UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
Fiscal Year Ended December 31, 2006
or
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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Commission
File Number 0-14412
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Farmers
Capital Bank Corporation
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|
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(Exact
name of registrant as specified in its charter)
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Kentucky
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61-1017851
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
Number)
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P.O.
Box 309, 202 West Main St.
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|
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Frankfort,
Kentucky
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40601
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code: (502) 227-1600
Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock - $.125 per share Par Value
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|
The
NASDAQ Global Select Market
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(Title
of each class)
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(Name
of each exchange on which
registered)
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Securities
registered pursuant to Section 12(g) of the Act:
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Act.
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.
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this
Form 10-K. x
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 o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act)
The
aggregate market value of the registrant’s outstanding voting stock held by
non-affiliates on June 30, 2006 (the last business day of the registrant’s most
recently completed second fiscal quarter) was $241,670,569 based on the closing
price per share of the registrant’s common stock reported on the
NASDAQ.
As
of
March 8, 2007 there were 7,886,240 shares outstanding.
Documents
incorporated by reference:
Portions
of the Registrant’s Proxy Statement relating to the Registrant’s 2007 Annual
Meeting of Shareholders are incorporated by reference into Part
III.
FARMERS
CAPITAL BANK CORPORATION
FORM
10-K
INDEX
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Page
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Part
I
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Item
1.
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4
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Item
1A.
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12
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Item
1B.
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14
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Item
2.
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15
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Item
3.
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16
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Item
4.
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16
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Part
II
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Item
5.
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16
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Item
6.
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19
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Item
7.
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20
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Item
7A.
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40
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Item
8.
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41
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Item
9.
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75
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Item
9A.
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75
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Item
9B.
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80
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Part
III
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Item
10.
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80
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Item
11.
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80
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Item
12.
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80
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Item
13.
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80
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Item
14.
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80
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Part
IV
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Item
15.
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81
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82
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83
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PART
I
The
disclosures set forth in this item are qualified by Item 1A (“Risk Factors”) and the section captioned “Forward-Looking
Statements” in Item 7
(“Management’s Discussion and Analysis of Financial Condition and Results of
Operations”) of this report and other cautionary statements contain elsewhere in
this report.
Organization
Farmers
Capital Bank Corporation (the “Registrant” or the “Company”) is a financial
holding company. The Registrant was originally formed as a bank holding company
under the Bank Holding Company Act of 1956, as amended, on October 28, 1982
under the laws of the Commonwealth of Kentucky. During 2000, the Company
elected
to change from a bank holding company to a financial holding company (see
discussion in Supervision and Regulation section of this report). The Company’s
subsidiaries provide a wide range of banking and bank-related services to
customers throughout Central and Northern Kentucky. The bank subsidiaries
owned
by the Company include Farmers Bank & Capital Trust Co. ("Farmers Bank"),
Frankfort, Kentucky; United Bank & Trust Co. ("United Bank"), Versailles,
Kentucky; Lawrenceburg National Bank ("Lawrenceburg Bank"), Harrodsburg,
Kentucky; First Citizens Bank, Elizabethtown, Kentucky; Farmers Bank and
Trust
Company ("Farmers Georgetown”), Georgetown, Kentucky; Citizens Bank of Northern
Kentucky, Inc. (“Citizens Northern”), Newport, Kentucky; and Citizens National
Bank of Jessamine County (“Citizens Jessamine”), Nicholasville,
Kentucky.
The
Company also owns FCB Services, Inc., ("FCB Services"), a nonbank data
processing subsidiary located in Frankfort, Kentucky; Kentucky General Life
Insurance Company, Inc., (“Kentucky General Life”), an inactive nonbank
insurance agency subsidiary located in Frankfort, Kentucky; Kentucky General
Holdings, LLC, (“Kentucky General”), in Frankfort, Kentucky, which holds a 50%
voting interest in KHL Holdings, LLC. KHL Holdings acquired a 100% interest
in
Kentucky Home Life Insurance Company effective January 1, 2005; Citizens
Acquisition Subsidiary Corporation (“Citizens Acquisition”), the one-bank
holding Company of Citizens Northern; FFKT Insurance Services, Inc., (“FFKT
Insurance”), a captive property and casualty insurance company in Frankfort,
Kentucky; and Farmers Capital Bank Trust I and Farmers Capital Bank Trust
II,
which are unconsolidated trusts established during 2005 to complete the private
offering of trust preferred securities.
The
Company provides a broad range of financial services to individuals,
corporations, and others through its 35 banking locations in 22 communities
throughout Central and Northern Kentucky. These services primarily include
the
activities of lending and leasing, receiving deposits, providing cash management
services, safe deposit box rental, and trust activities. Operations are managed
and financial performance is evaluated at the subsidiary level. The Company’s
chief decision makers monitor the results of the various banking products
and
services of its subsidiaries. Accordingly, all of the Company’s operations are
considered by management to be aggregated in one reportable operating segment:
commercial and retail banking. As of December 31, 2006, the Company had $1.8
billion in consolidated assets.
Organization
Chart
Subsidiaries
of Farmers Capital Bank Corporation are indicated in the table that follows.
Percentages reflect the ownership interest held by the parent company of
each of
the subsidiaries. Tier 2 subsidiaries are direct subsidiaries of Farmers
Capital
Bank Corporation. Tier 3 subsidiaries are direct subsidiaries of the Tier
2
subsidiary listed immediately above them. Tier 4 subsidiaries are direct
subsidiaries of the Tier 3 subsidiary listed immediately above
them.
Tier
|
Entity
|
1
|
Farmers
Capital Bank Corporation, Frankfort KY
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2
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United
Bank & Trust Co., Versailles KY 100%
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3
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EV
Properties, Inc., Versailles KY 100%
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2
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Lawrenceburg
National Bank, Harrodsburg KY 100%
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2
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Farmers
Bank & Capital Trust Co., Frankfort KY 100%
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3
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Farmers
Bank Realty Co., Frankfort KY 100%
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3
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Leasing
One Corporation, Frankfort KY 100%
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3
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EG
Properties, Inc., Frankfort KY 100%
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3
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Austin
Park Apartments, LTD, Frankfort KY 99%
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3
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Frankfort
Apartments II, LTD, Frankfort KY 99.9%
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3
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Farmers
Capital Insurance Corp., Frankfort KY 100%
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4
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Farmers
Fidelity Insurance Agency, LLP, Lexington KY 50%
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2
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Citizens
National Bank of Jessamine County, Nicholasville KY
100%
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2
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First
Citizens Bank, Elizabethtown KY 100%
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3
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EH
Properties, Inc., Elizabethtown KY 100% (Dissolved in January,
2007)
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2
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Farmers
Bank and Trust Company, Georgetown KY 100%
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3
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Pro
Mortgage Partners, LLC, Georgetown KY 100%
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2
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FCB
Services, Inc., Frankfort KY 100%
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2
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Kentucky
General Holdings, LLC, Frankfort, KY 100%
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3
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KHL
Holdings, LLC, Frankfort KY 45% (equity), 50% (voting)
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4
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Kentucky
Home Life Insurance Company, Frankfort KY 100%
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2
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Kentucky
General Life Insurance Company, Frankfort KY (Inactive)
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2
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FFKT
Insurance Services, Inc., Frankfort, KY 100%
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2
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Citizens
Acquisition Subsidiary Corporation, Frankfort, KY 100% (Dissolved
in
January, 2007)
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3
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Citizens
Bank of Northern Kentucky, Inc., Newport, KY 100% (Became a Tier
2
subsidiary in January, 2007)
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2
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Farmers
Capital Bank Trust I, Frankfort, KY 100%
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2
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Farmers
Capital Bank Trust II, Frankfort, KY
100%
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Farmers
Bank, originally organized in 1850, is a state chartered bank engaged in
a wide
range of commercial and personal banking activities, which include accepting
savings, time and demand deposits; making secured and unsecured loans to
corporations, individuals and others; providing cash management services
to
corporate and individual customers; issuing letters of credit; renting safe
deposit boxes; and providing funds transfer services. The bank's lending
activities include making commercial, construction, mortgage, and personal
loans
and lines of credit. The bank serves as an agent in providing credit card
loans.
It acts as trustee of personal trusts, as executor of estates, as trustee
for
employee benefit trusts and as registrar, transfer agent and paying agent
for
bond issues. Farmers Bank is the general depository for the Commonwealth
of
Kentucky and has been for more than 70 years.
Farmers
Bank is the largest bank chartered in Franklin County. It conducts business
in
its principal office and four branches within Frankfort, the capital of
Kentucky. Franklin County is a diverse community, including government,
commerce, finance, industry, medicine, education and agriculture. The bank
also
serves many individuals and corporations throughout Central Kentucky. On
December 31, 2006, it had total consolidated assets of $598 million, including
loans net of unearned income of $327 million. On the same date, total deposits
were $433 million and shareholders' equity totaled $37.0 million.
Farmers
Bank had six active subsidiaries during 2006: Farmers Bank Realty Co. ("Farmers
Realty"), Leasing One Corporation ("Leasing One"), Farmers Capital Insurance
Corporation (“Farmers Insurance”), EG Properties, Inc. (“EG Properties”), Austin
Park Apartments, LTD (“Austin Park”), and Frankfort Apartments II, LTD
(“Frankfort Apartments”).
Farmers
Realty was incorporated in 1978 for the purpose of owning certain real estate
used by the Company and Farmers Bank in the ordinary course of business.
Farmers
Realty had total assets of $3.3 million on December 31, 2006.
Leasing
One was incorporated in August 1993 to operate as a commercial equipment
leasing
company. It is located in Frankfort and is currently licensed to conduct
business in fourteen states. At year-end 2006, it had total assets of $17.5
million, including leases net of unearned income of $19.1 million.
Farmers
Insurance was organized in 1988 to engage in insurance activities permitted
to
the Company under federal and state law. Farmers Bank capitalized this
corporation in December 1998. Farmers Insurance acts as an agent for
Commonwealth Land Title Co. At year-end 2006 it had total assets of $949
thousand. Farmers Insurance holds a 50% interest in Farmers Fidelity Insurance
Company, LLP (“Farmers Fidelity”). The Creech & Stafford Insurance Agency,
Inc., an otherwise unrelated party to the Company, also holds a 50% interest
in
Farmers Fidelity. Farmers Fidelity is a direct writer of property and casualty
coverage, both individual and commercial.
In
November 2002 Farmers Bank incorporated EG Properties. EG Properties is involved
in real estate management and liquidation for properties repossessed by Farmers
Bank. It had total assets of $4.5 million at December 31, 2006.
Farmers
Bank is a limited partner in Austin Park and Frankfort Apartments, two low
income housing tax credit partnerships located in Frankfort, Kentucky. These
investments provide for federal income tax credits to the Company. Farmers
Bank’s aggregate investment in these partnerships was $1.4 million at year-end
2006.
On
February 15, 1985, the Company acquired United Bank, a state chartered bank
originally organized in 1880. It is engaged in a general banking business
providing full service banking to individuals, businesses and governmental
customers. It conducts business in its principal office and two branches
in
Woodford County, Kentucky. During 2003 United Bank incorporated EV Properties,
Inc. EV Properties is involved in real estate management and liquidation
for
properties repossessed by United Bank. EV Properties had total assets of
$408
thousand at year-end 2006. Based on deposits, United Bank is the second largest
bank chartered in Woodford County with total assets of $177 million and total
deposits of $153 million at December 31, 2006.
On
June
28, 1985, the Company acquired Lawrenceburg Bank, a national chartered bank
originally organized in 1885. It is engaged in a general banking business
providing full service banking to individuals, businesses and governmental
customers. During 1998, it moved its charter and main office to Harrodsburg,
Kentucky in Mercer County. Lawrenceburg Bank conducts business at its
Harrodsburg site, two branches in Anderson County, Kentucky, and one branch
in
Mercer County, Kentucky. Based on deposits, the Anderson County branches
rank
number one in size compared to all banks chartered
in Anderson County. Total assets were $179 million and total deposits were
$165
million at December 31, 2006.
On
March
31, 1986, the Company acquired First Citizens Bank, a state chartered bank
originally organized in 1964. It is engaged in a general banking business
providing full service banking to individuals, businesses and governmental
customers. It conducts business at its main office and three branches in
Hardin
County, Kentucky along with its branch office in Bullitt County, Kentucky.
During 2003 First Citizens Bank incorporated EH Properties, Inc. This company,
which had total assets of $27 thousand at December 31, 2006, is involved
in real
estate management and liquidation for properties repossessed by First Citizens
Bank. EH Properties was dissolved in January, 2007.
On
October 8, 2004, First Citizens Bank acquired Financial National Electronic
Transfer, Inc. (“FiNET”), a data processing company that specializes in the
processing of federal benefit payments and military allotments and is
headquartered in Radcliff, Kentucky. Effective January 1, 2005 FiNET was
merged
into First Citizens Bank. These services are now operated using the name
of
FirstNet.
On
November 2, 2006, First Citizens Bank announced the signing of a definitive
agreement to acquire the military allotment operation of PNC Bank, National
Association based in Elizabethtown, Kentucky. The operation specializes in
the
processing of data associated with military allotments and federal benefit
payments. The transaction was completed on January 12, 2007.
Based
on
deposits, First Citizens Bank ranks third in size compared to all banks
chartered in Hardin County. Total assets were $224 million and total deposits
were $178 million at December 31, 2006.
On
June
30, 1986, the Company acquired Farmers Georgetown, a state chartered bank
originally organized in 1850. It is engaged in a general banking business
providing full service banking to individuals, businesses and governmental
customers. During the fourth quarter of 2004 the Company merged its previously
acquired Citizens Bank (Kentucky), Inc. (“Citizens Georgetown”) into Farmers
Georgetown. During 2006, Farmers Georgetown sold the Bath County branches
that
it acquired from Citizens Georgetown. Farmers Georgetown conducts business
at
its principal office and three branches in Scott County, Kentucky and two
branches in Fayette County, Kentucky.
On
July
16, 2002, Farmers Georgetown incorporated Community Development of Kentucky,
Inc. (“CDK, Inc.”) in order to apply to be certified as a Community Development
Entity for participation in the New Markets Tax Credit Program (“Program”) as
provided by the Community Renewal Tax Relief Act of 2000. The Program is
designed to promote economic development in qualified low-income communities
as
defined by the tax regulations. The Company decided not to participate in
the
Program and CDK, Inc. was dissolved during 2006. In May 2004, Farmers Georgetown
incorporated Pro Mortgage Partners, LLC (“Pro Mortgage”), a mortgage brokerage
company established to offer a variety of fixed rate loan products. Pro Mortgage
has an office in Georgetown, Danville, and Lexington. At December 31, 2006,
Pro
Mortgage had total assets of $848 thousand.
Based
on
deposits, Farmers Georgetown is the largest bank chartered in Scott County
with
total assets of $322 million and total deposits of $214 million at December
31,
2006.
On
June
15, 1987, the Company acquired Horse Cave State Bank, a state chartered bank
originally organized in 1926. During 1997, it moved its charter to Glasgow,
Kentucky. Subsequent to that approval, Horse Cave State Bank changed its
name to
Kentucky Banking Centers, Inc. On December 1, 2006, the Company sold Kentucky
Banking Centers to Citizens First Corporation, an unrelated company
headquartered in Bowling Green, Kentucky.
On
December 6, 2005, the Company acquired Citizens Bancorp, Inc. (“Citizens
Bancorp”) in Newport, Kentucky. Citizens Bancorp was subsequently merged into
Citizens Acquisition. Citizens Acquisition is the parent company of Citizens
Northern. Citizens Northern is a state chartered bank organized in 1993 and
is
engaged in a general banking business providing full service banking to
individuals, businesses, and governmental customers. It conducts business
in its
principal office in Newport and four branches in Campbell County, Kentucky,
one
branch in Boone County, Kentucky and two branches in Kenton County, Kentucky.
Based on deposits, Citizens Northern ranks second in size compared to all
banks
chartered in Campbell County. Total assets were $248 million and total deposits
were $195 million at December 31, 2006. Citizens Financial Services, formerly
an
investment brokerage subsidiary of Citizens Acquisition, was dissolved
during
2006. During January, 2007 Citizens Acquisition was merged into the Company,
leaving Citizens Northern as a direct subsidiary of the Company.
On
October 1, 2006, the Company acquired Citizens National Bancshares (“Citizens
Bancshares”), the one-bank holding company of Citizens National Bank of
Jessamine County (“Citizens Jessamine”). Citizens Bancshares was subsequently
merged into the Company, leaving Citizens Jessamine as a direct subsidiary
of
the Company. Citizens Jessamine is a national chartered bank organized in
1996
and is engaged in a general banking business providing full service banking
to
individuals, businesses, and governmental customers. It conducts business
in its
principal office and three branches in Jessamine County, Kentucky. Based
on
deposits, Citizens Jessamine ranks first in size compared to all banks chartered
in Jessamine County. Total assets were $173 million and total deposits were
$136
million at December 31, 2006.
FCB
Services, organized in 1992, provides data processing services and support
for
the Company and its subsidiaries. It is located in Frankfort, Kentucky. During
1994, FCB Services began performing data processing services for nonaffiliated
banks. FCB Services had total assets of $2.9 million at December 31,
2006.
Kentucky
General Holdings, LLC (“Kentucky General”) was incorporated in November 2004 and
holds a 50% voting interest in KHL Holdings, LLC. Effective January 1, 2005
KHL
Holdings, LLC purchased Kentucky Home Life Insurance Company (“KHL”). KHL writes
credit life and health insurance in Kentucky. The remaining 50% voting interest
in KHL Holdings, LLC is held by Hamburg Insurance, LLC, an otherwise unrelated
company. Kentucky General had total assets of $2.0 million at December 31,
2006.
Kentucky
General Life was incorporated on June 22, 2000 to engage in insurance activities
permitted by federal and state law. This corporation was inactive as of December
31, 2006.
Farmers
Capital Bank Trust I and Farmers Capital Bank Trust II are two separate Delaware
statutory business trusts sponsored by the Company during 2005. The Company
completed two private offerings of trust preferred securities through the
Trusts
totaling $25.0 million. The Company owns all of the common securities of
each of
the Trusts. The Company does not consolidate the Trusts into its financial
statements.
FFKT
Insurance was incorporated during 2005. It is a captive property and casualty
insurance company insuring primarily deductible exposures and uncovered
liability related to properties of the Company. It had total assets of $2.3
million at December 31, 2006.
Lending
A
significant part of the Company’s operating activities include originating
loans, approximately 76% of which are secured by real estate at December
31,
2006. Real estate lending primarily includes loans secured by owner-occupied
one-to-four family residential properties as well as commercial real estate
mortgage loans to developers and owners of other commercial real estate.
Real
estate lending primarily includes both variable and adjustable rate products.
