared to the same period a year
earlier. The effective federal income tax rate decreased 56 basis points to
20.3% from 20.9% in the comparison. The effective federal income tax rate is
expected to increase after the sale of the Company’s discontinued operations is
complete, which is expected to occur in the fourth quarter of 2006.
Income
From Discontinued Operations
Income
from discontinued operations was $1.3 million for the current nine months ended
September 30, 2006. This represents an increase of $188 thousand or 17.0%
compared to $1.1 million in the same period a year earlier. Basic and diluted
income per share from discontinued operations was $.17 in the current period,
an
increase of $.01 compared to $.16 a year earlier.
FINANCIAL
CONDITION
Total
assets related to continuing operations were $1.6 billion on September 30,
2006,
up $58.2 million or 3.8% from the prior year-end. The composition of the
Company’s significant assets changed as follows: a $16.0 million or 12.2%
increase in cash and cash equivalents; a $52.7 million or 16.0% decrease in
securities; and an increase in net loans of $93.4 million or 9.8%. The changes
within the asset groups correlate to the overall funding position of the
Company. Cash and cash equivalents increased primarily as a result of an
additional $15 million borrowed near the end of the quarter for the payment
of
the cash portion of the Citizens Jessamine acquisition that was paid subsequent
to the end of the quarter. The decline in investment securities and the $44.2
million increase in deposits primarily funded loan growth. Payment of the prior
year-end accrued purchase price of Citizens Bancorp of $21.8 million was offset
by a $23.9 million and a $3.0 million increase in other borrowed funds and
federal funds purchased and securities sold under agreements to repurchase,
respectively. Shareholders’ equity grew $6.2 million or 4.0% to $160 million at
September 30, 2006.
Management
of the Company considers it noteworthy to understand the relationship between
the Company’s principal subsidiary, Farmers Bank & Capital Trust Co., 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 related to continuing operations were $1.5 billion
for the first nine months of 2006, an increase of $248 million or 19.2% from
year-end 2005 driven mainly by an additional $226 million from the Citizens
Bancorp purchase during December 2005. Average earning assets, primarily loans
and securities, were $1.4 billion at September 30, 2006, an increase of $209
million or 18.2% from year-end 2005. Average earning assets represent 88.1%
of
total average assets on September 30, 2006, a decrease of 8 basis points
compared to 88.9% at year-end 2005.
Loans
Loans,
net of unearned income, totaled $1.1 billion at September 30, 2006, an increase
of $92.9 million or 9.6% from year-end 2005. The composition of the loan
portfolio is summarized in the table below.
| |
|
September
30, 2006
|
|
December
31, 2005
|
|
|
(Dollars
in thousands)
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
agriculture
|
|
$
|
185,290
|
|
|
17.5
|
%
|
$
|
173,797
|
|
|
18.1
|
%
|
|
Real
estate - construction
|
|
|
130,425
|
|
|
12.4
|
|
|
88,693
|
|
|
9.2
|
|
|
Real
estate mortgage - residential
|
|
|
340,823
|
|
|
32.3
|
|
|
331,508
|
|
|
34.4
|
|
|
Real
estate mortgage farmland and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
commercial enterprises
|
|
|
310,929
|
|
|
29.5
|
|
|
274,411
|
|
|
28.5
|
|
|
Installment
|
|
|
54,345
|
|
|
5.1
|
|
|
56,169
|
|
|
5.8
|
|
|
Lease
financing
|
|
|
33,619
|
|
|
3.2
|
|
|
37,993
|
|
|
4.0
|
|
|
Total
|
|
$
|
1,055,431
|
|
|
100.0
|
%
|
$
|
962,571
|
|
|
100.0
|
%
|
On
average, loans represented 74.0% of earning assets during the current nine-month
period, an increase of 536 basis points compared to 68.6% for year-end 2005.
The
increase was due mainly to the Citizens Bancorp acquisition, which had loans
representing 83.0% of its average earning assets for the nine-month period
ended
September 30, 2006. As loan demand fluctuates, the available funds are
reallocated between loans and temporary investments or investment securities,
which typically involve a decrease in credit risk and lower yields.
Allowance
for Loan Losses
The
allowance for loan losses was $10.5 million at September 30, 2006, a decrease
of
$568 thousand or 5.1% from the prior year-end. The allowance for loan losses
was
.99% of loans net of unearned income at September 30, 2006, a decrease of 16
basis points compared to 1.15% at December 31, 2005. The provision for loan
losses decreased $95 thousand and $195 thousand in the current three-month
and
nine-month comparisons, respectively. The lower provision for loans losses
in
the current periods is attributed to continued improvement in the credit quality
of the Company’s loan portfolio. Although loans 90 days past due are up $1.6
million since year-end, other measurements of credit quality have declined.