Loan rates on variable rate loans generally adjust upward or downward
immediately based on changes in the loan’s index, normally prime rate as
published in the Wall Street Journal. Rates on adjustable rate loans move
upward
or downward after an initial fixed term of normally one, three, or five years.
However, rate adjustments on adjustable rate loans are made annually after
the
initial fixed term expires and are indexed primarily to shorter-term Treasury
indexes. Generally, variable and adjustable rate loans contain provisions
that
cap annual increases at a maximum of 100 basis points with lifetime caps
of up
to 600 basis points and lifetime floors of 100 basis points.
The
Company also makes fixed rate commercial real estate loans to a lesser extent
with repayment terms generally not exceeding 12 months. The Company’s subsidiary
banks make first and second residential mortgage loans secured by real estate
not to exceed 90% loan to value without seeking third party guarantees.
Commercial real estate loans are made primarily to small and mid-sized
businesses, secured by real estate not exceeding 80% loan to value. Other
commercial loans are asset based loans secured by equipment and lines of
credit
secured by receivables and include lending across a diverse range of business
types. Commercial lending and real estate construction lending, including
commercial leasing, generally includes a higher degree of credit risk than
other
loans, such as residential mortgage loans. Commercial loans, like other loans,
are evaluated at the time of approval to determine the adequacy of repayment
sources and collateral requirements. Collateral requirements vary to some
degree
among borrowers and depend on the borrower’s financial
strength,
the terms and amount of the loan, and collateral available to secure the
loan.
Credit risk results from the decreased ability or willingness to pay by a
borrower. Credit risk also results when a liquidation of collateral occurs
and
there is a shortfall in collateral value as compared to a loans outstanding
balance. For construction loans, inaccurate initial estimates of a property’s
value could lead to a property having a value that is insufficient to satisfy
full payment of the amount of funds advanced for the property. Secured and
unsecured consumer loans generally are made for automobiles, boats, and other
motor vehicles. In most cases loans are restricted to the subsidiaries' general
market area.
Supervision
and Regulation
The
Company and its subsidiaries are subject to comprehensive supervision and
regulation that affect virtually all aspects of their operations. These laws
and
regulations are primarily intended to protect depositors and borrowers and,
to a
lesser extent, stockholders. Changes in applicable laws or regulations or
in the
policies of banking and other government regulators may have a material effect
on our current or future business. The following summarizes certain of the
more
important aspects of the relevant statutory and regulatory
provisions.
Supervisory
Authorities
The
Company is a financial holding company, registered with and regulated by
the
Federal Reserve Board (“FRB”). Five of its seven subsidiary banks are Kentucky
state banks, and as such are subject to supervision, regulation and examination
by the Federal Deposit Insurance Corporation (“FDIC”) and the Kentucky Office of
Financial Institutions (“Kentucky Office”). The Company’s two national bank
subsidiaries are subject to supervision, regulation and examination by the
FDIC
and the Office of the Comptroller of the Currency (“Comptroller”). The
regulatory authorities routinely examine the Company and its subsidiary banks,
to monitor their compliance with laws and regulations, financial condition,
adequacy of capital and reserves, quality and documentation of loans, payment
of
dividends, adequacy of systems and controls, credit underwriting and asset
liability management, and the establishment of branches. The Company and
its
subsidiary banks are required to file regular reports with the FRB, the FDIC
and
the Kentucky Office or Comptroller, as applicable.
Capital
The
FRB,
the FDIC, the Kentucky Office and the Comptroller require the Company and
its
subsidiary banks to meet certain ratios of capital to assets in order to
conduct
their activities. To be well-capitalized, the institutions must generally
maintain a Total Capital ratio of 10% or greater, a Tier 1 Capital ratio
of 6%
or greater, and a leverage ratio of 5% or better. For the purposes of these
tests, Tier 1 Capital consists of common equity, retained earnings and a
limited
amount of qualifying preferred stock, less goodwill and certain core deposit
intangibles. Tier 2 Capital consists of non-qualifying preferred stock, certain
types of debt and a limited amount of other items. Total Capital is the sum
of
Tier 1 and Tier 2 Capital.
In
measuring the adequacy of capital, assets are generally weighted for risk.
Certain assets, such as cash and U.S. government securities, have a zero
risk
weighting. Others, such as commercial and consumer loans, have a 100% risk
weighting. Risk weightings are also assigned for off-balance sheet items
such as
loan commitments. The various items are multiplied by the appropriate
risk-weighting to determine risk-adjusted assets for the capital calculations.
For the leverage ratio mentioned above, assets are not risk-weighted.
If
the
institution fails to remain well-capitalized, it will be subject to a series
of
restrictions that increase as the capital condition worsens. For instance,
federal law generally prohibits a depository institution from making any
capital
distribution, including the payment of a dividend or paying any management
fee
to its holding company, if the depository institution would be undercapitalized
as a result. Undercapitalized depository institutions may not accept brokered
deposits absent a waiver from the FDIC, are subject to growth limitations
and
are required to submit a capital restoration plan for approval, which must
be
guaranteed by the institution’s parent holding company. Significantly
undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting
stock
to become adequately capitalized, requirements to reduce total assets, and
cessation of receipt of deposits from correspondent banks. Critically
undercapitalized institutions are subject to the appointment of a receiver
or
conservator.
All
of
the Company’s subsidiary banks exceed the minimum Tier 1, Total Capital and
leverage ratios and qualify as “well-capitalized” under current regulatory
criteria.
Expansion
and Activity Limitations
With
prior regulatory approval, the Company may acquire other banks or bank
holding
companies and its subsidiaries may merge with other banks. Acquisitions
of banks
located in other states may be subject to certain deposit-percentage, age
or
other restrictions. In addition, as a financial holding company, the Company
and
its subsidiaries are permitted to acquire or engage in activities that
were not
previously permitted for bank holding companies such as insurance underwriting,
securities underwriting and distribution, travel agency activities, broad
insurance agency activities, merchant banking, and other activities that
the FRB
determines to be financial in nature or complementary to these
activities. The
Company has subsidiaries that engage in some of these additional activities,
including insurance underwriting and distribution and other activities
that are
financial in nature. The FRB normally requires some form of notice or
application to engage in or acquire companies engaged in such activities.
Under
the Bank Holding Company Act and Gramm-Leach-Bliley Act, the Company is
generally prohibited from engaging in or acquiring direct or indirect control
of
more than 5% of the voting shares of any company engaged in activities
other
than those referred to above.
Limitations
on Acquisitions of Bank Holding Companies
As
a
general proposition, other companies seeking to acquire control of a financial
holding company such as the Company would require the approval of the FRB
under
the Bank Holding Company Act. In addition, individuals or groups of individuals
seeking to acquire control of a financial holding company such as the Company
would need to file a prior notice with the FRB (which the FRB may disapprove
under certain circumstances) under the Change in Bank Control Act. Control
is
conclusively presumed to exist if an individual or company acquires 25%
or more
of any class of voting securities of the bank holding company. Control
may exist
under the Change in Bank Control Act if the individual or company acquires
10%
or more of any class of voting securities of the bank holding company and
no
shareholder holds a larger percentage of the subject class of voting securities.
Deposit
Insurance
All
of
the Company’s subsidiary banks are members of the FDIC, and their deposits are
insured by the FDIC’s Deposit Insurance Fund up to the amount permitted by law.
The Company’s subsidiary banks are thus subject to FDIC deposit insurance
assessments. The
FDIC
utilizes a risk-based assessment system that imposes insurance premiums
based
upon a risk matrix that takes into account a bank’s capital level and
supervisory rating. The Company was not required to pay any deposit insurance
premiums in 2006; however, it is possible that the FDIC could impose assessment
rates in the future in connection with declines in the insurance funds
or
increases in the amount of insurance coverage. An increase in the assessment
rate could have a material adverse effect on the
Company’s
earnings,
depending on the amount of the increase. Under the Federal Deposit Insurance
Reform Act of 2005, which became law in 2006, the Company received a one-time
assessment credit of $1.2 million that can be applied against future premiums,
subject to certain limitations. During 2006, the Company paid $158 thousand
in
Financing Corporation (“FICO”) assessments related to outstanding FICO bonds to
the FDIC as collection agent. The FICO is a mixed-ownership government
corporation established by the Competitive Equality Banking Act of 1987 whose
sole purpose was to function as a financing vehicle for the now defunct Federal
Savings & Loan Insurance Corporation.
Other
Statutes and Regulations
The
Company and its subsidiary banks are subject to a myriad of other statutes
and
regulations affecting their activities. Some of the more important are:
Anti-Money
Laundering.
Financial institutions are required to establish anti-money laundering programs
that must include the development of internal policies, procedures, and
controls; the designation of a compliance officer; an ongoing employee training
program; and an independent audit function to test the performance of the
programs. The Company and its subsidiary banks are also subject to prohibitions
against specified financial transactions and account relationships as well
as
enhanced due diligence and “know your customer” standards in their dealings with
foreign financial institutions and foreign customers. Financial institutions
must take reasonable steps to conduct enhanced scrutiny of account relationships
in order to guard against money laundering and to report any suspicious
transactions. Recent laws provide the law enforcement authorities with increased
access to financial information maintained by banks.
Sections
23A and 23B of the Federal Reserve Act.
The
Company’s subsidiary banks are limited in their ability to lend funds or engage
in transactions with the Company or other non-bank affiliates of the Company,
and all transactions must be on an arms’-length basis and on terms at least as
favorable to the subsidiary bank as prevailing at the time for transactions
with
unaffiliated companies.
Dividends.
The
Company’s principal source of cash flow, including cash flow to pay dividends to
its shareholders, is the dividends that it receives from its subsidiary banks.
Statutory and regulatory limitations apply to the subsidiary banks’ payments of
dividends to the Company as well as to the Company’s payment of dividends to its
shareholders. A depository institution may not pay any dividend if payment
would
cause it to become undercapitalized or if it already is undercapitalized.
The
federal banking agencies may prevent the payment of a dividend if they determine
that the payment would be an unsafe and unsound banking practice. Moreover,
the
federal agencies have issued policy statements that provide that financial
holding companies and insured banks should generally only pay dividends out
of
current operating earnings.
Community
Reinvestment Act.
The
Company’s subsidiary banks are subject to the provisions of the Community
Reinvestment Act of 1977 (“CRA”), as amended, and the federal banking agencies’
related regulations, stating that all banks have a continuing and affirmative
obligation, consistent with safe and sound operations, to help meet the credit
needs for their entire communities, including low and moderate-income
neighborhoods. The CRA requires a depository institution’s primary federal
regulator, in connection with its examination of the institution or its
evaluation of certain regulatory applications, to assess the institution’s
record in assessing and meeting the credit needs of the community served
by that
institution, including low and moderate-income neighborhoods. The regulatory
agency’s assessment of the institution’s record is made available to the public.
Insurance
Regulation.
The
Company’s subsidiaries that underwrite or sell insurance products are subject to
regulation by the Kentucky Department of Insurance.
Consumer
Regulation.
The
activities of the Company and its bank subsidiaries are subject to a variety
of
statutes and regulations designed to protect consumers. These laws and
regulations:
|
·
|
limit
the interest and other charges collected or contracted for by all
of the
Company’s subsidiary banks;
|
|
·
|
govern
disclosures of credit terms to consumer borrowers;
|
|
·
|
require
financial institutions to provide information to enable the public
and
public officials to determine whether a financial institution is
fulfilling its obligation to help meet the housing needs of the
community
it serves;
|
|
·
|
prohibit
discrimination on the basis of race, creed, or other prohibited
factors in
extending credit;
|
|
·
|
require
all of the Company’s subsidiary banks to safeguard the personal non-public
information of its customers, provide annual notices to consumers
regarding the usage and sharing of such information and limit disclosure
of such information to third parties except under specific circumstances;
and
|
|
·
|
govern
the manner in which consumer debts may be collected by collection
agencies.
|
The
deposit operations of the Company’s subsidiary banks are also subject to laws
and regulations that:
|
·
|
require
disclosure of the interest rate and other terms of consumer deposit
accounts;
|
|
·
|
impose
a duty to maintain the confidentiality of consumer financial records
and
prescribe procedures for complying with administrative subpoenas
of
financial records; and
|
|
·
|
govern
automatic deposits to and withdrawals from deposit accounts and
customers’
rights and liabilities arising from the use of automated teller
machines
and other electronic banking services.
|
References
under the caption “Supervision and Regulation” to applicable statutes and
regulations are brief summaries of portions thereof which do not purport
to be
complete and which are qualified in their entirety by reference
thereto.
Competition
The
Company and its subsidiaries compete for banking business with various types
of
businesses other than commercial banks and savings and loan associations.
These
include, but are not limited to, credit unions, mortgage lenders, finance
companies, insurance companies, stock and bond brokers, financial planning
firms, and department stores which compete for one or more lines of banking
business. The banks also compete for commercial and retail business not only
with banks in Central and Northern Kentucky, but with banking organizations
from
Ohio, Indiana, Tennessee, Pennsylvania, and North Carolina which have banking
subsidiaries located in Kentucky. These competing businesses may possess
greater
resources and offer a greater number of branch locations, higher lending
limits,
and may offer other services not provided by the Company. In addition, the
Company’s competitors that are not depository institutions are generally not
subject to the extensive regulations that apply to the Company and its
subsidiary banks. The Company has attempted to offset some of the advantages
of
its competitors by arranging participations with other banks for loans above
its
legal lending limits, expanding into additional markets and product lines,
and
entering into third party arrangements to better compete for its targeted
customer base.
The
Company competes primarily on the basis of quality of services, interest
rates
and fees charged on loans, and the rates of interest paid on deposit
funds.
The
business of the Company is not dependent upon any one customer or on a few
customers, and the loss of any one or a few customers would not have a material
adverse effect on the Company.
No
material portion of the business of the Company is seasonal. No material
portion
of the business of the Company is subject to renegotiation of profits or
termination of contracts or subcontracts at the election of the government,
though certain contracts are subject to such renegotiation or
termination.
The
Company is not engaged in operations in foreign countries.
Employees
As
of
December 31, 2006, the Company and its subsidiaries had 585 full-time equivalent
employees. Employees are provided with a variety of employee benefits. A
retirement plan, a profit-sharing (401K) plan, group life insurance,
hospitalization, dental, and major medical insurance along with postretirement
health insurance benefits are available to eligible personnel. Employees
are not
represented by a union. Management and employee relations are good.
During
1997, the Company’s Board of Directors approved its Stock Option Plan (“Plan”),
which grants certain eligible employees the option to purchase a limited
number
of the Company’s common stock. The Plan specifies the conditions and terms that
the grantee must meet in order to exercise the options. The Company’s
shareholders at its annual meeting held on May 12, 1998 subsequently ratified
the Plan.
In
January 2004, the Company’s Board of Directors adopted an Employee Stock
Purchase Plan (“ESPP”). The ESPP was subsequently approved by the Company’s
shareholders in May 2004, and became effective July 1, 2004. Under the ESPP,
in
the discretion of the Board of Directors, employees of the Company and its
subsidiaries can purchase Company common stock at a discounted price and
without
payment of brokerage costs or other fees and in the process benefit from
the
favorable tax treatment afforded such plans pursuant to Section 423 of the
Internal Revenue Code.
Available
Information
The
Company makes available, free of charge through its website
(www.farmerscapital.com),
its
Code of Ethics, its annual reports on Form 10-K, quarterly reports on Form
10-Q,
current reports on Form 8-K, and amendments to these reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after electronically filing such material with the SEC.
Investing
in the Company’s common stock is subject to risks inherent to the Company’s
business. The material risks and uncertainties that management believes affect
the Company are described below. Before making an investment decision, you
should carefully consider the risks and uncertainties described below together
with all of the other information included or incorporated by reference in
this
report. The risks and uncertainties described below are not the only ones
facing
the Company. Additional risks and uncertainties that management is not aware
of
or focused on or that management currently deems immaterial may also impair
the
Company’s business operations. This report is qualified in its entirety by these
risk factors.
If
any of
the following risks actually occur, the Company’s financial condition and
results of operations could be materially and adversely affected. If this
were
to happen, the market price of the Company’s common stock could decline
significantly, and you could lose all or part of your investment.
Risks
associated with unpredictable economic and political conditions may be amplified
as a result of limited market area
Commercial
banks and other financial institutions are affected by economic and political
conditions, both domestic and international, and by governmental monetary
policies. Conditions such as inflation, value of the dollar, recession,
unemployment, high interest rates, short money supply, scarce natural resources,
international disorders, terrorism and other factors beyond our control may
adversely affect profitability. In addition, almost all of the Company’s primary
business area is located in Central and Northern Kentucky. A significant
downturn in this regional economy may result in, among other things,
deterioration in the Company’s credit quality or a reduced demand for credit and
may harm the financial stability of the Company’s customers. Due to the
Company’s regional market area, these negative conditions may have a more
noticeable effect on the Company than would be experienced by an institution
with a larger, more diverse market area.
The
Company’s status as a holding company makes it dependent on dividends from its
subsidiaries to meet its obligations
The
Company is a financial holding company and conducts almost all of its operations
through its subsidiaries. The Company does not have any significant assets
other
than cash, company-owned life insurance and the stock of its subsidiaries.
Accordingly, the Company depends on dividends from its subsidiaries to meet
its
obligations and obtain revenue. The Company’s right to participate in any
distribution of earnings or assets of its subsidiaries is subject to the
prior
claims of creditors of such subsidiaries. Under federal and state law, the
Company’s bank subsidiaries are limited in the amount of dividends they may pay
to the Company without prior regulatory approval. Also, bank regulators have
the
authority to prohibit the subsidiary banks from paying dividends if the bank
regulators determine the payment would be an unsafe and unsound banking
practice.
Interest
rate volatility could significantly harm the Company’s
business
The
Company’s results of operations are affected by the monetary and fiscal policies
of the federal government and the regulatory policies of governmental
authorities. A significant component of the Company’s earnings is its net
interest income, which is the difference between the income from
interest-earning assets, such as loans, and the expense of interest-bearing
liabilities, such as deposits. A change in market interest rates could adversely
affect the Company’s earnings if market interest rates change such that the
interest the Company’s subsidiaries pay on deposits and borrowings
Available
Information
The
Company makes available, free of charge through its website
(www.farmerscapital.com),
its
Code of Ethics, its annual reports on Form 10-K, quarterly reports on Form
10-Q,
current reports on Form 8-K, and amendments to these reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after electronically filing such material with the SEC.
Investing
in the Company’s common stock is subject to risks inherent to the Company’s
business. The material risks and uncertainties that management believes affect
the Company are described below. Before making an investment decision, you
should carefully consider the risks and uncertainties described below together
with all of the other information included or incorporated by reference in
this
report. The risks and uncertainties described below are not the only ones
facing
the Company. Additional risks and uncertainties that management is not aware
of
or focused on or that management currently deems immaterial may also impair
the
Company’s business operations. This report is qualified in its entirety by these
risk factors.
If
any of
the following risks actually occur, the Company’s financial condition and
results of operations could be materially and adversely affected. If this
were
to happen, the market price of the Company’s common stock could decline
significantly, and you could lose all or part of your investment.
Risks
associated with unpredictable economic and political conditions may be amplified
as a result of limited market area
Commercial
banks and other financial institutions are affected by economic and political
conditions, both domestic and international, and by governmental monetary
policies. Conditions such as inflation, value of the dollar, recession,
unemployment, high interest rates, short money supply, scarce natural resources,
international disorders, terrorism and other factors beyond our control may
adversely affect profitability. In addition, almost all of the Company’s primary
business area is located in Central and Northern Kentucky. A significant
downturn in this regional economy may result in, among other things,
deterioration in the Company’s credit quality or a reduced demand for credit and
may harm the financial stability of the Company’s customers. Due to the
Company’s regional market area, these negative conditions may have a more
noticeable effect on the Company than would be experienced by an institution
with a larger, more diverse market area.
The
Company’s status as a holding company makes it dependent on dividends from its
subsidiaries to meet its obligations
The
Company is a financial holding company and conducts almost all of its operations
through its subsidiaries. The Company does not have any significant assets
other
than cash, company-owned life insurance and the stock of its subsidiaries.
Accordingly, the Company depends on dividends from its subsidiaries to meet
its
obligations and obtain revenue. The Company’s right to participate in any
distribution of earnings or assets of its subsidiaries is subject to the
prior
claims of creditors of such subsidiaries. Under federal and state law, the
Company’s bank subsidiaries are limited in the amount of dividends they may pay
to the Company without prior regulatory approval. Also, bank regulators have
the
authority to prohibit the subsidiary banks from paying dividends if the bank
regulators determine the payment would be an unsafe and unsound banking
practice.
Interest
rate volatility could significantly harm the Company’s
business
The
Company’s results of operations are affected by the monetary and fiscal policies
of the federal government and the regulatory policies of governmental
authorities. A significant component of the Company’s earnings is its net
interest income, which is the difference between the income from
interest-earning assets, such as loans, and the expense of interest-bearing
liabilities, such as deposits. A change in market interest rates could adversely
affect the Company’s earnings if market interest rates change such that the
interest the Company’s subsidiaries pay on deposits and borrowings increases
faster than the interest they collect on loans and investments. Consequently,
the Company, along with other financial institutions generally, is sensitive
to
interest rate fluctuations.
The
Company’s results of operations are significantly affected by the ability of its
borrowers to repay their loans
Lending
money is an essential part of the banking business. However, borrowers do
not
always repay their loans. The risk of non-payment is affected by:
|
·
|
credit
risks of a particular borrower;
|
|
·
|
changes
in economic and industry
conditions;
|
|
·
|
the
duration of the loan; and
|
|
·
|
in
the case of a collateralized loan, uncertainties as to the future
value of
the collateral.
|
Due
to
the fact that the outstanding principal balances can be larger for commercial
loans than other types of loans, such loans present a greater risk to the
Company than other types of loans when non-payment by a borrower
occurs.
In
addition, consumer loans typically have shorter terms and lower balances
with
higher yields compared to real estate mortgage loans, but generally carry
higher
risks of frequency of default than real estate mortgage and commercial loans.
Consumer loan collections are dependent on the borrower’s continuing financial
stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state
laws,
including bankruptcy and insolvency laws, may limit the amount that can be
recovered on these loans.
The
Company’s financial condition and results of operations would be adversely
affected if its allowance for loan losses were not sufficient to absorb actual
losses
There
is
no precise method of predicting loan losses. The Company can give no assurance
that the allowance for loan losses of its subsidiaries is or will be sufficient
to absorb actual loan losses. Excess loan losses could have a material adverse
effect on the Company’s financial condition and results of operations. Each of
the Company’s subsidiary banks attempts to maintain an appropriate allowance for
loan losses to provide for estimated losses in its loan portfolio, but there
are
no guaranties actual future loan losses will not exceed these estimates and
allowances. Each subsidiary bank of the Company periodically determines the
amount of its allowance for loan losses based upon consideration of several
factors, including:
|
·
|
a
regular review of the quality, mix and size of the overall loan
portfolio;
|
|
·
|
historical
loan loss experience;
|
|
·
|
evaluation
of non-performing loans;
|
|
·
|
assessment
of economic conditions and their effects on the bank’s existing portfolio;
and
|
|
·
|
the
amount and quality of collateral, including guarantees, securing
loans.
|
Combining
Citizens Jessamine or other business entities with the Company’s network of
banks may be more difficult, costly or time-consuming than we
expect
Citizens
Jessamine will continue to operate as an independent bank, albeit within
the
network of the Company’s existing banking subsidiaries. Bringing Citizens
Jessamine within this network will involve converting certain data processing
functions from its current format, changing some of the policies and procedures
in place at Citizens Jessamine and other integration issues. It is possible
that
the integration process could result in the loss of key employees or disruption
of each company’s ongoing business or inconsistencies in standards, procedures
and policies that would adversely affect our ability
to maintain relationships with clients and employees or to achieve the
anticipated benefits of the merger. If we have difficulties with the integration
process, we might not achieve the economic benefits we expect to result from
the
acquisition. As with any merger of banking institutions, there also may be
business disruptions that cause Citizens Jessamine to lose customers or cause
customers to take their deposits out of the bank and move their business
to
other financial institutions.
Inability
to hire or retain certain key professionals, management and staff could
adversely affect our revenues and net income
The
Company relies on key personnel to manage and operate its business, including
major revenue generating functions such as its loan and deposit portfolios.
The
loss of key staff may adversely affect the Company’s ability to maintain and
manage these portfolios effectively, which could negatively affect our revenues.
In addition, loss of key personnel could result in increased recruiting and
hiring expenses, which could cause a decrease in our net income.
The
Company’s controls and procedures may fail or be
circumvented
The
Company’s management regularly reviews and updates its internal controls,
disclosure controls and procedures, and corporate governance policies and
procedures. Any system of controls, however well-designed and operated, can
provide only reasonable, not absolute, assurances that the objectives of
the
system of controls are met. Any failure or circumvention of the Company’s
controls and procedures or failure to comply with regulations related to
controls and procedures could have a material and adverse effect on the
Company’s business, results of operations, and financial condition.
Trading
volume in the Company’s common stock is less than that of other similar
companies
The
Company’s common stock is listed for trading on the NASDAQ Global Select Stock
Market. However, the trading volume of the Company’s common stock is less than
that of other similar companies. An efficient public trading market is dependent
upon the existence in the marketplace of willing buyers and willing sellers
of
the Company’s common stock at any given time. This existence depends on
individual decisions of investors and general economic and market conditions
over which the Company has no control. Given the lower trading volume of
the
Company’s common stock, larger sales volumes of the Company’s common stock could
cause the value of the Company’s common stock to decrease.
None.
The
Company, through its subsidiaries, owns or leases buildings that are used
in the
normal course of business. The corporate headquarters is located at 202 W.
Main
Street, Frankfort, Kentucky, in a building owned by the Company. The Company’s
subsidiaries own or lease various other offices in the counties and cities
in
which they operate. See the Notes to
Consolidated Financial Statements contained in Item 8, Financial Statement
and Supplementary Data, of this Form 10-K for information with respect to
the
amounts at which bank premises and equipment are carried and commitments
under
long-term leases.
Unless
otherwise indicated, the properties listed below are owned by the Company
and
its subsidiaries as of December 31, 2006.
Corporate
Headquarters
202
- 208
W. Main Street, Frankfort, KY
Banking
Offices
|
|
125
W. Main Street, Frankfort, KY
|
|
555
Versailles Road, Frankfort, KY
|
|
835
Louisville Road, Frankfort, KY (leased)
|
|
154
Versailles Road, Frankfort, KY
|
|
1301
US 127 South, Frankfort, KY (leased)
|
|
200
E. Main Street, Georgetown, KY
|
|
100
Farmers Bank Drive, Georgetown, KY (leased)
|
|
100
N. Bradford Lane, Georgetown, KY
|
|
3285
Main Street, Stamping Ground, KY
|
|
333
W. Vine Street, Suite 102, Lexington, KY (leased)
|
|
3098
Harrodsburg Road, Lexington, KY (leased)
|
|
100
United Bank Drive, Versailles, KY
|
|
Locust
& Green Streets, Versailles, KY
|
|
206
N. Gratz, Midway, KY
|
|
128
S. Main Street, Lawrenceburg, KY
|
|
West
Park Shopping Center, Lawrenceburg, KY
|
|
838
N. College Street, Harrodsburg, KY
|
|
1035
Ben Ali Drive, Danville, KY (leased)
|
|
425
W. Dixie Avenue, Elizabethtown, KY
|
|
3030
Ring Road, Elizabethtown, KY
|
|
111
Towne Drive (Kroger Store) Elizabethtown, KY (leased)
|
|
232
Redmar Plaza, Radcliff, KY (leased)
|
|
4810
N. Preston Highway, Shepherdsville, KY
|
|
103
Churchill Drive, Newport, KY
|
|
7300
Alexandria Pike, Alexandria, KY
|
|
164
Fairfield Avenue, Bellevue, KY
|
|
8730
US Highway 42, Florence, KY
|
|
34
N. Ft. Thomas Avenue, Ft. Thomas, KY (leased)
|
|
2911
Alexandria Pike, Highland Heights, KY (leased)
|
|
2006
Patriot Way, Independence, KY
|
|
2774
Town Center Blvd., Crestview Hills, KY (leased)
|
|
201
N. Main Street, Nicholasville, KY
|
|
995
S. Main Street (Kroger Store), Nicholasville, KY (leased)
|
|
986
N. Main Street, Nicholasville, KY
|
|
106
S. Lexington Avenue, Wilmore, KY
|
|
Data
Processing Center
102
Byplass Plaza, Frankfort, KY
Leasing
One Corporation & Farmers Capital Insurance
Corporation
201
W.
Main Street, Frankfort, KY
The
Company considers its properties to be suitable and adequate based on its
present needs.
As
of
December 31, 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 adverse effect upon the consolidated financial statements
of the
Company.
No
matters were submitted during the fourth quarter of the fiscal year covered
by
this report to a vote of security holders, through the solicitation of proxies
or otherwise.
PART
II
The
following table provides information with respect to shares of common stock
repurchased by the Company during the quarter ended December 31,
2006.
|
|
|
|
|
Period
|
Total
Number of
Shares
Purchased
|
Average
Price Paid
per
Share
|
Total
Number of Shares
Purchased
as Part of
Publicly
Announced Plans
or
Programs
|
Maximum
Number of
Shares
that May Yet Be
Purchased
Under the Plans
or
Programs
|
October
1, 2006 to October
31, 2006
|
2,967
|
$
34.16
|
2,967
|
153,145
|
November
1, 2006 to November
30, 2006
|
130
|
33.94
|
130
|
153,015
|
December
1, 2006 to December
31, 2006
|
|
|
|
153,015
|
Total
|
3,097
|
$
34.15
|
3,097
|
|
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. No stated
expiration date was established under this plan. Generally, the stock repurchase
plan allows the Company to proactively manage its capital position and return
excess capital to its shareholders.
Performance
Graph
The
following graph sets forth a comparison of the five-year cumulative total
returns among the shares of Company Common Stock, the NASDAQ Composite Index
("broad market index") and Southeastern Banks under 1 Billion
Market-Capitalization ("peer group index"). Cumulative shareholder return
is
computed by dividing the sum of the cumulative amount of dividends for the
measurement period and the difference between the share price at the end
and the
beginning of the measurement period by the share price at the beginning of
the
measurement period. The broad market index includes over 3,000 domestic and
international based common shares listed on The NASDAQ Stock Market. The
peer
group index consists of 40 banking companies in the Southeastern United States.
The Company is among the 40 companies included in the peer group
index.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
Farmers
Capital Bank Corporation
|
|
$
|
100.00
|
|
$
|
94.03
|
|
$
|
99.97
|
|
$
|
125.76
|
|
$
|
97.61
|
|
$
|
114.84
|
|
NASDAQ
Composite
|
|
|
100.00
|
|
|
71.97
|
|
|
107.18
|
|
|
117.07
|
|
|
120.50
|
|
|
137.02
|
|
Southeastern
Banks Under 1 Billion Market Capitalization
|
|
|
100.00
|
|
|
119.52
|
|
|
169.59
|
|
|
202.36
|
|
|
206.28
|
|
|
240.80
|
|
Corporate
Address
The
headquarters of Farmers Capital Bank Corporation is located at:
202
West
Main Street
Frankfort,
Kentucky 40601
Direct
correspondence to:
Farmers
Capital Bank Corporation
P.O.
Box
309
Frankfort,
Kentucky 40602-0309
Phone:
(502) 227-1668
www.farmerscapital.com
Annual
Meeting
The
annual meeting of shareholders of Farmers Capital Bank Corporation will be
held
Tuesday, May 8, 2007 at 11:00 a.m. at the main office of Farmers Bank &
Capital Trust Co., Frankfort, Kentucky.
Form
10-K
For
a
free copy of Farmers Capital Bank Corporation's Annual Report on Form 10-K
filed
with the Securities and Exchange Commission, please write:
C.
Douglas Carpenter, Senior Vice President, Secretary, & Chief Financial
Officer
Farmers
Capital Bank Corporation
P.O.
Box
309
Frankfort,
Kentucky 40602-0309
Phone:
(502) 227-1668
Web
Site Access to Filings
All
reports filed electronically by the Company to the United States Securities
and
Exchange Commission, including annual reports on Form 10-K, quarterly reports
on
Form 10-Q, current reports on Form 8-K, and all amendments to those reports,
are
available at no cost on the Company’s Web site at www.farmerscapital.com.
NASDAQ
Market Makers
|
|
J.J.B.
Hilliard, W.L. Lyons, Inc.
|
Morgan,
Keegan and Company
|
(502)
588-8400
|
(800)
260-0280
|
(800)
444-1854
|
|
UBS
Securities, LLC
|
Howe
Barnes Investments, Inc.
|
859-269-6900
|
(800)
621-2364
|
502-589-4000
|
|
The
Transfer Agent and Registrar for Farmers Capital Bank Corporation is American
Stock Transfer & Trust Company.
American
Stock Transfer & Trust Company
Shareholder
Relations
59
Maiden
Lane - Plaza Level
New
York,
NY 10038
PH:
800-937-5449
Fax:
718-236-2641
Website:
www.amstock.com
Additional
information is set forth under the captions “Shareholder Information” and “Stock Prices”
on pages
39 and 40 under Part II, Item 7
and Note 17 in the notes to the Company's 2006 audited
consolidated financial statements on pages 67 and 68 of this Form 10-K and
is
hereby incorporated by reference.
Selected
Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
(In
thousands, except per share data)
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Results
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
92,340
|
|
$
|
65,651
|
|
$
|
55,296
|
|
$
|
52,218
|
|
$
|
59,695
|
|
Interest
expense
|
|
|
41,432
|
|
|
24,409
|
|
|
16,729
|
|
|
17,565
|
|
|
22,789
|
|
Net
interest income
|
|
|
50,908
|
|
|
41,242
|
|
|
38,567
|
|
|
34,653
|
|
|
36,906
|
|
Provision
for loan losses
|
|
|
965
|
|
|
622
|
|
|
856
|
|
|
1,895
|
|
|
4,095
|
|
Noninterest
income
|
|
|
20,459
|
|
|
19,867
|
|
|
17,164
|
|
|
17,179
|
|
|
15,797
|
|
Noninterest
expense
|
|
|
53,377
|
|
|
42,164
|
|
|
38,812
|
|
|
34,555
|
|
|
33,256
|
|
Income
from continuing operations
|
|
|
13,665
|
|
|
14,532
|
|
|
13,064
|
|
|
12,267
|
|
|
11,861
|
|
Income
from discontinued operations1
|
|
|
7,707
|
|
|
1,240
|
|
|
328
|
|
|
696
|
|
|
700
|
|
Net
income
|
|
|
21,372
|
|
|
15,772
|
|
|
13,392
|
|
|
12,963
|
|
|
12,561
|
|
Per
Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
1.82
|
|
$
|
2.13
|
|
$
|
1.94
|
|
$
|
1.82
|
|
$
|
1.73
|
|
Net
income
|
|
|
2.85
|
|
|
2.31
|
|
|
1.99
|
|
|
1.93
|
|
|
1.83
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
1.82
|
|
|
2.12
|
|
|
1.93
|
|
|
1.81
|
|
|
1.72
|
|
Net
income
|
|
|
2.84
|
|
|
2.30
|
|
|
1.98
|
|
|
1.92
|
|
|
1.82
|
|
Cash
dividends declared
|
|
|
1.43
|
|
|
1.32
|
|
|
1.32
|
|
|
1.29
|
|
|
1.25
|
|
Book
value
|
|
|
22.60
|
|
|
20.87
|
|
|
19.38
|
|
|
18.83
|
|
|
18.52
|
|
Selected
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of income from continuing operations to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shareholders’ equity (ROE)
|
|
|
8.49
|
%
|
|
10.81
|
%
|
|
10.21
|
%
|
|
9.83
|
%
|
|
9.48
|
%
|
Average
total assets2
(ROA)
|
|
|
.85
|
|
|
1.10
|
|
|
1.07
|
|
|
1.07
|
|
|
1.07
|
|
Percentage
of dividends declared to income from continuing operations
|
|
|
78.89
|
|
|
61.67
|
|
|
68.10
|
|
|
70.70
|
|
|
72.41
|
|
Percentage
of average shareholders’ equity to average total assets2
|
|
|
10.04
|
|
|
10.19
|
|
|
10.45
|
|
|
10.88
|
|
|
11.23
|
|
Total
shareholders’ equity
|
|
$
|
178,441
|
|
$
|
154,236
|
|
$
|
131,450
|
|
$
|
126,471
|
|
$
|
125,773
|
|
Total
assets
|
|
|
1,824,366
|
|
|
1,673,943
|
|
|
1,399,896
|
|
|
1,324,341
|
|
|
1,280,108
|
|
Long-term
debt
|
|
|
87,992
|
|
|
75,291
|
|
|
51,265
|
|
|
53,932
|
|
|
55,593
|
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,511
|
|
|
6,831
|
|
|
6,737
|
|
|
6,727
|
|
|
6,870
|
|
Diluted
|
|
|
7,526
|
|
|
6,864
|
|
|
6,780
|
|
|
6,770
|
|
|
6,910
|
|
1Includes
gain on disposals of $6,417 during 2006.
2Excludes
assets of discontinued operations.