This
includes lower nonaccrual loans of $863 thousand and a sharp decline in watch
list loans. Additionally, annualized net charge-offs as a percentage of average
loans were .10% for the nine-month period ended September 30, 2006, down 15
basis points from .25% at December 31, 2005.
The
allowance for loan losses as a percentage of nonperforming loans totaled 193.3%
and 235.4% at September 30, 2006 and December 31, 2005, respectively. The
decrease in the current period compared to the prior year-end is attributed
to
the net increase in nonperforming loans of $730 thousand and $761 thousand
lower
allowance for loan losses. Management continues to emphasize collection efforts
and evaluation of risks within the loan portfolio.
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. Nonperforming assets totaled $9.0 million at September 30,
2006,
a decrease of $4.5 million or 33.6% from the prior year-end. Nonperforming
loans
were $5.4 million at September 30, 2006, a $730 thousand or 15.5% increase
compared to year-end 2005. The increase in nonperforming loans relates primarily
to higher loan’s past due 90 days or more of $1.6 million, partially offset by
lower nonaccrual loans of $863 thousand or 37.2%. The decrease in nonaccrual
loans was led by a decline of $768 thousand to a single borrower, of which
$475
thousand was transferred to the Company through foreclosure and subsequently
liquidated. The increase in loans 90 days or more past due was driven up
primarily by five individual credits totaling $1.9 million. Nonperforming loans
represent .5% of loans net of unearned income at September 30, 2006, unchanged
compared to year-end 2005.
Other
real estate owned was $3.4 million at September 30, 2006. This represents a
decrease of $5.4 million or 60.9% compared to $8.8 million at year-end 2005.
A
significant portion of this decrease is attributed to the sale of foreclosed
real estate related to the Company’s previous disclosures regarding a
financially troubled builder.
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
September 30, 2006, temporary investments were $39.4 million, a decrease of
$20.1 million or 33.8% compared to $59.5 million at year-end 2005. Temporary
investments averaged $51.1 million during the first nine months of 2006, a
decrease of $17.1 million or 25.1% from year-end 2005. The decrease is primarily
a result of the Company’s net funding position, which was driven by $21.8
million cash payment to Citizens Northern stockholders during the current nine
months along with higher loan demand. 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 agency
securities, mortgage-backed securities, and tax-exempt securities of states
and
political subdivisions. Total investment securities were $275 million on
September 30, 2006, a decrease of $52.7 million or 16.0% from year-end 2005.
The
decline in investment securities was due in part to the sale of investment
securities for normal asset and liability management purposes and reinvesting
a
higher percentage of the proceeds from matured or called investment securities
into loans or alternate uses other than for the purchase of additional
investment securities.
Investment
securities averaged $302 million in total for the current nine months, an
increase of $2.8 million or less than 1% compared to the year-end 2005 balance.
The Company had a net unrealized loss on available for sale
investment
securities of $2.0 million at September 30, 2006 compared to a net unrealized
loss of $6.6 million and $2.7 million at June 30, 2006 and year-end 2005,
respectively. The $4.6 million increase during the three months ended September
30, 2006 is reflective of a sharp jump in market bond prices near the end of
the
reporting period, particularly on bonds within the two to ten year maturity
ranges. In addition, the investment portfolio has declined as a result of
reinvesting proceeds from matured or called bonds into alternative uses,
primarily loans. This has shortened up the maturity dates of the remaining
portfolio, which generally has brought bond values closer to their par
value.
Company-owned
Life Insurance
Company-owned
life insurance was $31.0 million at September 30, 2006, an increase of $973
thousand or 3.2% from $30.0 million at year-end 2005. Income from company-owned
life insurance was $320 thousand and $1.0 million for the three and nine months
ended September 30, 2006, respectively. This represents an increase of $6
thousand or 1.9% and $142 thousand or 16.5% in the three and nine-month
comparisons, respectively. Income edged up during the quarter due to the
addition of $33 thousand attributed to Citizens Bancorp. For the nine-month
comparison, higher crediting rates combined with an additional $93 thousand
from
Citizens Bancorp boosted the income $142 thousand.
Assets
of Discontinued Operations
Total
assets of discontinued operations were $139 million at September 30, 2006,
a
decrease of $4.6 million or 3.2% compared to year-end 2005.
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 September 30, 2006 total deposits
were $1.2 billion, an increase of $44.2 million or 3.7% from year-end 2005.