Glossary
of Financial Terms
Allowance
for loan losses
A
valuation allowance to offset credit losses specifically identified in the
loan
portfolio, as well as management’s best estimate of probable losses in the
remainder of the portfolio at the balance sheet date. Management estimates
the
allowance balance required using past loan loss experience, an assessment
of the
financial condition of individual borrowers, a determination of the value
and
adequacy of underlying collateral, the condition of the local economy, an
analysis of the levels and trends of the loan portfolio, and a review of
delinquent and classified loans. Actual losses could differ significantly
from
the amounts estimated by management.
Dividend
payout
Cash
dividends paid on common shares, divided by net income.
Basis
points
Each
basis point is equal to one hundredth of one percent. Basis points are
calculated by multiplying percentage points times 100. For example: 3.7
percentage points equals 370 basis points.
Interest
rate sensitivity
The
relationship between interest sensitive earning assets and interest bearing
liabilities.
Net
charge-offs
The
amount of total loans charged off net of recoveries of loans that have been
previously charged off.
Net
interest income
Total
interest income less total interest expense.
Net
interest margin
Taxable
equivalent net interest income expressed as a percentage of average earning
assets.
Net
interest spread
The
difference between the taxable equivalent yield on earning assets and the
rate
paid on interest bearing funds.
Other
real estate owned
Real
estate not used for banking purposes. For example, real estate acquired through
foreclosure.
Provision
for loan losses
The
charge against current income needed to maintain an adequate allowance for
loan
losses.
Return
on average assets (ROA)
Net
income divided by average total assets. Measures the relative profitability
of
the resources utilized by the Company.
Return
on average equity (ROE)
Net
income divided by average shareholders’ equity. Measures the relative
profitability of the shareholders' investment in the Company.
Tax
equivalent basis (TE)
Income
from tax-exempt loans and investment securities have been increased by an
amount
equivalent to the taxes that would have been paid if this income were taxable
at
statutory rates. In order to provide comparisons of yields and margins for
all
earning assets, the interest income earned on tax-exempt assets is increased
to
make them fully equivalent to other taxable interest income
investments.
Weighted
average number of common shares outstanding
The
number of shares determined by relating (a) the portion of time within a
reporting period that common shares have been outstanding to (b) the total
time
in that period.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following pages present management’s discussion and analysis of the consolidated
financial condition and results of operations of Farmers Capital Bank
Corporation (the “Company”), a financial holding company, and its bank and
nonbank subsidiaries. Bank subsidiaries include Farmers Bank & Capital Trust
Co. (“Farmers Bank”) in Frankfort, KY and its significant wholly-owned
subsidiaries Leasing One Corporation (“Leasing One”) and Farmers Capital
Insurance Corporation (“Farmers Insurance”). Leasing One is a commercial leasing
company in Frankfort, KY and Farmers Insurance is an insurance agency in
Frankfort, KY; Farmers Bank and Trust Company in Georgetown, KY (“Farmers
Georgetown”) and its wholly-owned subsidiary Pro Mortgage Partners, LLC (“Pro
Mortgage”), a mortgage brokerage company 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; Kentucky
Banking Centers, Inc. in Glasgow, KY ("KBC"), which was sold during 2006;
Citizens Bank of Northern Kentucky, Inc. in Newport, KY (“Citizens Northern”);
and Citizens National Bank of Jessamine County in Nicholasville, KY (“Citizens
Jessamine”) acquired on October 1, 2006. The Company has three active nonbank
subsidiaries, FCB Services, Inc. (“FCB Services”), Kentucky General Holdings,
LLC (“Kentucky General”), and FFKT Insurance Services, Inc. (“FFKT Insurance”).
FCB Services is a data processing subsidiary located in Frankfort, KY, which
provides services to the Company’s banks as well as unaffiliated 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. For a complete
list of the Company’s subsidiaries, please refer to the discussion under the
heading “Organization” included in Part 1, Item 1 of this Form 10-K. The
following discussion should be read in conjunction with the audited consolidated
financial statements and related Notes that follow.
This
report contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties. In general,
forward-looking statements relate to a discussion of future financial results
or
projections, future economic performance, future operational plans and
objectives, and statements regarding the underlying assumptions of such
statements. Although the Company believes that the assumptions underlying
the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance
that
the forward-looking statements included herein will prove to be accurate.
Factors that could cause actual results to differ from the results discussed
in
the forward-looking statements include, but are not limited to: economic
conditions (both generally and more specifically in the markets in which
the
Company and its subsidiaries operate) and lower interest margins; competition
for the Company’s customers from other providers of financial services; deposit
outflows or reduced demand for financial services and loan products; government
legislation, regulation, and changes in monetary and fiscal policies (which
changes from time to time and over which the Company has no control); changes
in
interest rates; inflation; material unforeseen changes in the liquidity,
results
of operations, or financial condition of the Company’s customers; changes in the
level of non-performing assets and charge-offs; the capability of the Company
to
successfully enter into a definitive agreement for and close anticipated
transactions; the possibility that acquired entities may not perform as well
as
expected; unexpected claims or litigation against the Company; technological
or
operational difficulties; the impact of new accounting pronouncements and
changes in policies and practices that may be adopted by regulatory agencies;
acts of war or terrorism; and other risks or uncertainties detailed in the
Company’s filings with the Securities and Exchange Commission, all of which are
difficult to predict and many of which are beyond the control of the Company.
The Company expressly disclaims any intent or obligation to update any
forward-looking statements after the date hereof to conform such statements
to
actual results or to changes in our opinions or expectations.
DISCONTINUED
OPERATIONS
In
June
2006, the Company announced that it had entered into a definitive agreement
to
sell KBC, its wholly-owned subsidiary based in Glasgow, Kentucky. In
addition, Farmers Georgetown entered into a definitive agreement during August
2006 to sell its Owingsville and Sharpsburg branches in Bath County (the
“Branches”). These sales were completed during the fourth quarter of 2006. All
prior period results included herein have been reclassified to conform to
the
current presentation which displays the operating results of KBC and the
Branches as discontinued operations. These reclassifications had no effect
on
net income or shareholders’ equity. Unless
otherwise noted, this Management’s Discussion and Analysis of Financial
Condition and Results of Operations relate only to the Company’s continuing
operations.
The
majority of the Company’s current operations are located in and around the
larger population areas of Central and Northern Kentucky. The decision to
sell
KBC and the Branches allows the Company to focus its resources on geographical
areas it has determined to have the highest potential, including new and
existing markets.
Application
of Critical Accounting Policies
The
Company’s audited consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
and follow general practices applicable to the banking industry. Application
of
these principles requires
management
to make estimates, assumptions, and judgments that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenues
and
expenses during the reported period. These estimates, assumptions, and judgments
are based on information available as of the date of the financial statements;
accordingly, as this information changes, the financial statements could
reflect
different estimates, assumptions, and judgments. Certain policies inherently
have a greater reliance on the use of estimates, assumptions, and judgments
and
as such have a greater possibility of producing results that could be materially
different than originally reported. Estimates, assumptions, and judgments
are
necessary when assets and liabilities are required to be recorded at fair
value,
when a decline in the value of an asset warrants an impairment write-down
or
valuation reserve to be established, or when an asset or liability needs
to be
recorded contingent upon a future event. Carrying assets and liabilities
at fair
value inherently results in more financial statement volatility. The fair
values
and the information used to record valuation adjustments for certain assets
and
liabilities are based either on quoted market prices or are provided by other
third-party sources, when available. When third-party information is not
available, valuation adjustments are estimated in good faith by management
primarily through the use of internal cash flow modeling
techniques.
The
most
significant accounting policies followed by the Company are presented in
Note 1
of the Company’s 2006 audited consolidated financial statements. These policies,
along with the disclosures presented in the other financial statement notes
and
in this management’s discussion and analysis of financial condition and results
of operations, provide information on how significant assets and liabilities
are
valued in the financial statements and how those values are determined. Based
on
the valuation techniques used and the sensitivity of financial statement
amounts
to the methods, assumptions, and estimates underlying those amounts, management
has identified the determination of the allowance for loan losses and accounting
for business acquisitions to be the accounting areas that requires the most
subjective or complex judgments, and as such could be most subject to revision
as new information becomes available.
The
allowance for loan losses represents credit losses specifically identified
in
the loan portfolio, as well as management's estimate of probable credit losses
in the loan portfolio at the balance sheet date. Determining the amount of
the
allowance for loan losses and the related provision for loan losses is
considered a critical accounting estimate because it requires significant
judgment and the use of estimates related to the amount and timing of expected
future cash flows on impaired loans, estimated losses on pools of homogeneous
loans based on historical loss experience, and consideration of current economic
trends and conditions, all of which may be susceptible to significant change.
The loan portfolio also represents the largest asset group on the consolidated
balance sheets. Additional information related to the allowance for loan
losses
that describes the methodology and risk factors can be found under the captions
“Asset Quality” and “Nonperforming
Assets” in this management’s
discussion and analysis of financial condition and results of operation,
as well
as Notes 1 and 5 of the Company’s 2006
audited consolidated financial statements.
The
Company accounts for its business acquisitions as a purchase in accordance
with
Statement of Financial Accounting Standards No. 141, whereby the purchase
price
is allocated to the tangible and intangible assets acquired and liabilities
assumed based on their estimated fair value. The excess of the purchase price
over estimated fair value of the net identifiable assets is allocated to
goodwill. The Company engages third-party appraisal firms to assist in
determining the fair values of certain assets acquired and liabilities assumed.
Determining fair value of assets and liabilities requires many assumptions
and
estimates. These estimates and assumptions are sometimes refined subsequent
to
the initial recording of the transaction with adjustments to goodwill as
information is gathered and final appraisals are completed. The changes in
these
estimates could impact the amount of tangible and intangible assets, including
goodwill, and liabilities, ultimately recorded on our balance sheet as a
result
of an acquisition and could impact our operating results subsequent to such
acquisition. We believe that our estimates have been materially accurate
in the
past.
EXECUTIVE
LEVEL OVERVIEW
The
Company offers a variety of financial products and services at its 35 banking
locations in 22 communities throughout Central and Northern Kentucky. The
most
significant products and services include consumer and commercial lending
and
leasing, receiving deposits, providing trust services, and offering other
traditional banking products and services. The primary goals of the Company
are
to continually improve profitability and shareholder value, maintain a strong
capital position, provide excellent service to our customers through our
community banking structure, and to provide a challenging and rewarding work
environment for our employees.
The
Company generates a significant amount of its revenue, cash flows, and net
income from interest income and net interest income, respectively. Interest
income is generated by earnings on the Company’s earning assets, primarily loans
and investment securities. Net interest income is the excess of the interest
income earned on earning assets over the interest expense paid on amounts
borrowed to support those earning assets. Interest expense is paid primarily
on
deposit accounts and other short and long-term borrowing arrangements. The
ability to properly manage net interest income under changing market
environments is crucial to the success of the Company.
In
assessing the Company’s financial performance in this report, the following
items of note should be considered:
|
·
|
Since
2004, the general trend of the short-term interest rate environment
has
been upward primarily as a result of short-term interest rate increases
by
the Federal Reserve Board (the “Fed”). The Fed began to increase the
short-term federal funds rate by increments of 25 basis points
during the
last half of 2004 that continued into 2006. In all, the federal
funds rate
was increased 125 basis points during 2004, 200 basis points during
2005,
and 100 basis points during 2006 and ended the year at 5.25%. The
prime
interest rate, which significantly impacts the Company’s loan portfolio,
moved in a similar manner as the federal funds rate in the periods
discussed above. Longer-term yields, such as for the 3, 5, 10,
and 20 year
treasuries, were also up at year-end 2006 compared to year-end
2005, with
the 3, 5, and 10 year notes up 37, 35, and 32 basis points,
respectively and the 20 year bond up 30 basis points. For the Company,
this has had a relatively neutral impact on net interest spread
in the
twelve-month comparison of 2006 compared to 2005. Net interest
spread for
2005 was unchanged at 3.32% in the comparable periods. Net interest
margin
increased 6 basis points to 3.75% from 3.69% due to the impact
of
noninterest bearing sources of funds used to support the increase
in
interest earning assets.
|
|
·
|
On
October 1, 2006, the Company acquired 100% of the outstanding common
shares of Citizens Bancshares. Citizens Bancshares, which was subsequently
merged into the Company, was the parent company of Citizens Jessamine
before the merger. Citizens Jessamine operates four banking locations
in
Jessamine County in Central Kentucky. The impact on this acquisition
was
an immediate increase in loans and deposits of $120 million and
$139
million, respectively, to the Company’s consolidated balance sheet. The
purchase also resulted in an additional $14.6 million and $4.5
million of
goodwill and core deposit intangible assets, respectively. The
additional
core deposit intangible added $255 thousand in amortization expense
for
the Company in 2006.
|
|
·
|
During
the fourth quarter of 2006 the Company sold KBC and the Bath County
branches of its Farmers Georgetown bank subsidiary. The Company
recorded a
pretax gain on these sales of $9.8 million. The impact from these
sales,
which has been classified as discontinued operations, was a decrease
in
net loans and deposits of $88.6 million and $146 million, respectively.
|
|
·
|
On
December 6, 2005, the Company acquired Citizens Bancorp in a cash
and
stock transaction. Citizens Bancorp is the former parent company
of
Citizens Northern, which has eight banking locations in our Northern
Kentucky market. The impact of this acquisition generally resulted
in
higher income and expense amounts during 2006 compared to 2005
due to the
timing of this transaction.
|
|
·
|
In
addition to the four new banking sites acquired in the Citizens
Jessamine
purchase, the Company replaced one existing site in Elizabethtown
and
opened new branches in Danville, Independence, and Crestview Hills.
Additional sites are anticipated to open during
2007.
|
RESULTS
OF OPERATIONS
Consolidated
net income was $21.4 million for 2006, an increase of $5.6 million or 35.5%
compared to $15.8 million reported for 2005. Basic and diluted net income
per
share was $2.85 and $2.84 in 2006, an increase of $.54 or 23.4% (basic) and
$.54
or 23.5% (diluted) compared to $2.31 and $2.30 a year earlier. Gains on the
disposal of discontinued operations during 2006, net of tax, was $6.4
million.
Income
from continuing operations was $13.7 million for 2006, a decline of $867
thousand or 6.0% from $14.5 million for 2005. Basic and diluted income per
share
from continuing operations was $1.82 for the current twelve months, a decrease
of $.31 or 14.6% on a basic per share basis and $.30 or 14.2% on a diluted
per
share basis compared to a year earlier.
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 and an additional 464 thousand shares issued
in
connection with the October 1, 2006 acquisition of Citizens Jessamine. The
operating results related to Citizens Bancorp and Citizens Jessamine generally
increased reported income and expense line items in the current twelve-month
periods compared to a year ago due to the timing of the acquisitions. Net
loans
and deposits acquired from Citizens Bancorp on the date of purchase were
$149
million and $173 million, respectively. Net loans and deposits acquired from
Citizens Jessamine on the date of purchase were $120 million and $139 million,
respectively.
An
increase in net interest income, which was fueled by the Citizens Bancorp
and
Citizens Jessamine acquisitions, had a significant impact on net income for
the
twelve months ended December 31, 2006. Net interest income was $50.9 million
for
the current year. This represents an increase of $9.7 million or 23.4% compared
to 2005. The increase in net interest income is primarily due to higher interest
on loans of $24.7 million or 47.0%, partially offset by $13.4 million or
70.2%
higher interest expense on deposits. The Citizens
Bancorp
acquisition accounted for $6.7 million of the increase in net interest income,
including $11.0 million higher interest from loans partially offset by $5.2
million higher interest expense on deposits. The Citizens Jessamine acquisition
accounted for $1.4 million of the increase in net interest income in 2006,
including $2.2 million higher interest from loans partially offset by $1.2
million higher interest expense on deposits.
The
provision for loan losses increased $343 thousand or 55.1% during 2006 compared
to a year earlier. The percentage increase is not indicative of a decline
in
credit quality of the loan portfolio, but rather to a large increase in loan
volume. Due to relatively low amounts recorded in the prior year, even a
moderate increase in dollars can result in a large percentage change. The
increase in the provision for loan losses was also impacted by the Citizens
Jessamine acquisition during the fourth quarter of 2006, which accounts for
$196
thousand of the increase. The amount of net charge-offs for 2006 remain
relatively low at 0.1% of net loans outstanding.
Noninterest
income was $20.5 million in 2006, up $592 thousand or 3.0% compared to 2005.
The
increase in noninterest income was driven mainly by higher service charges
on
deposits of $648 thousand or 7.6%. Non-deposit service charges, commissions,
and
fees also increased $372 thousand or 16.6% in the comparison. Both line items
were fueled by the Citizens Bancorp and Citizens Jessamine acquisitions.
The
increase in noninterest income also reflects a one-time gain of $700 thousand
on
the sale of the Company’s credit card portfolio recorded in the first quarter of
2005. Excluding the effect of the one-time gain on the sale of the credit
card
portfolio in the prior year, noninterest income grew $1.3 million or 6.7%
during
2006 compared to 2005.
The
Company recorded a loss of $195 thousand on the sale of available for sale
investment securities during 2006 compared to a loss of $3 thousand during
2005.
Trust department income increased $174 thousand or 10.8% in the comparison.
Income from company-owned life insurance was up $154 thousand or 13.0% in
2006
compared to 2005. Allotment processing fees were $55 thousand or 2.1% lower
in
2006 due to procedural changes and volume losses related to Hurricane Katrina
beginning late in the third quarter of 2005.
Noninterest
expenses were $53.4 million in 2006, which represents an increase of $11.2
million or 26.6%. The increase in noninterest expenses occurred across a
broad
range of line items and is generally attributed to the Citizens Bancorp and
Citizens Jessamine acquisitions. The most significant increase was salaries
and
employee benefits, which was up $6.6 million
or 29.7% in the comparison. The increase in salaries and employee benefits
was
primarily driven by an increase in the average number of full time equivalent
employees to 546 from 467 and $1.3 million related to the initial-year impact
of
the adoption of a new paid time off policy for the Company’s employees. Combined
other noninterest expenses increased $4.6 million or 23.1% and occurred across
a
broad range of categories. These increases are generally attributed to the
purchases of Citizens Bancorp and Citizens Jessamine. The effective income
tax
rate was 19.7% for the current twelve-month period compared to 20.7% a year
earlier.
Excluding
the gain on sale of discontinued operations (net of tax) of $6.4 million,
the
Company had income from discontinued operations of $1.3 million for 2006.
This
represents an increase of $50 thousand compared to 2005. As previously
disclosed, the Company completed the sale of its KBC subsidiary and the Bath
County branches of Farmers Georgetown during the fourth quarter of 2006.
The
return on assets (“ROA”) was .85% in 2006, a decrease of 25 basis points from
the prior year-end. Noninterest income and noninterest expenses as a percentage
of average assets contributed to 23 basis points and 14 basis points,
respectively, to the decrease which was partially offset by a 10 basis point
lower amount of income tax expense relative to average assets. The return
on
equity (“ROE”) decreased 232 basis points to 8.49% compared to 10.81% in the
prior year. The decrease in ROE is a result of the $867 thousand decrease
in
income from continuing operations combined with an increase in average equity
capital of $26.6 million or 19.8%.
Interest
Income
Interest
income results from interest earned on earning assets, which primarily include
loans and investment securities. Interest income is affected by volume (average
balance), composition of earning assets, and the related rates earned on
those
assets. Total interest income for 2006 was $92.3 million, an increase of
$26.7
million or 40.7% from the previous year. The increase in interest income
is a
result of both higher average asset volumes, primarily loans, and higher
average
rates earned on earning assets. The increase in average loan balances
outstanding resulted from both the Citizens Jessamine and Citizens Northern
acquisitions along with internally generated loan growth. Interest income
on
securities grew as a result of a higher average rate earned on the investments.
The Company’s tax equivalent yield on earning assets for the current year was
6.7%, an increase of 90 basis points compared to 5.8% the same period a year
ago.
Interest
and fees on loans was $77.3 million, an increase of $24.7 million or 47.0%
compared to $52.6 million a year earlier. Average loans increased $246 million
or 30.6% to $1.1 billion in the comparison fueled by $177 million additional
average loan balances outstanding from the Citizens Jessamine and Citizens
Northern acquisitions and higher loan demand at our pre-existing bank
subsidiaries in what remains a relatively low rate environment. On October
1,
2006, the Company purchased $120 million in loans
related
to the Citizens Jessamine acquisition and on December 6, 2005 the Company
purchased $149 million in loans related to the Citizens Northern acquisition.
A
higher average rate earned on loans also contributed to the rise in interest
income. New loans and variable rate loans repricing during the current year
have
generally repriced higher as market interest rates have moved upward. The
tax
equivalent yield on loans increased 83 basis points to 7.4% from 6.6% in
the
annual comparison. Interest on taxable securities was $9.0 million, an increase
of $1.5 million or 20.6% due to an increase in the average rate earned. The
average rate earned on taxable securities increased 67 basis points to 4.3%
from
3.6% while the average balance grew $3.4 million or 1.6% to $212 million.
Taxable equivalent interest on nontaxable securities decreased $141 thousand
or
2.6% due mainly to a 20 basis point lower average rate (TE) earned of 5.8%
from
6.0%. Interest on short-term investments, including time deposits in other
banks, federal funds sold, and securities purchased under agreements to resell,
increased $544 thousand due to an increase in the average rate earned of
113
basis points, which offset lower average balances outstanding of $5.8
million.
Interest
Expense
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 $41.4 million for 2006, an increase of $17.0 million or 69.7%
from
the prior year. Interest expense increased as a result of higher average
rates
paid and higher average interest bearing liabilities outstanding during the
current year. The increase in average interest bearing liabilities was impacted
by the Citizens Jessamine and Citizens Northern acquisitions. The Company
acquired $142 million and $177 million in interest bearing liabilities,
primarily deposits,
from the Citizens Jessamine and Citizens Northern acquisitions that accounted
for $1.2 million and $5.6 million of the increase in total interest expense,
respectively. The Company’s cost of funds was 3.4% for 2006, an increase of 90
basis points from 2.5% for the prior year. The higher cost of funds was led
by a
156 basis point increase in the average rate paid on federal funds purchased
and
securities sold under agreements to repurchase, which is reflective of the
higher trend in short term market interest rates by the Fed during 2006.
The
average rate paid for other interest bearing liabilities also moved upward
as a
result of the overall economic environment.
Interest
expense on time deposits, the largest component of total interest expense,
increased $9.7 million or 65.9% to $24.3 million. The increase in interest
expense on time deposits was equally attributed to a $133.6 million increase
in
the average outstanding balance to $587 million and a 91 basis point increase
in
average rates paid to 4.2%. Interest expense on savings deposits and interest
bearing demand deposits increased $1.9 million or 72.3% and $1.9 million
or
101%, respectively. These increases were due primarily to an increase in
the
average rate paid on savings and interest bearing demand deposits of 67 basis
points and 57 basis points, respectively. Average savings deposits and interest
bearing demand deposits increased $30.6 million or 16.8% and $45.9 million
or
21.4%, respectively.
Interest
expense on federal funds purchased and securities sold under agreements to
repurchase increased $1.8 million or 69.0% due mainly to an increase in the
average rate paid of 156 basis points to 4.7%. The increase in rate is mainly
due to the increase in short term market interest rates by the Fed during
2006.
Interest expense on subordinated notes payable to unconsolidated trusts
increased to $1.7 million in 2006 from $623 thousand in 2005. The Company
completed a private offering of preferred securities through Company-sponsored
trusts totaling $25.0 million during July 2005. The increase in interest
expense
related to the preferred securities is attributed to both the timing of the
transaction, which occurred during the middle of 2005, and the rate on the
debt
that has repriced upward in the current interest rate environment. Interest
expense on other borrowed funds consists primarily of Federal Home Loan Bank
(“FHLB”) borrowings. Interest expense on other borrowed funds was $2.8 million,
an increase of $700 thousand or 33.6% due to both a $6.3 million or 12.0%
increase in the average balance outstanding to $59.1 million and a 76 basis
point increase in the average rate paid to 4.8% from 4.0%.
Net
Interest Income
Net
interest income is the most significant component of the Company’s earnings. Net
interest income is the excess of the interest income earned on earning assets
over the interest paid for funds to support those assets. The two most common
metrics used to analyze net interest income are net interest spread and net
interest margin. Net interest spread represents the difference between the
yields on earning assets and the rates paid on interest bearing liabilities.
Net
interest margin represents the percentage of net interest income to average
earning assets. Net interest margin will exceed net interest spread because
of
the existence of noninterest bearing sources of funds, principally demand
deposits and shareholders’ equity, which are also available to fund earning
assets. Changes in net interest income and margin result from the interaction
between the volume and the composition of earning assets, their related yields,
and the associated cost and composition of the interest bearing liabilities.
Accordingly, portfolio size, composition, and the related yields earned and
the
average rates paid can have a significant impact on net interest spread and
margin. The table on the following page represents the major components of
interest earning assets and interest bearing liabilities on a tax equivalent
basis. To compare the tax-exempt asset yields to taxable yields, amounts
are
adjusted to pretax equivalents based on the marginal corporate Federal tax
rate
of 35%.
Tax
equivalent net interest income was $53.1 million for 2006, an increase of
$9.8
million or 22.6% compared to $43.3 million in 2005. The net interest margin
was
3.8%, an increase of 6 basis points from 3.7% in the prior year. Net interest
spread was unchanged at 3.3%, while the impact of noninterest bearing sources
of
funds positively impacted net interest margin by 6 basis points. The effect
of
noninterest bearing sources of funds on net interest margin is reflective
of an
increasing overall interest rate environment. The effect of noninterest bearing
sources of funds on net interest margin typically increases in a rising rate
environment.
During
2006, the tax equivalent yield on total earning assets and the cost of funds
both increased 90 basis points and ended the year at 6.7% and 3.4%,
respectively. This resulted in the net interest spread of 3.3% for year-ends
2006 and 2005 as indicated above. Although the yield on earning assets and
the
cost of funds both increased 90 basis points, net interest income increased
because the earning asset base is greater than the amount of interest bearing
liabilities.
The
Company remains proactive in management of the rate sensitive components
of both
its assets and liabilities. This task continues to be challenging due to
competitive market factors and the effects of a dynamic interest rate
environment, that is, however, still relatively low in a historical context.
Beginning in 2004, the Fed increased the short-term federal funds rate five
times totaling 125 basis points. This trend continued throughout 2005 and
into
2006, with eight additional rate increases totaling 200 basis points in 2005
and
four rate increases totaling 100 basis points in 2006. The prime interest
rate,
which for the Company has a significant impact on interest income on loans,
moved in a similar manner to that of the federal funds rate. Predicting the
movement of future interest rates is uncertain. During the past year, the
average rates on the two most significant components of net interest income
for
the Company, loans and time deposits, both increased. Should interest rates
continue to increase, the Company’s cost of funds may also increase and could
continue to increase faster than the yields on earning assets, resulting
in even
smaller net interest margins. Should interest rates on the Company’s earning
assets and interest paying liabilities begin to decline, the Company’s yield on
earning assets could potentially decrease faster than its cost of
funds.
Distribution
of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest
Differential
|
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
|
|
Average
|
|
(In
thousands)
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Earning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
212,357
|
|
$
|
9,025
|
|
|
4.25
|
%
|
$
|
208,967
|
|
$
|
7,483
|
|
|
3.58
|
%
|
$
|
220,518
|
|
$
|
7,321
|
|
|
3.32
|
%
|
Nontaxable1
|
|
|
91,413
|
|
|
5,278
|
|
|
5.77
|
|
|
90,758
|
|
|
5,419
|
|
|
5.97
|
|
|
91,060
|
|
|
5,721
|
|
|
6.28
|
|
Time
deposits with banks, federal funds sold and securities purchased
under
agreements to resell
|
|
|
62,378
|
|
|
2,355
|
|
|
3.78
|
|
|
68,212
|
|
|
1,811
|
|
|
2.65
|
|
|
40,349
|
|
|
472
|
|
|
1.17
|
|
Loans
1,2,3
|
|
|
1,051,002
|
|
|
77,836
|
|
|
7.41
|
|
|
805,014
|
|
|
52,990
|
|
|
6.58
|
|
|
735,697
|
|
|
43,874
|
|
|
5.96
|
|
Total
earning assets
|
|
|
1,417,150
|
|
$
|
94,494
|
|
|
6.67
|
%
|
|
1,172,951
|
|
$
|
67,703
|
|
|
5.77
|
%
|
|
1,087,624
|
|
$
|
57,388
|
|
|
5.28
|
%
|
Allowance
for loan losses
|
|
|
(11,094
|
)
|
|
|
|
|
|
|
|
(10,528
|
)
|
|
|
|
|
|
|
|
(10,811
|
)
|
|
|
|
|
|
|
Total
earning assets, net of allowance for loan losses
|
|
|
1,406,056
|
|
|
|
|
|
|
|
|
1,162,423
|
|
|
|
|
|
|
|
|
1,076,813
|
|
|
|
|
|
|
|
Nonearning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
77,509
|
|
|
|
|
|
|
|
|
75,302
|
|
|
|
|
|
|
|
|
84,674
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
32,029
|
|
|
|
|
|
|
|
|
22,759
|
|
|
|
|
|
|
|
|
21,403
|
|
|
|
|
|
|
|
Other
assets
|
|
|
88,044
|
|
|
|
|
|
|
|
|
58,566
|
|
|
|
|
|
|
|
|
41,637
|
|
|
|
|
|
|
|
Assets
of discontinued operations
|
|
|
129,827
|
|
|
|
|
|
|
|
|
148,474
|
|
|
|
|
|
|
|
|
131,845
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,733,465
|
|
|
|
|
|
|
|
$
|
1,467,524
|
|
|
|
|
|
|
|
$
|
1,356,372
|
|
|
|
|
|
|
|
Interest
Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand
|
|
$
|
260,417
|
|
$
|
3,774
|
|
|
1.45
|
%
|
$
|
214,548
|
|
$
|
1,878
|
|
|
.88
|
%
|
$
|
214,150
|
|
$
|
1,077
|
|
|
.50
|
%
|
Savings
|
|
|
212,948
|
|
|
4,437
|
|
|
2.08
|
|
|
182,337
|
|
|
2,575
|
|
|
1.41
|
|
|
176,723
|
|
|
1,668
|
|
|
.94
|
|
Time
|
|
|
587,047
|
|
|
24,343
|
|
|
4.15
|
|
|
453,419
|
|
|
14,677
|
|
|
3.24
|
|
|
390,195
|
|
|
10,637
|
|
|
2.73
|
|
Federal
funds purchased and securities sold under agreements to
repurchase
|
|
|
92,092
|
|
|
4,348
|
|
|
4.72
|
|
|
81,318
|
|
|
2,573
|
|
|
3.16
|
|
|
90,092
|
|
|
1,293
|
|
|
1.44
|
|
Other
borrowed funds
|
|
|
84,869
|
|
|
4,530
|
|
|
5.34
|
|
|
64,027
|
|
|
2,706
|
|
|
4.23
|
|
|
54,257
|
|
|
2,055
|
|
|
3.79
|
|
Total
interest bearing liabilities
|
|
|
1,237,373
|
|
$
|
41,432
|
|
|
3.35
|
%
|
|
995,649
|
|
$
|
24,409
|
|
|
2.45
|
%
|
|
925,417
|
|
$
|
16,730
|
|
|
1.81
|
%
|
Noninterest
Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth
of Kentucky deposits
|
|
|
38,627
|
|
|
|
|
|
|
|
|
37,978
|
|
|
|
|
|
|
|
|
35,875
|
|
|
|
|
|
|
|
Other
demand deposits
|
|
|
157,355
|
|
|
|
|
|
|
|
|
141,219
|
|
|
|
|
|
|
|
|
133,767
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
7,705
|
|
|
|
|
|
|
|
|
11,292
|
|
|
|
|
|
|
|
|
8,634
|
|
|
|
|
|
|
|
Liabilities
of discontinued operations
|
|
|
131,437
|
|
|
|
|
|
|
|
|
147,010
|
|
|
|
|
|
|
|
|
124,686
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,572,497
|
|
|
|
|
|
|
|
|
1,333,148
|
|
|
|
|
|
|
|
|
1,228,379
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
160,968
|
|
|
|
|
|
|
|
|
134,376
|
|
|
|
|
|
|
|
|
127,993
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
1,733,465
|
|
|
|
|
|
|
|
$
|
1,467,524
|
|
|
|
|
|
|
|
$
|
1,356,372
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
53,062
|
|
|
|
|
|
|
|
|
43,294
|
|
|
|
|
|
|
|
|
40,658
|
|
|
|
|
TE
basis adjustment
|
|
|
|
|
|
(2,154
|
)
|
|
|
|
|
|
|
|
(2,052
|
)
|
|
|
|
|
|
|
|
(2,091
|
)
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
50,908
|
|
|
|
|
|
|
|
$
|
41,242
|
|
|
|
|
|
|
|
$
|
38,567
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
3.32
|
%
|
|
|
|
|
|
|
|
3.32
|
%
|
|
|
|
|
|
|
|
3.47
|
%
|
Effect
of noninterest bearing sources of funds
|
|
|
|
|
|
|
|
|
.43
|
|
|
|
|
|
|
|
|
.37
|
|
|
|
|
|
|
|
|
.27
|
|
Net
interest margin
|
|
|
|
|
|
|
|
|
3.75
|
%
|
|
|
|
|
|
|
|
3.69
|
%
|
|
|
|
|
|
|
|
3.74
|
%
|
1
|
Income
and yield stated at a fully tax equivalent basis using the marginal
corporate Federal tax rate of 35%.
|
2
|
Loan
balances include principal balances on nonaccrual
loans.
|
3
|
Loan
fees included in interest income amounted to $2.0 million,
$2.1 million, and $1.8 million for 2006, 2005, and 2004,
respectively.
|
The
following table is an analysis of the change in net interest
income.
Analysis
of Changes in Net Interest Income (tax equivalent basis)
|
|
|
|
|
|
|
|
|
|
|
|
Variance
|
|
Variance
Attributed to
|
|
Variance
|
|
Variance
Attributed to
|
|
(In
thousands)
|
|
2006/20051
|
|
Volume
|
|
Rate
|
|
2005/20041
|
|
Volume
|
|
Rate
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
investment securities
|
|
$
|
1,542
|
|
$
|
123
|
|
$
|
1,419
|
|
$
|
162
|
|
$
|
(394
|
)
|
$
|
556
|
|
Nontaxable
investment securities2
|
|
|
(141
|
)
|
|
39
|
|
|
(180
|
)
|
|
(302
|
)
|
|
(19
|
)
|
|
(283
|
)
|
Time
deposits with banks, federal funds sold and securities purchased
under
agreements to resell
|
|
|
544
|
|
|
(167
|
)
|
|
711
|
|
|
1,339
|
|
|
473
|
|
|
866
|
|
Loans2
|
|
|
24,846
|
|
|
17,586
|
|
|
7,260
|
|
|
9,116
|
|
|
4,333
|
|
|
4,783
|
|
Total
interest income
|
|
|
26,791
|
|
|
17,581
|
|
|
9,210
|
|
|
10,315
|
|
|
4,393
|
|
|
5,922
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand deposits
|
|
|
1,896
|
|
|
471
|
|
|
1,425
|
|
|
801
|
|
|
2
|
|
|
799
|
|
Savings
deposits
|
|
|
1,862
|
|
|
486
|
|
|
1,376
|
|
|
907
|
|
|
54
|
|
|
853
|
|
Time
deposits
|
|
|
9,666
|
|
|
4,950
|
|
|
4,716
|
|
|
4,040
|
|
|
1,876
|
|
|
2,164
|
|
Federal
funds purchased and securities sold under agreements to
repurchase
|
|
|
1,775
|
|
|
375
|
|
|
1,400
|
|
|
1,280
|
|
|
(137
|
)
|
|
1,417
|
|
Other
borrowed funds
|
|
|
1,824
|
|
|
1,010
|
|
|
814
|
|
|
651
|
|
|
396
|
|
|
255
|
|
Total
interest expense
|
|
|
17,023
|
|
|
7,292
|
|
|
9,731
|
|
|
7,679
|
|
|
2,191
|
|
|
5,488
|
|
Net
interest income
|
|
$
|
9,768
|
|
$
|
10,289
|
|
$
|
(521
|
)
|
$
|
2,636
|
|
$
|
2,202
|
|
$
|
434
|
|
Percentage
change
|
|
|
100.0
|
%
|
|
105.3
|
%
|
|
(5.3
|
)%
|
|
100.0
|
%
|
|
83.5
|
%
|
|
16.5
|
%
|
1
|
The
changes which are not solely due to rate or volume are allocated
on a
percentage basis using the absolute values of rate and volume variances
as
a basis for allocation.
|
2
|
Income
stated at fully tax equivalent basis using the marginal corporate
Federal
tax rate of 35%.
|
Noninterest
Income
Noninterest
income totaled $20.5 million for 2006, an increase of $592 thousand or 3.0%
compared to $19.9 million in 2005. Noninterest income represented 18.1% of
total
revenue at year-end 2006, a decline of 509 basis points from 23.2% for 2005.