The
bulk of the increase was related to noninterest bearing deposits, which
increased $28.8 million or 15.7% to $212 million from $183 million. Interest
bearing deposits grew $15.4 million or 1.5% to $1.0 billion. Average total
deposits were $1.2 billion for the first nine months of 2006, an increase of
$178 million or 17.3% compared to year-end 2005. Net increases in average
deposits were consistent throughout nearly the entire deposit portfolio as
follows: noninterest bearing demand of $9.9 million or 5.5%; interest bearing
demand of $44.5 million or 20.7%; savings accounts of $22.9 million or 12.6%;
and time deposits of $101 million or 22.3%. The increase in average deposits
outstanding is primarily attributed to the Citizens Bancorp acquisition late
in
the fourth quarter of 2005. This acquisition contributed $17.2 million and
$158
million in average noninterest bearing and interest bearing deposits,
respectively, during the first nine months of 2006.
Borrowed Funds
Borrowed
funds totaled $174 million at September 30, 2006, an increase of $26.9 million
or 18.3% from $147 million at year-end 2005. Included in the increase is $15.0
million of short-term borrowing used in connection with the purchase of Citizens
National. Total borrowed funds averaged $170 million, an increase of $24.8
million or 17.1% from $145 million at year-end 2005. The increase in average
borrowed funds since year-end 2005 was led by a $14.5 million higher average
of
subordinated notes payable to unconsolidated trusts outstanding that is due
to
the timing of the transaction, which took place during the middle of 2005.
Average federal funds purchased and securities sold under agreements to
repurchase were also up by $8.8 million or 10.8% to $90.1 million.
Liabilities
of Discontinued Operations
Total
liabilities of discontinued operations were $140 million at September 30, 2006,
a decrease of $4.2 million or 2.9% compared to $144 million at year-end
2005.
LIQUIDITY
The
Parent Company’s primary use of cash consists of dividend payments to its common
shareholders, purchases of its common stock, corporate acquisitions, interest
expense on borrowings, and other general operating purposes. Liquidity of the
Parent Company depends primarily on the receipt of dividends from its subsidiary
banks and cash balances maintained. As of September 30, 2006 combined retained
earnings of the subsidiary banks, excluding KBC, was $63.1 million, of which
$22.3 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 pay dividends in order
to
provide funds to the Parent Company during the remainder of 2006 sufficient
to
meet its liquidity needs. The Parent Company had cash balances of $24.3 million
at September 30, 2006, a decrease of $7.8 million or 25.0% from $32.1 million
at
year-end 2005. Included in the Parent Company’s cash balances at September 30,
2006 is $15.0 million drawn from its line of credit with an unaffiliated
financial institution for payment of the cash portion of the purchase of
Citizens National. This was paid out subsequent to September 30, 2006. Excluding
the $15.0 million cash paid during October 2006 for the Citizens National
purchase, the $22.8 million decrease in cash at the Parent Company is due
primarily to the $21.8 million cash paid during 2006 for the acquisition of
Citizens Bancorp.
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 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 September 30, 2006 the Company had
approximately $163 million in additional borrowing capacity under various FHLB
and federal funds 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
our
liquidity from these sources.
The
Company expects to receive $20.0 million in cash during the fourth quarter
of
2006 from the previously announced sale of KBC. It also intends to use part
of
the cash proceeds from the sale of KBC to repay the $15.0 million in short-term
borrowings drawn upon in connection with the Citizens National acquisition
that
closed effective October 1, 2006.
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 Asset and Liability Management
Committee, 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 securities available for sale.
At
September 30, 2006, such consolidated assets were $413 million, a decrease
of
$33.0 million or 7.4% from year-end 2005. The decrease in liquid assets is
attributed to the overall funding position of the Company, which changes as
loan
demand, deposit levels, and other sources and uses of funds fluctuate.
Net
cash
provided by continuing operating activities was $17.3 million in the first
nine
months of 2006, an increase of $6.8 million compared to the same period a year
earlier. Net cash used in continuing investing activities was $65.7 million
and
$31.5 million in the current and previous-year nine month periods ended
September 30, an increase of $34.2 million. The most significant items included
in the $34.2 million higher net cash outflows from continuing investing
activities are the $21.8 million cash payment for the purchase of Citizens
Bancorp and $66.9 million net outflows related to increased loan activity,
partially offset by $58.6 million of net cash provided by investment securities
transactions. Net cash provided by continuing financing activities was $64.4
million for the nine months ended September 30, 2006, a decrease of $24.4
million compared to the same period a year earlier. This decrease is related
mainly to lower net inflows in the comparable periods of $25.4 million related
to deposit activity.
Commitments
to extend credit are considered in addressing the Company’s liquidity
management. The Company does not expect these commitments to significantly
effect the liquidity position in future periods.