The
decrease in noninterest income as a percentage of total income is attributed
to
the makeup of the revenue streams of Citizens Bancshares and Citizens Jessamine
acquisitions, which are more heavily weighted toward interest income. The
increase in noninterest income also reflects a one-time gain of $700 thousand
on
the sale of the Company’s credit card portfolio recorded in the first quarter of
2005. Excluding the effect of the one-time gain on the sale of the credit
card
portfolio in the prior year, noninterest income grew $1.3 million or 6.7%
during
2006 compared to 2005.
The
$592
thousand increase in noninterest income was driven mainly by higher service
charges on deposits of $648 thousand or 7.6% and non-deposit service charges,
commissions, and fees of $372 thousand or 16.6% in the comparison. Both line
items were fueled by the Citizens Bancorp and Citizens Jessamine acquisitions
which added an additional $1.2 million in service charges on deposits and
$386
thousand in non-deposit service charges, commissions, and fees. The additional
$1.2 million in service charges on deposits resulting from these acquisitions
offset declines among our pre-existing locations as follows: overdraft fees
$266
thousand; Commonwealth of Kentucky $253 thousand; and dormant fees $148
thousand. The additional $386 thousand of non-deposit service charges,
commissions, and fees from the acquisitions offset a relatively flat or slight
decline in fees among our pre-existing locations occurring across a broad
range
of line items. The lower fees from the Commonwealth of Kentucky is closely
related to the lower correspondent bank fees discussed under the caption
“Noninterest Expense” below and is attributed to lower volume.
Trust
income was $1.8 million for 2006, an increase of $174 thousand or 10.8% compared
to 2005. The increase is mainly attributed the Citizens Bancorp acquisition,
which accounted for $134 thousand of the increase. Income from company-owned
life insurance was up $154 thousand or 13.0%. Citizens Bancorp accounted
for
$114 thousand of the increase with the remaining attributed mainly to higher
crediting rates on the underlying investments.
A
net
loss of $195 thousand was recorded on the sale of available for sale investment
securities in the current year and is a result of periodic sales of securities
for asset/liability management. Allotment processing fees were $2.6 million
in
2006, a decline of $55 thousand or 2.1% compared to a year earlier. The decrease
is attributed to procedural changes and volume losses related to Hurricane
Katrina beginning late during the third quarter of 2005. Other noninterest
income was $744 thousand, a decrease of $438 thousand or 37.1% compared to
2005.
Excluding the $700 thousand one-time gain on the sale of the Company’s credit
card portfolio during 2005, other noninterest income increased $262 thousand
or
54.4% in the comparison mainly due to a gain on the sale of a vacant office
building for $125 thousand.
Noninterest
Expense
Total
noninterest expense was $53.4 million for 2006, an increase of $11.2 million
or
26.6% compared to $42.2 million in 2005. The increase in noninterest expense
occurred across a broad range of line items and is generally attributed to
the
Company’s acquisitions and business expansion efforts during 2006. The most
significant increases were salaries and employee benefits, which increased
$6.6
million or 29.7%, amortization of intangible assets of $1.1 million or 115%,
and
net occupancy expenses of $913 thousand or 33.2%.
The
$6.6
million increase in salaries and employee benefits resulted from an additional
79 average full time equivalent employees (62 from the Citizens Bancorp
acquisition), normal salary increases for existing employees, and an increase
in
benefit costs. Salaries and related payroll taxes increased $5.2 million
or
28.9%, with Citizens Bancorp and Citizens Jessamine accounting for $3.8 million
or 72.9% of the increase. Also included in the higher salaries and related
payroll taxes is an additional $1.3 million related to the initial-year impact
of the adoption of a new paid time off policy for employees. Benefit expenses
increased $1.3 million or 30.1%, a sharp increase that was boosted by $580
thousand related to Citizens Bancorp and Citizens Jessamine acquisitions.
The
increase in benefit expenses is mainly attributed to higher health care costs
in
the current year compared to a year ago. Employee health care claims and
the
number of employees 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 $125 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 $913 thousand or 33.2% and totaled
$3.7
million for 2006. The increase was led by $616 thousand attributed to the
Citizens Bancorp and Citizens Jessamine acquisitions along with normal operating
increases. Equipment expenses were up $342 thousand or 13.2% to $2.9 million
led
by a $404 thousand increase attributed to the Citizens Bancorp and Citizens
Jessamine acquisitions. Data processing and communications expense was up
$819
thousand or 19.7% to $5.0 million. The increase is attributed to the Citizens
Bancorp and Citizens Jessamine acquisitions, which added $880 thousand of
expense and offset an otherwise modest decline of $61 thousand for the current
year. Approximately $570 thousand of the increase in data processing and
communication expense is related to data processing expense at Citizens
Northern, much of which is expected to decline once Citizens Northern’s
processing system is fully converted to the Company’s processing system. Bank
franchise taxes increased $454 thousand or 33.0% led by $313 thousand attributed
to the Citizens Bancorp and Citizens Jessamine acquisitions. Correspondent
bank
fees declined $191 thousand or 21.6% and is correlated to the decline in
service
charges and fees on deposits related to the Commonwealth of Kentucky noted
under
the caption “Noninterest Income” above. Amortization of intangibles was up $1.1
million or 115% resulting from additional core deposit intangible amortization
at Citizens Northern and Citizens Jessamine of $1.3 million. Other noninterest
expenses were $8.3 million, an increase of $1.2 million or 16.4% compared
to the
prior year. The increase in other noninterest expenses was mainly attributed
to
the Citizens Bancorp and Citizens Jessamine acquisitions.
Income
Tax
Income
tax expense for 2006 was $3.4 million, a decrease of $431 thousand or 11.4%
from
the previous year. The effective tax rate was 19.7% for the current year,
a
decline of 96 basis points from 20.7% in 2005. The decrease in the effective
tax
rate is due to lower revenues from taxable sources and an increase in revenue
from nontaxable insurance activities.
Income
From Discontinued Operations
Income
from discontinued operations, net of tax, was $7.7 million for 2006, an increase
of $6.5 million compared to $1.2 million in 2005. Income from operations
for
2006 was $1.3 million, up $50 thousand or 3.9% from 2005. The gain on disposal
of discontinued operations was $6.4 million, net of tax, during 2006. Basic
and
diluted income per share from discontinued operations was $1.03 and $1.02,
respectively, for 2006, an increase of $.85 and $.84 compared to $.18 a year
earlier. The increase in basic and diluted earning per share from discontinued
operations is primarily attributed to the gain on disposal in the current
year.
FINANCIAL
CONDITION
Total
assets related to continuing operations were $1.8 billion at December 31,
2006,
up $294 million or 19.2% from the prior year-end. The composition of the
Company’s significant assets changed as follows: a $25.8 million or 19.7%
increase in cash and cash equivalents; a $234 million or 24.6% increase in
net
loans; and a $14.4 million or 50.6% increase in goodwill. The changes within
the
asset groups correlate to the overall funding position of the Company. An
increase in primary funding sources was led by a $263 million or 22.1% increase
in deposits and an increase in FHLB borrowings of $20.0 million. Payment
of the
prior year-end accrued purchase price of Citizens Bancorp of $21.8 million
was
offset primarily by a $17.5 million decline in federal funds sold and securities
purchased under agreements to resell. Shareholders’ equity increased $24.2
million or 15.7% to $178 million at year-end 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 from continuing operations were $1.6 billion
for
2006, an increase of $285 million or 21.6% from year-end 2005 mainly due
to the
Citizens Bancorp and Citizens Jessamine acquisitions. Average earning assets,
primarily loans and securities, were $1.4 billion for 2006, an increase of
$244
million or 20.8% compared to 2005. Average earning assets represent 88.4%
of
total average assets from continuing operations on December 31, 2006, a decrease
of 55 basis points compared to 88.9% at year-end 2005.
Loans
Loans,
net of unearned income, totaled $1.2 billion on December 31, 2006, an increase
of $235 million or 24.4% from $963 million at year-end 2005. Higher balances
were recorded throughout much of the loan portfolio, with the exception of
lease
financing. The Citizens Jessamine acquisition accounted for $122 million
or
51.7% of the increase in loans; the remaining increase is attributed to
internally generated loan growth of $113 million or 11.8% compared to $963
million at year-end 2005. Real estate lending increased $215 million or 31.0%
in
the comparison, led by $97.8 million attributed to Citizens Jessamine. Real
estate mortgage loans make up 61.2% of the total net loans outstanding at
December 31, 2006 and increased $127 million or 21.0% compared to a year
earlier. Real estate construction loans nearly doubled, with Citizens Jessamine
accounting for $30.1 million or 34.1% of the $88.1 million increase from
a year
ago. Commercial, financial, and agricultural loans increased $23.8 million
or
13.7% to $198 million with Citizens Jessamine contributing $19.2 million
or
80.5% of the increase. Installment loans were relatively unchanged at year-end
2006 compared to 2005. Lease financing was $33.5 million at year-end 2006,
a
decline of $4.5 million or 11.9%. On average, loans represented 74.2% of
earning
assets during 2006 compared to 68.6% for 2005. When loan demand declines,
the
available funds are redirected to lower earning temporary investments or
investment securities, which typically involve a decrease in credit risk
and
lower yields.
The
composition of the loan portfolio, net of unearned income, is summarized
in the
table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
December
31,
|
|
2006
|
|
% |
|
2005
|
|
%
|
|
2004
|
|
% |
|
2003
|
|
% |
|
2002
|
|
% |
|
Commercial,
financial, and agricultural
|
|
$
|
197,613
|
|
|
16.5
|
%
|
$
|
173,797
|
|
|
18.1
|
%
|
$
|
119,004
|
|
|
15.3
|
%
|
$
|
99,291
|
|
|
14.7
|
%
|
$
|
98,392
|
|
|
14.8
|
%
|
Real
estate - construction
|
|
|
176,779
|
|
|
14.7
|
|
|
88,693
|
|
|
9.2
|
|
|
62,111
|
|
|
8.0
|
|
|
44,622
|
|
|
6.6
|
|
|
54,177
|
|
|
8.2
|
|
Real
estate mortgage - residential
|
|
|
381,081
|
|
|
31.8
|
|
|
331,508
|
|
|
34.4
|
|
|
280,869
|
|
|
36.2
|
|
|
245,737
|
|
|
36.4
|
|
|
229,990
|
|
|
34.7
|
|
Real
estate mortgage - farmland and other commercial
enterprises
|
|
|
351,793
|
|
|
29.4
|
|
|
274,411
|
|
|
28.5
|
|
|
210,701
|
|
|
27.2
|
|
|
192,541
|
|
|
28.5
|
|
|
182,281
|
|
|
27.5
|
|
Installment
|
|
|
57,116
|
|
|
4.8
|
|
|
56,169
|
|
|
5.8
|
|
|
63,684
|
|
|
8.2
|
|
|
58,274
|
|
|
8.6
|
|
|
61,932
|
|
|
9.3
|
|
Lease
financing
|
|
|
33,454
|
|
|
2.8
|
|
|
37,993
|
|
|
4.0
|
|
|
39,348
|
|
|
5.1
|
|
|
35,372
|
|
|
5.2
|
|
|
36,730
|
|
|
5.5
|
|
Total
|
|
$
|
1,197,836
|
|
|
100.0
|
%
|
$
|
962,571
|
|
|
100.0
|
%
|
$
|
775,717
|
|
|
100.0
|
%
|
$
|
675,837
|
|
|
100.0
|
%
|
$
|
663,502
|
|
|
100.0
|
%
|
The
following table presents commercial, financial, and agricultural loans and
real
estate construction loans outstanding at December 31, 2006 which, based on
remaining scheduled repayments of principal, are due in the periods
indicated.
Loan
Maturities
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
After
One But
|
|
After
|
|
|
|
(In
thousands)
|
|
One
Year
|
|
Within
Five Years
|
|
Five
Years
|
|
Total
|
|
Commercial,
financial, and agricultural
|
|
$
|
89,589
|
|
$
|
58,312
|
|
$
|
49,712
|
|
$
|
197,613
|
|
Real
estate - construction
|
|
|
120,894
|
|
|
47,883
|
|
|
8,002
|
|
|
176,779
|
|
Total
|
|
$
|
210,483
|
|
$
|
106,195
|
|
$
|
57,714
|
|
$
|
374,392
|
|
The
table
below presents commercial, financial, and agricultural loans and real estate
construction loans outstanding at December 31, 2006 that are due after one
year,
classified according to sensitivity to changes in interest rates.
Interest
Sensitivity
|
|
|
|
|
|
|
|
Fixed
|
|
Variable
|
|
(In
thousands)
|
|
Rate
|
|
Rate
|
|
Due
after one but within five years
|
|
$
|
60,426
|
|
$
|
45,769
|
|
Due
after five years
|
|
|
14,787
|
|
|
42,927
|
|
Total
|
|
$
|
75,213
|
|
$
|
88,696
|
|
The
Company’s loan portfolio is subject to varying degrees of credit risk. Credit
risk is mitigated by diversification within the portfolio, limiting exposure
to
any single customer or industry, standard lending policies and underwriting
criteria, and collateral requirements. The Company maintains policies and
procedures to ensure that the granting of credit is done in a sound and
consistent manner. This includes policies on a company-wide basis that require
certain minimum standards to be maintained. However, the policies also permit
the individual subsidiary companies authority to adopt standards that are
no
less stringent than those included in the company-wide policies. Credit
decisions are made at the subsidiary bank level under guidelines established
by
policy. The Company’s internal audit department performs loan reviews at each
subsidiary bank during the year. This loan review evaluates loan administration,
credit quality, documentation, compliance with Company loan standards, and
the
adequacy of the allowance for loan losses on a consolidated and subsidiary
basis.
The
provision for loan losses represents charges made to earnings to maintain
an
allowance for loan losses at an adequate level based on credit losses
specifically identified in the loan portfolio, as well as management’s best
estimate of probable loan losses in the remainder of the portfolio at the
balance sheet date. The allowance for loan losses is a valuation allowance
increased by the provision for loan losses and decreased by net charge-offs.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are
credited to the allowance.
Management
estimates the allowance balance required using a risk-rated methodology.
Many
factors are considered when estimating the allowance. These include, but
are not
limited to, past loan loss experience, an assessment of the financial condition
of individual borrowers, a determination of the value and adequacy of underlying
collateral, the condition of the local economy, an analysis of the levels
and
trends of the loan portfolio, and a review of delinquent and classified
loans.
The
allowance for loan losses consists of specific and general components. The
specific component relates to loans that are individually classified as impaired
or loans otherwise classified as substandard or doubtful. The general component
covers non-classified loans and is based on historical loss experience adjusted
for current risk factors. Allocations of the allowance may be made for specific
loans, but the entire allowance is available for any loan that, in management’s
judgment, should be charged off. Actual loan losses could differ significantly
from the amounts estimated by management.
The
risk-rated methodology includes segregating watch list and past due loans
from
the general portfolio and allocating specific reserves to these loans depending
on their status. For example, watch list loans, which may be identified by
the
internal loan review risk-rating system or by regulatory examiner
classification, are assigned a certain loss percentage while loans past due
30
days or more are assigned a different loss percentage. Each of these percentages
considers past experience as well as current factors. The remainder of the
general loan portfolio is segregated into three components having similar
risk
characteristics as follows: commercial loans, consumer loans, and real estate
loans. Each of these components is assigned a loss percentage based on their
respective 12-quarter historical loss percentage. Additional allocations
to the
allowance may then be made for subjective factors, such as those mentioned
above, as determined by senior managers who are knowledgeable about these
matters.
While
management considers the allowance for loan losses to be adequate based on
the
information currently available, additional adjustments to the allowance
may be
necessary due to changes in the factors noted above. Borrowers may experience
difficulty in periods of economic deterioration, and the level of nonperforming
loans, charge-offs, and delinquencies could rise and require additional
increases in the provision. Also, regulatory agencies, as an integral part
of
their examinations, periodically review the allowance for loan losses. These
reviews could result in additional adjustments to the provision based upon
their
judgments about relevant information available during their
examination.
The
provision for loan losses was $965 thousand in 2006, an increase of $343
thousand or 55.1% compared to $622 thousand for 2005. Total net charge-offs
for
the Company decreased $905 thousand or 45.1% for year-end 2006 compared to
2005
and were as follows for 2006: commercial, financial, and agricultural loans
$224
thousand, real estate lending $119 thousand, installment loans $545 thousand,
and lease financing $213 thousand. The decrease in net charge-offs for 2006
compared to 2005 were as follows: commercial, financial, and agriculture
$8
thousand or 3.4%; real estate lending $103 thousand or 46.4%; installment
loans
$449 thousand or 45.2%; and lease financing $345 thousand or 61.8%. The decline
in net charge-offs on installment loans is attributed to a higher amount
during
2005
related to the acquisition of Citizens Georgetown during 2004 along with
an
unusually high volume of lower dollar consumer loans charged-off at one of
our
bank subsidiaries during 2005. The decrease in net charge-offs related to
lease
financing is mainly attributed to a high dollar single credit in the
manufacturing industry that was charged-off during 2005. Net charge-offs
equaled
0.1% of average loans for 2006, a decline of 15 basis points compared to
the
prior year-end. The allowance for loan losses, which included an increase
of
$1.1 million as a result of the Citizens Bancshares acquisition, was $12.0
million at year-end 2006 and represented 1.0% of loans net of unearned income
at
year-end 2006 compared to 1.1% at year-end 2005. The allowance for loan losses
as a percentage of nonperforming loans was 278% and 238% at year-end 2006
and
2005, respectively. Management continues to emphasize collection efforts
and
evaluation of risks within the portfolio. The composition of the Company’s loan
portfolio continues to be diverse with no significant concentration to any
individual or industry.
The
table
below summarizes the loan loss experience for the past five years.
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31, (In thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Balance
of allowance for loan losses at beginning of year
|
|
$
|
11,069
|
|
$
|
11,043
|
|
$
|
10,088
|
|
$
|
9,931
|
|
$
|
9,570
|
|
Acquisition
of Citizens National Bancshares
|
|
|
1,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Citizens Bancorp, Inc.
|
|
|
|
|
|
1,410
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Citizens Bank (Kentucky), Inc.
|
|
|
|
|
|
|
|
|
2,005
|
|
|
|
|
|
|
|
Loans
charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial, and agricultural
|
|
|
486
|
|
|
301
|
|
|
678
|
|
|
171
|
|
|
336
|
|
Real
estate
|
|
|
200
|
|
|
288
|
|
|
462
|
|
|
650
|
|
|
2,668
|
|
Installment
loans to individuals
|
|
|
839
|
|
|
1,254
|
|
|
1,115
|
|
|
898
|
|
|
949
|
|
Lease
financing
|
|
|
254
|
|
|
602
|
|
|
113
|
|
|
385
|
|
|
144
|
|
Total
loans charged off
|
|
|
1,779
|
|
|
2,445
|
|
|
2,368
|
|
|
2,104
|
|
|
4,097
|
|
Recoveries
of loans previously charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial, and agricultural
|
|
|
262
|
|
|
69
|
|
|
119
|
|
|
73
|
|
|
62
|
|
Real
estate
|
|
|
81
|
|
|
66
|
|
|
89
|
|
|
47
|
|
|
71
|
|
Installment
loans to individuals
|
|
|
294
|
|
|
260
|
|
|
229
|
|
|
227
|
|
|
226
|
|
Lease
financing
|
|
|
41
|
|
|
44
|
|
|
25
|
|
|
19
|
|
|
5
|
|
Total
recoveries
|
|
|
678
|
|
|
439
|
|
|
462
|
|
|
366
|
|
|
364
|
|
Net
loans charged off
|
|
|
1,101
|
|
|
2,006
|
|
|
1,906
|
|
|
1,738
|
|
|
3,733
|
|
Additions
to allowance charged to expense
|
|
|
965
|
|
|
622
|
|
|
856
|
|
|
1,895
|
|
|
4,094
|
|
Balance
at end of year
|
|
$
|
11,999
|
|
$
|
11,069
|
|
$
|
11,043
|
|
$
|
10,088
|
|
$
|
9,931
|
|
Average
loans net of unearned income
|
|
$
|
1,051,002
|
|
$
|
805,014
|
|
$
|
735,697
|
|
$
|
663,442
|
|
$
|
634,985
|
|
Ratio
of net charge-offs during year to average loans, net of unearned
income
|
|
|
.10
|
%
|
|
.25
|
%
|
|
.26
|
%
|
|
.26
|
%
|
|
.59
|
%
|
The
following table presents an estimate of the allocation of the allowance for
loan
losses by type for the date indicated. Although specific allocations exist,
the
entire allowance is available to absorb losses in any particular
category.
Allowance
For Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
December
31, (In thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Commercial,
financial, and agricultural
|
|
$
|
2,223
|
|
$
|
2,840
|
|
$
|
2,108
|
|
$
|
2,068
|
|
$
|
3,436
|
|
Real
estate
|
|
|
6,497
|
|
|
5,849
|
|
|
6,206
|
|
|
5,560
|
|
|
4,517
|
|
Installment
loans to individuals
|
|
|
2,316
|
|
|
1,601
|
|
|
1,634
|
|
|
1,478
|
|
|
1,550
|
|
Lease
financing
|
|
|
963
|
|
|
779
|
|
|
1,095
|
|
|
982
|
|
|
428
|
|
Total
|
|
$
|
11,999
|
|
$
|
11,069
|
|
$
|
11,043
|
|
$
|
10,088
|
|
$
|
9,931
|
|
Nonperforming
assets for the Company include nonperforming loans, other real estate owned,
and
other foreclosed assets. Nonperforming loans consist of nonaccrual loans,
loans
past due 90 days on which interest is still accruing, and restructured loans.
Generally, the accrual of interest on loans is discontinued when it is
determined that the collection of interest or principal is doubtful, or when
a
default of interest or principal has existed 90 days or more, unless such
loan
is well secured and in the process of collection.
Nonperforming
assets totaled $9.4 million at year-end 2006, a decrease of $4.1 million
or
30.1% compared to 2005. The decrease is primarily due to a $3.8 million or
42.7%
decline in other real estate owned and $334 thousand or 7.2% lower nonperforming
loans. The decrease in other real estate owned includes liquidation during
2006
of $4.9 million of the underlying real estate collateral that previously
secured
loans to a financially troubled builder. The decline in nonperforming loans
includes lower nonaccrual loans of $807 thousand or 35.6%, partially offset
by
$473 thousand or 19.8% higher balance of loans past due 90 days or more and
still accruing. 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 three individual credits
totaling $1.3 million and offset declines throughout much of the portfolio.
Nonperforming loans represent .4% of loans net of unearned income at year-end
2006, a decrease of one basis point from .5% compared to year-end 2005.
Information pertaining to nonperforming loans and assets is presented in
the
table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Loans
accounted for on nonaccrual basis
|
|
$
|
1,462
|
|
$
|
2,269
|
|
$
|
4,990
|
|
$
|
4,823
|
|
$
|
15,474
|
|
Loans
past due 90 days or more and still accruing
|
|
|
2,856
|
|
|
2,383
|
|
|
2,831
|
|
|
3,235
|
|
|
3,558
|
|
Total
nonperforming loans
|
|
|
4,318
|
|
|
4,652
|
|
|
7,821
|
|
|
8,058
|
|
|
19,032
|
|
Other
real estate owned
|
|
|
5,031
|
|
|
8,786
|
|
|
3,719
|
|
|
1,662
|
|
|
282
|
|
Other
foreclosed assets
|
|
|
54
|
|
|
21
|
|
|
32
|
|
|
218
|
|
|
60
|
|
Total
nonperforming assets
|
|
$
|
9,403
|
|
$
|
13,459
|
|
$
|
11,572
|
|
$
|
9,938
|
|
$
|
19,374
|
|
Temporary
Investments
Temporary
investments consist of interest bearing deposits in other banks and federal
funds sold and securities purchased under agreements to resell. The Company
uses
these funds in the management of liquidity and interest rate sensitivity.
At
December 31, 2006, temporary investments were $41.2 million, a decrease of
$18.3
million or 30.8% compared to $59.5 million at year-end 2005. In 2006, temporary
investments averaged $62.4 million, a decline of $5.8 million or 8.6% from
year-end 2005. The decrease is primarily a result of the Company’s net funding
position, which includes, but is not limited to, the following: a $21.8 million
cash payment during the first quarter of 2006 for the purchase of Citizens
Bancorp; a $15.3 million cash payment for the purchase of Citizens Jessamine;
proceeds from the sale of KBC of $19.9 million; and higher loan demand and
increased deposits. Temporary investments are reallocated as loan demand
and
other investment alternatives present the opportunity.
Investment
Securities
The
investment securities portfolio is comprised primarily of U.S.
government-sponsored agency securities, mortgage-backed securities, and
tax-exempt securities of states and political subdivisions. Total investment
securities were $334 million on December 31, 2006, an increase of $5.6 million
or 1.7% from year-end 2005. The increase in investment securities was boosted
by
an additional $13.4 million outstanding at year-end 2006 attributed to the
Citizens Jessamine acquisition.
The
funds
made available from maturing or called bonds have been redirected as necessary
to fund higher yielding loan growth, reinvested to purchase additional
investment securities, or otherwise employed to improve the composition of
the
balance sheet. The purchase of nontaxable obligations of states and political
subdivisions is one of the primary means of managing the Company’s tax position.
The impact of the alternative minimum tax related to the Company’s ability to
acquire tax-free obligations at an attractive yield is routinely
monitored.
Investment
securities averaged $304 million in total for the current year, up $4.0 million
or 1.3%. The increase in average investment securities occurred almost entirely
in the taxable portfolio. The Company had a net unrealized loss on available
for
sale investment securities of $2.0 million at December 31, 2006 compared
to a
net unrealized loss of $2.7 million at year-end 2005. The $678 thousand
improvement in the current period is due primarily to the impact of changing
economic conditions. In addition, sector and maturity allocation for the
reinvestment of matured or called bonds allowed for a decrease in the
portfolio’s duration. Given the year over year change in market interest rates,
this decrease in duration brought the portfolio closer to par
value.
On
December 31, 2006, available for sale securities made up 97.7% of the total
investment securities, up from 95.9% from a year earlier. U.S.
government-sponsored agencies were $142 million and $124 million at year-end
2006 and 2005, respectively. This represents 43.4% of the total available
for
sale securities and 42.4% of the total portfolio at year-end 2006. At year-end
2005, U.S. Government-sponsored agencies made up 39.3% of the total available
for sale securities and 37.6% of the total portfolio. Obligations of states
and
political subdivisions in the available for sale and held to maturity portfolio
were $88.1 million and $7.8 million, respectively at December 31, 2006. This
represents 27.0% and 100% of the available for sale and held to maturity
portfolio, respectively. Mortgage-backed securities in the available for
sale
portfolio were $86.7 million at year-end 2006, a decrease of $11.3 million
or
11.5% from year-end 2005. Mortgage-backed securities accounted for 26.6%
and
31.1% of the available for sale securities portfolio at December 31, 2006
and
2005, respectively.
The
Company realized a net loss of $195 thousand from the sale of available for
sale
investment securities during 2006, an increase of $192 thousand compared
to a
net realized loss of $3 thousand during 2005. The increase in the net loss
on
the
sale
of available for sale investment securities was due to higher sales activity
from normal asset/liability management.
The
following table summarizes the carrying values of investment securities on
December 31, 2006, 2005, and 2004. The investment securities are divided
into
available for sale and held to maturity securities. Available for sale
securities are carried at the estimated fair value and held to maturity
securities are carried at amortized cost.
|
|
|
|
|
|
|
|
December
31,
|
|
2006
|
|
2005
|
|
2004
|
|
(In
thousands)
|
|
Available
for
Sale
|
|
Held
to
Maturity
|
|
Available
for
Sale
|
|
Held
to
Maturity
|
|
Available
for
Sale
|
|
Held
to
Maturity
|
|
Obligations
of U.S. government-sponsored agencies
|
|
$
|
141,832
|
|
|
|
|
$
|
123,684
|
|
|
|
|
$
|
109,517
|
|
|
|
|
Obligations
of states and political subdivisions
|
|
|
88,147
|
|
$
|
7,788
|
|
|
86,031
|
|
$
|
13,610
|
|
|
81,154
|
|
$
|
17,885
|
|
Mortgage-backed
securities
|
|
|
86,716
|
|
|
|
|
|
98,025
|
|
|
|
|
|
108,772
|
|
|
|
|
U.S.
Treasury securities
|
|
|
484
|
|
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
Money
market mutual funds
|
|
|
1,396
|
|
|
|
|
|
925
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
7,910
|
|
|
|
|
|
6,298
|
|
|
|
|
|
5,222
|
|
|
|
|
Total
|
|
$
|
326,485
|
|
$
|
7,788
|
|
$
|
315,067
|
|
$
|
13,610
|
|
$
|
304,665
|
|
$
|
17,885
|
|
The
following table presents an analysis of the contractual maturity and tax
equivalent weighted average interest rates of investment securities at December
31, 2006. For purposes of this analysis, available for sale securities are
stated at fair value and held to maturity securities are stated at amortized
cost. Equity securities in the available for sale portfolio consist primarily
of
restricted FHLB and Federal Reserve Board stocks, which have no stated maturity
and are not included in the maturity schedule that follows.
Available
for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
One But
|
|
After
Five But
|
|
|
|
|
|
Within
One Year
|
|
Within
Five Years
|
|
Within
Ten Years
|
|
After
Ten Years
|
|
(In
thousands)
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Obligations
of U.S. government-sponsored agencies
|
|
$
|
88,317
|
|
|
4.8
|
%
|
$
|
43,857
|
|
|
4.4
|
%
|
$
|
8,675
|
|
|
5.3
|
%
|
$
|
983
|
|
|
5.4
|
%
|
Obligations
of states and political subdivisions
|
|
|
805
|
|
|
7.0
|
|
|
25,116
|
|
|
6.7
|
|
|
52,785
|
|
|
5.0
|
|
|
9,441
|
|
|
6.4
|
|
Mortgage-backed
securities
|
|
|
19,941
|
|
|
4.5
|
|
|
19,290
|
|
|
4.8
|
|
|
31,199
|
|
|
4.7
|
|
|
16,286
|
|
|
5.1
|
|
U.S.
Treasury securities
|
|
|
151
|
|
|
5.1
|
|
|
333
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market mutual funds
|
|
|
1,396
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
110,610
|
|
|
4.7
|
%
|
$
|
88,596
|
|
|
5.3
|
%
|
$
|
92,659
|
|
|
4.9
|
%
|
$
|
26,710
|
|
|
5.7
|
%
|
Held
to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
One But
|
|
After
Five But
|
|
|
|
|
|
Within
One Year
|
|
Within
Five Years
|
|
Within
Ten Years
|
|
After
Ten Years
|
|
(In
thousands)
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Obligations
of states and political subdivisions
|
|
$
|
3,778
|
|
|
6.9
|
%
|
$
|
2,885
|
|
|
6.8
|
%
|
$
|
0
|
|
|
0
|
%
|
$
|
1,125
|
|
|
6.3
|
%
|
The
calculation of the weighted average interest rates for each category is based
on
the weighted average costs of the securities. The weighted average tax rates
on
exempt states and political subdivisions are computed based on the marginal
corporate Federal tax rate of 35%.
Deposits
The
Company’s primary source of funding for its lending and investment activities
results from its customer deposits, which consist of noninterest and interest
bearing demand, savings, and time deposits. On December 31, 2006, deposits
were
$1.5 billion, an increase of $263 million or 22.1% from year-end 2005. The
increase in deposits was led by additional year-end 2006 balances at Citizens
Jessamine of $136 million along with an increase of $127 million or 10.7%
from
pre-existing banking locations. The increase in the deposit portfolio was
made
up of a $203 million or 20.2% increase in interest bearing deposits combined
with a $59.7 million or 32.6% increase in noninterest bearing deposits. The
increase in interest bearing deposits include higher time deposits of $185
million or 35.1%, higher savings deposits of $15.6 million or 7.4%, and higher
interest bearing demand deposits of $2.9 million or 1.1%. The increase in
each
deposit category, particularly savings deposits, was positively impacted
by the
Citizens Jessamine acquisition, which added $114 million in interest bearing
deposits at year-end 2006 as follows: time deposits $65.6; savings deposits
$39.8 million; and interest bearing demand $8.5 million. End of period
noninterest bearing deposits grew mainly as a result of $47.1 million higher
deposits related to the Commonwealth of Kentucky and an additional $22.0
million
resulting from the Citizens Jessamine acquisition.
Average
total deposits were $1.3 billion for 2006, an increase of $227 million or
22.0%
compared to 2005. Increases in average deposits were consistent throughout
the
entire deposit portfolio as follows: noninterest bearing demand of $16.8
million
or 9.4%; interest bearing demand of $45.9 million or 21.4%; savings accounts
of
$30.6 million or 16.8%; and time deposits of $134 million or 29.5%. The Citizens
Northern and Citizens Jessamine acquisitions boosted average deposits by
$166
million and $35.0 million, respectively, as follows: noninterest bearing
demand
$16.4 million and $5.9 million; interest bearing demand $45.5 million and
$2.0
million; savings deposits $28.0 million and $9.9 million; and time deposits
$76.0 million and $17.2 million.
During
2006, total average interest bearing deposits were $1.1 billion, an increase
of
$210 million or 24.7% from $850 million for 2005. Average noninterest bearing
deposits were $196 million, an increase of $16.8 million or 9.4% from $179
million in the prior year.
A
summary
of average balances and rates paid on deposits follows.
|
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
(In
thousands)
|
|
Average
Balance
|
|
Average
Rate
|
|
Average
Balance
|
|
Average
Rate
|
|
Average
Balance
|
|
Average
Rate
|
|
Noninterest
bearing demand
|
|
$
|
195,982
|
|
|
|
|
$
|
179,197
|
|
|
|
|
$
|
169,642
|
|
|
|
|
Interest
bearing demand
|
|
|
260,417
|
|
|
1.45
|
%
|
|
214,548
|
|
|
.88
|
%
|
|
214,150
|
|
|
.50
|
%
|
Savings
|
|
|
212,948
|
|
|
2.08
|
|
|
182,337
|
|
|
1.41
|
|
|
176,723
|
|
|
.94
|
|
Time
|
|
|
587,047
|
|
|
4.15
|
|
|
453,419
|
|
|
3.24
|
|
|
390,195
|
|
|
2.73
|
|
Total
|
|
$
|
1,256,394
|
|
|
2.59
|
%
|
$
|
1,029,501
|
|
|
1.85
|
%
|
$
|
950,710
|
|
|
1.41
|
%
|
Maturities
of time deposits of $100,000 or more outstanding at December 31, 2006 are
summarized as follows.
|
|
|
|
(In
thousands)
|
|
Amount
|
|
3
months or less
|
|
$
|
35,542
|
|
Over
3 through 6 months
|
|
|
37,231
|
|
Over
6 through 12 months
|
|
|
89,610
|
|
Over
12 months
|
|
|
52,986
|
|
Total
|
|
$
|
215,369
|
|
Short-term
Borrowings
Short-term
borrowings primarily consist of federal funds purchased and securities sold
under agreements to repurchase with year-end balances of $67.9 million, $71.3
million, and $59.6 million in 2006, 2005, and 2004, respectively. Such
borrowings are generally on an overnight basis. Other short-term borrowings
consist of FHLB borrowings totaling $8.0 million, 0, and $1.0 million at
year-end 2006, 2005, and 2004, respectively, and demand notes issued to the
U.S.
Treasury under the treasury tax and loan note option account totaling $777
thousand, $779 thousand, and $791 thousand in 2006, 2005, and 2004 respectively.
A summary of short-term borrowings is as follows.
|
|
|
|
|
|
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Amount
outstanding at year-end
|
|
$
|
76,718
|
|
$
|
72,115
|
|
$
|
61,349
|
|
Maximum
outstanding at any month-end
|
|
|
98,926
|
|
|
166,550
|
|
|
122,671
|
|
Average
outstanding
|
|
|
94,703
|
|
|
82,030
|
|
|
91,053
|
|
Weighted
average rate at year-end
|
|
|
4.55
|
%
|
|
3.89
|
%
|
|
2.09
|
%
|
Weighted
average rate during the year
|
|
|
4.74
|
|
|
3.16
|
|
|
1.44
|
|
Prior
to
2005, substantially all of the Company’s long-term borrowings consisted of FHLB
advances to the Company’s subsidiary banks. These advances are secured by
restricted holdings of FHLB stock that the banks are required to own as well
as
certain mortgage loans as required by the FHLB. Such advances are made pursuant
to several different credit programs, which have their own interest rates
and
range of maturities. Interest rates on FHLB advances are generally fixed
and
range between 2.32% and 7.10%, with a weighted average rate of 4.51%, and
maturities of up to 14 years. Approximately $21.0 million of the total long-term
advances from the FHLB are convertible to a floating interest rate. These
advances may convert to a floating interest rate indexed to three-month LIBOR
only if LIBOR equals or exceeds 7%. At year-end 2006, the three-month LIBOR
was
5.36%. FHLB advances are generally used to increase the Company’s lending
activities and to aid the efforts of asset and liability management by utilizing
various repayment options offered by the FHLB. Long-term advances from the
FHLB
totaled $61.2 million at December 31, 2006, an increase of $12.0 million
or
24.4% from year-end 2005.
In
July
2005, the Company completed two private offerings of trust preferred securities
through two separate Delaware statutory trusts sponsored by the Company.