CAPITAL
RESOURCES
Shareholders’
equity was $160 million on September 30, 2006, an increase of $6.2 million
or
4.0% from $154 million at December 31, 2005. Retained earnings were up $5.1
million or 3.3% as a result of $12.4 million of net income partially offset
by
$7.3 million or $.99 per share in cash dividends declared. The Company issued
37
thousand and six thousand shares of common stock, respectively, during the
current nine-month period related to its nonqualified stock option and employee
stock purchase plans. The issuance of these shares increased shareholders’
equity by $1.1 million. Shareholders’ equity also increased as a result of $125
thousand of noncash compensation expense attributed to its nonqualified stock
option and employee stock purchase plans. The Company purchased 23 thousand
shares of its outstanding common stock during the current nine months which
reduced shareholders’ equity $715 thousand.
Accumulated
other comprehensive loss, consisting of net unrealized holding losses on
available for sale securities (net of tax), was $1.4 million at September 30,
2006, a decrease of $3.1 million and $535 thousand from June 30, 2006 and
year-end 2005. The change is directly related to the fluctuation in market
values of the Company’s available for sale securities as discusses previously in
this report.
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 September 30, 2006 and the
regulatory minimums are as follows.
| |
|
Farmers
Capital
|
|
Regulatory
|
|
| |
|
Bank
Corporation
|
|
Minimum
|
|
|
Tier
1 risk based
|
|
|
12.46
|
%
|
|
4.00
|
%
|
|
Total
risk based
|
|
|
13.31
|
%
|
|
8.00
|
%
|
|
Leverage
|
|
|
9.17
|
%
|
|
4.00
|
%
|
As
of
September 30, 2006, all of the Company’s subsidiary banks were in excess of the
well-capitalized regulatory ratio requirements as calculated under guidelines
established by federal banking agencies. Citizens Jessamine, acquired subsequent
to September 30, 2006, is also considered well-capitalized under the federal
banking guidelines.
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 over future time periods.
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 of net interest income and net
income. The forecasted results are then adjusted for the effect of a gradual
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
September 30, 2006, the model indicated that if rates were to gradually increase
by 75 basis points during the remainder of the calendar year, then net interest
income and net income would increase .08% and .11%, respectively for the year
ending December 31, 2006. The model indicated that if rates were to gradually
decrease by 75 basis points over the same period, then net interest income
and
net income would increase .03% and .13%, respectively.
The
Registrant’s Chief Executive Officer and Chief Financial Officer have reviewed
and evaluated the effectiveness of the Registrant’s disclosure controls and
procedures as of the end of the period covered by this report, and have
concluded that the Registrant’s disclosure controls and procedures were adequate
and effective to ensure that all material information required to be disclosed
in this annual report has been made known to them in a timely fashion.
There
were no significant changes in the Registrant’s internal controls or in other
factors that could significantly affect these controls subsequent to the date
of
the Chief Executive Officer and Chief Financial Officers evaluation, nor were
there any significant deficiencies or material weaknesses in the controls which
required corrective action.
PART
II - OTHER INFORMATION
As
of
September 30, 2006, 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.
On
January 27, 2003, the Company’s Board of Directors authorized the purchase of up
to 300,000 shares of the Company’s outstanding common stock; with no stated
expiration date established under this plan. There were no shares of common
stock repurchased by the Company during the quarter ended September 30, 2006.
The maximum number of shares that may yet be purchased under the Company’s
repurchase plan is 156,112.
| |
List
of Exhibits
|
| |
|
|
| |
3i.
|
Amended
and Restated Articles of Incorporation of Farmers Capital Bank Corporation
(incorporated by reference to Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2006).
|
| |
|
|
| |
3ii.
|
Amended
and Restated By-Laws of Farmers Capital Bank Corporation (incorporated
by
reference to Annual Report of Form 10-K for the fiscal year ended
December
31, 1997.
|
| |
|
|
| |
3iia
|
Amendments
to By-Laws of Farmers Capital Bank Corporation (incorporated by reference
to Quarterly Report of Form 10-Q for the quarterly period ended March
31,
2003).
|
| |
|
|
| |
31.1
|
|
| |
|
|
| |
31.2
|
|
| |
|
|
| |
32
|
|
| |
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Date:
|
November
7, 2006 |
|
/s/
G. Anthony Busseni |
| |
|
|
G.
Anthony Busseni,
|
| |
|
|
President
and CEO
|
| |
|
|
(Principal
Executive Officer)
|
| |
|
|
|
|
Date:
|
11-7-06 |
|
/s/
Doug Carpenter |
| |
|
|
C.
Douglas Carpenter,
|
| |
|
|
Senior
Vice President, Secretary, and CFO
|
| |
|
|
(Principal
Financial and Accounting Officer)
|