Farmers
Capital Bank Trust I (“Trust I”) sold $10.0 million of preferred securities and
Farmers Capital Bank Trust II (“Trust II”) sold $15.0 million of preferred
securities (Trust I and Trust II are hereafter collectively referred to as
the
“Trusts”). The proceeds from the offering were used to fund the cash portion of
the Citizens Bancorp acquisition. The Company owns all of the common securities
of each of the Trusts.
The
Trusts used the proceeds from the sale of preferred securities, plus capital
contributed to establish the trusts, to purchase the Company’s subordinated
notes in amounts and bearing terms that parallel the amounts and terms of
the
respective preferred securities. The subordinated notes mature in 2035 and
bear
a floating interest rate (current three-month LIBOR plus 150 basis points
in the
case of the notes held by Trust I and current three-month LIBOR plus 165
basis
points in the case of the notes held by Trust II). Interest on the notes
is
payable quarterly.
The
subordinated notes are redeemable in whole or in part, without penalty, at
the
Company’s option on or after September 30, 2010 and mature on September 30,
2035. The notes are junior in right of payment of all present and future
senior
indebtedness. At December 31, 2005, the balance of the subordinated notes
payable to Trust I and Trust II was $10.3 million and $15.5 million
respectively. The interest rates in effect as of the last determination date
in
2006 were 6.87% and 7.02% for Trust I and Trust II, respectively.
Contractual
Obligations
The
Company is contractually obligated to make payments as follows.
|
|
|
|
|
|
Payments
Due by Period
|
|
Contractual
Obligations (In thousands)
|
|
Total
|
|
Less
Than
One
Year
|
|
One
to Three
Years
|
|
Three
to Five
Years
|
|
More
Than Five
Years
|
|
Long-term
debt
|
|
$
|
61,174
|
|
$
|
20,447
|
|
$
|
20,841
|
|
$
|
5,806
|
|
$
|
14,080
|
|
Subordinated
notes payable
|
|
|
25,774
|
|
|
|
|
|
|
|
|
|
|
|
25,774
|
|
Unfunded
postretirement benefit obligations
|
|
|
4,701
|
|
|
383
|
|
|
813
|
|
|
902
|
|
|
2,603
|
|
Operating
leases
|
|
|
4,494
|
|
|
613
|
|
|
1,017
|
|
|
760
|
|
|
2,104
|
|
Capital
lease obligations
|
|
|
1,044
|
|
|
232
|
|
|
480
|
|
|
332
|
|
|
|
|
Total
|
|
$
|
97,187
|
|
$
|
21,675
|
|
$
|
23,151
|
|
$
|
7,800
|
|
$
|
44,561
|
|
Long-term
FHLB debt represents FHLB advances pursuant to several different credit
programs. Long-term FHLB debt and subordinated notes payable are more fully
described under the caption “Long-Term
Borrowings” above and in Note 8 of the Company’s 2006
audited consolidated financial statements. Payments for borrowings in the
table
above do not include interest. Postretirement benefit obligations are
actuarially determined and estimated based on various assumptions. Estimates
can
vary significantly each year due to changes in significant assumptions. Capital
lease obligations represent amounts relating to the acquisition of data
processing hardware and software. Operating leases include standard business
equipment used in the Company’s day-to-day business as well as the lease of
certain branch sites. Operating lease terms generally range from one to five
years, with the ability to extend certain branch site leases at the Company’s
option. Payments related to leases are based on actual payments specified
in the
underlying contracts.
Effects
of Inflation
The
majority of the Company’s assets and liabilities are monetary in nature.
Therefore, the Company differs greatly from most commercial and industrial
companies that have significant investments in nonmonetary assets, such as
fixed
assets and inventories. However, inflation does have an important impact
on the
growth of assets in the banking industry and on the resulting need to increase
equity capital at higher than normal rates in order to maintain an appropriate
equity to assets ratio. Inflation also affects other noninterest expense,
which
tends to rise during periods of general inflation.
Management
believes the most significant impact on financial and operating results is
the
Company’s ability to react to changes in interest rates. Management seeks to
maintain an essentially balanced position between interest sensitive assets
and
liabilities in order to protect against the effects of wide interest rate
fluctuations.
Market
Risk Management
Market
risk is the risk of loss arising from adverse changes in market prices and
rates. The Company’s market risk is comprised primarily of interest rate risk
created by its core banking activities of extending loans and receiving
deposits. The Company’s success is largely dependent upon its ability to manage
this risk. Interest rate risk is defined as the exposure of the Company’s net
interest income to adverse movements in interest rates. Although the Company
manages other risks, such as credit and liquidity risk,
management
considers interest rate risk to be its most significant risk, which could
potentially have the largest and a material effect on the Company’s financial
condition and results of operations. A sudden and substantial change in interest
rates may adversely impact the Company’s earnings to the extent that the
interest rates earned on assets and paid on liabilities do not change at
the
same speed, to the same extent, or on the same basis. Other events that could
have an adverse impact on the Company’s performance include changes in general
economic and financial conditions, general movements in market interest rates,
and changes in consumer preferences. The Company’s primary purpose in managing
interest rate risk is to effectively invest the Company’s capital and to manage
and preserve the value created by its core banking business.
The
Company has a Corporate Asset and Liability Management Committee (“ALCO”). ALCO
monitors the composition of the balance sheet to ensure comprehensive management
of interest rate risk and liquidity. ALCO also provides guidance and support
to
each ALCO of the Company’s subsidiary banks and is responsible for monitoring
risks on a company-wide basis. ALCO has established minimum standards in
its
asset and liability management policy that each subsidiary bank must adopt.
However, the subsidiary banks are permitted to deviate from these standards
so
long as the deviation is no less stringent than that of the Corporate
policy.
The
Company uses a simulation model as a tool to monitor and evaluate interest
rate
risk exposure. The model is designed to measure the sensitivity of net interest
income and net income to changing interest rates during the next twelve months.
Forecasting net interest income and its sensitivity to changes in interest
rates
requires the Company to make assumptions about the volume and characteristics
of
many attributes, including assumptions relating to the replacement of maturing
earning assets and liabilities. Other assumptions include, but are not limited
to, projected prepayments, projected new volume, and the predicted relationship
between changes in market interest rates and changes in customer account
balances. These effects are combined with the Company’s estimate of the most
likely rate environment to produce a forecast for the next twelve months.
The
forecasted results are then compared to the effect of a gradual 200 basis
point
increase and decrease in market interest rates on the Company’s net interest
income and net income. Because assumptions are inherently uncertain, the
model
cannot precisely estimate net interest income or net income or the effect
of
interest rate changes on net interest income and net income. Actual results
could differ significantly from simulated results.
At
December 31, 2006, the model indicated that if rates were to gradually increase
by 200 basis points over the next twelve months, then net interest income
(TE)
and net income would increase 5.2% and 12.9%, respectively, compared to
forecasted results. The model indicated that if rates were to gradually decrease
by 200 basis points over the next twelve months, then net interest income
(TE)
and net income would decrease 2.3% and 5.6%, respectively, compared to
forecasted results.
In
the
current relatively low interest rate environment, it is not practical or
possible to reduce certain deposit rates by the same magnitude as rates on
earning assets. The average rate paid on some of the Company’s deposits remains
below 2%. This situation magnifies the model’s predicted results when modeling a
decrease in interest rates, as earning assets with higher yields have more
of an
opportunity to reprice at lower rates than lower-rate deposits.
LIQUIDITY
Liquidity
measures the ability to meet current and future cash flow needs as they become
due. For financial institutions, liquidity reflects the ability to meet loan
requests, to accommodate possible outflows in deposits, and to capitalize
on
interest rate market opportunities. A financial institution's ability to
meet
its current financial obligations is dependent upon the structure of its
balance
sheet, its ability to liquidate assets, and its access to alternative sources
of
funds. The Company’s goal is to meet its funding needs by maintaining a level of
liquid funds through its asset/liability management.
The
Company uses a liquidity ratio to help measure its ability to meet its cash
flow
needs. This ratio is monitored by ALCO at both the bank level and on a
consolidated basis. The liquidity ratio is based on current and projected
levels
of sources and uses of funds. This measure is useful in analyzing cash needs
and
formulating strategies to achieve desired results. For example, a low liquidity
ratio could indicate that the Company’s ability to fund loans might become more
difficult. A high liquidity ratio could indicate that the Company may have
a
disproportionate amount of funds in low yielding assets, which is more likely
to
occur during periods of sluggish loan demand. The Company’s liquidity position
was lower at year-end 2006 compared to year-end 2005, but remains within
ALCO
guidelines and considered by management to be at an adequate level.
At
the
Parent Company level, liquidity is primarily affected by the receipt of
dividends from its subsidiary banks (see Note 17 of the
Company’s 2006 audited consolidated financial statements), cash balances
maintained, and borrowings from nonaffiliated sources. The Parent Company’s
primary uses of cash include the payment of dividends to shareholders,
repurchasing its common stock, business acquisitions, interest expense on
borrowings, and paying for general operating expenses.
The
primary source of funds for the Parent Company is the receipt of dividends
from
its subsidiary banks. As of December 31, 2006, combined retained earnings
of the
subsidiary banks were $60.9 million, of which $25.7 million was available
for
the payment of dividends to the Parent Company without obtaining prior approval
from bank regulatory agencies. As a practical matter, payment of future
dividends is also subject to the maintenance of other capital ratio
requirements. Management expects that in the aggregate, its
subsidiary
banks will continue to have the ability to dividend adequate funds to the
Parent
Company. In addition, the Parent Company has a $15.0 million unsecured line
of
credit with an unrelated financial institution available for general corporate
purposes. This line of credit matures on June 5, 2007 and bears interest
at the
three-month LIBOR rate plus 125 basis points.
The
Parent Company had cash balances of $11.1 million at year-end 2006, a decrease
of $21.0 million or 65.4% from the prior year-end. The decrease in cash at
the
Parent Company is due primarily to cash payment to Citizens Bancorp shareholders
of the cash portion of the purchase price that was accrued at year-end 2005.
Other significant cash flows of the Parent Company during 2006 include the
receipt of $9.1 million in dividends from its subsidiaries and the payment
of
$9.6 million in dividend to its shareholders. Each of the Company’s subsidiary
banks continued to maintain “well capitalized” status as defined by the FDIC
subsequent to their dividend payments. The Parent Company also received $19.9
million in proceeds from the disposal of KBC, which was partially offset
by the
cash portion of the purchase of Citizens Jessamine of $15.0
million.
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 December 31, 2006, the Company had $193 million
in
additional borrowing capacity under various FHLB, federal funds, and other
borrowing agreements.
For
the
longer term, the liquidity position is managed by balancing the maturity
structure of the balance sheet. This process allows for an orderly flow of
funds
over an extended period of time. The Company’s ALCOs, both at the bank
subsidiary level and on a consolidated basis, meet regularly and monitors
the
composition of the balance sheet to ensure comprehensive management of interest
rate risk and liquidity.
Liquid
assets consist of cash, cash equivalents, and available for sale investment
securities. At December 31, 2006, liquid assets totaled $483 million, a $37.2
million or 8.3% increase compared to the prior year-end. Cash and equivalents
increased $25.8 million or 19.7% combined with an $11.4 million or 3.6% in
available for sale investment securities in the comparison. The increase
in cash
and cash equivalents is due mainly to the overall net 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 $21.5 million in 2006, an
increase of $2.5 million or 13.0% from $19.0 million in the prior year. Net
cash
used in continuing investing activities was $135 million during 2006 compared
to
$17.9 million a year earlier. The $117 million increase in the comparison
is
attributed mainly to an increase in net loans originated for investment of
$75.0
million and the Company’s acquisition activity that contributed $31.2 million in
the comparison. The most significant item of acquisition activity was the
purchase of Citizens Bancorp. During 2005, the Company purchased Citizens
Bancorp in which $21.8 million of the cash purchase price was paid during
2006.
This transaction resulted in net cash acquired during 2005 of $10.6 million.
The
cash outflow during 2006 combined with the cash inflow during 2005 accounts
for
$32.5 million of the additional acquisition activity in the year-end comparison.
Net cash provided by continuing financing activities totaled $130 million
for
the year 2006 compared to $52.1 million during 2005. This represents an increase
in cash flows of $77.4 million in the comparison and is due primarily to
a net
increase in internally generated deposit activity of $93.8 million partially
offset by an $18.1 million net decrease in federal funds purchased and
securities sold under agreements to repurchase activity during the comparable
periods.
In
January 2007, First Citizens closed on its transaction to acquire the Military
Allotment operation of PNC Bank, National Association in a cash transaction
for
$13.7 million. First Citizens acquired intangible assets in the form of a
customer list and goodwill. It also recorded a core deposit intangible in
connection with receiving approximately $11.0 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.
Information
relating to off-balance sheet arrangements, which for the Company comprise
of
commitments to extend credit and standby letters of credit, is disclosed
in Note 14 of the Company’s 2006 audited consolidated financial
statements. These transactions are entered into in the ordinary course of
providing traditional banking services and are considered in managing the
Company’s liquidity position. The Company does not expect these commitments to
significantly affect the liquidity position in future periods. The Company
has
not entered into any contracts for financial derivative instruments such
as
futures, swaps, options, or similar instruments.
CAPITAL
RESOURCES
Shareholders’
equity was $178 million on December 31, 2006 compared to $154 million on
December 31, 2005. This represents an increase of $24.2 million or 15.7%
in the
year-end comparisons. In addition to net income of $21.4 million, other
significant changes in shareholders’ equity during 2006 included $15.0 million
of common stock issued in connection with the Citizens Jessamine acquisition,
$10.8 million of dividends declared, $1.5 million related to stock option
compensation, and $820 thousand of treasury stock purchases. Accumulated
other
comprehensive income decreased $2.5 million during 2006 and was driven by
the
after-tax effect of $3.1 million related to the implementation of SFAS
No.
158, which records the change in the funded status of the Company’s defined
benefit postretirement benefit plans.
Under
current regulatory requirements, accumulated other comprehensive amounts
related
to the net unrealized gain or loss on securities available for sale and the
funded status of the Company’s defined benefit postretirement benefit plans do
not impact regulatory capital; therefore, they are not included in the
risk-based capital or leverage ratios.
Consistent
with the objective of operating a sound financial organization, the Company’s
goal is to maintain capital ratios well above the regulatory minimum
requirements. The Company's capital ratios as of December 31, 2006, the
regulatory minimums, and the regulatory standard for a well-capitalized
institution are as follows.
|
|
|
|
|
|
|
|
Farmers
Capital
Bank
Corporation
|
|
Regulatory
Minimum
|
|
Tier
1 risk-based
|
|
|
12.23
|
%
|
|
4.00
|
%
|
Total
risk-based
|
|
|
13.17
|
|
|
8.00
|
|
Leverage
|
|
|
8.47
|
|
|
4.00
|
|
The
capital ratios of each subsidiary bank were in excess of the applicable minimum
regulatory capital ratio requirements at December 31, 2006.
The
table
below is an analysis of dividend payout ratios and equity to asset ratios
for
the previous five years.
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Percentage
of dividends declared to income from continuing operations
|
|
|
78.89
|
%
|
|
61.67
|
%
|
|
68.10
|
%
|
|
70.70
|
%
|
|
72.41
|
%
|
|
Percentage
of average shareholders’ equity to average total assets1
|
|
|
10.04
|
|
|
10.19
|
|
|
10.45
|
|
|
10.88
|
|
|
11.23
|
|
1Excludes
assets of discontinued operations.
Share
Buy Back Program
In
January 2003, the Company announced that it intended to purchase up to 300,000
additional shares of its outstanding common stock. This was in addition to
the
stock purchase plans announced in July 2000 and November 1998 to purchase
500,000 and 400,000 shares, respectively. The Company has purchased 149,000
shares pursuant to the January 2003 announcement. Purchases are dependent
on
market conditions and there is no guarantee as to the number of shares to
be
purchased by the Company. Shares would be used for general corporate purposes.
Consistent with the objective of maximizing shareholder value, the Company
considers the purchase of its outstanding shares in a given price range to
be a
good investment of the Company’s available funds. At the time of the most recent
announcement, the Company had purchased nearly all of the previously authorized
shares.
As
of
February 21, 2007, the Company had 2,909 shareholders of record.
Farmers
Capital Bank Corporation's stock is traded on the NASDAQ Stock Market LLC
exchange in the Global Select Market tier, with sales prices reported under
the
symbol: FFKT. The table below lists the stock prices and dividends declared
for
2006 and 2005.
Stock
Prices
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
Dividends
Declared
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
36.98
|
|
$
|
32.40
|
|
$
|
.44
|
|
Third
Quarter
|
|
|
34.59
|
|
|
29.78
|
|
|
.33
|
|
Second
Quarter
|
|
|
32.82
|
|
|
29.25
|
|
|
.33
|
|
First
Quarter
|
|
|
33.54
|
|
|
30.59
|
|
|
.33
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
33.73
|
|
$
|
28.54
|
|
$
|
.33
|
|
Third
Quarter
|
|
|
35.85
|
|
|
30.61
|
|
|
.33
|
|
Second
Quarter
|
|
|
34.64
|
|
|
31.75
|
|
|
.33
|
|
First
Quarter
|
|
|
41.25
|
|
|
32.90
|
|
|
.33
|
|
The
closing price per share of common stock on December 29, 2006, the last trading
day of the Company’s fiscal year, was $34.13. Dividends declared per share were
$1.43 and $1.32 for 2006 and 2005, respectively.
Recently
Issued Accounting Standards
2005
Compared to 2004
Consolidated
net income for 2005 was $15.8 million, an increase of $2.4 million or 17.8%
compared to $13.4 million for 2004. Basic and diluted net income per share
for
2005 was $2.31 and $2.30, respectively. This represents an increase of $.32
or
16.1% and 16.2% on a basic and diluted basis, respectively. Income from
continuing operations for 2005 was $14.5 million, an increase of $1.5 million
or
11.2% from $13.1 million in 2004. Basic and diluted income from continuing
operation for 2005 was $2.13 and $2.12, respectively compared to $1.94 and
$1.93
in 2004. This represents an increase of $.19 or 9.8% on a basic and diluted
basis.
For
2005,
the Company reported a $2.7 million or 6.9% increase in net interest income
and
a lower provision for loan losses of $234 thousand. Net noninterest expense
(noninterest expense in excess of noninterest income) grew $649 thousand
and the
provision for income taxes was up $792 thousand.
The
general trend of the short-term interest rate environment for 2005 was upward
primarily as a result of short-term interest rate increases by the Fed. The
Fed
began to increase the short-term federal funds rate by increments of 25 basis
points during the last half of 2004 that continued into 2005. In all, the
federal funds rate was increased 125 basis points during 2004 and an additional
200 basis points during 2005 and stood at 5.25% at year-end 2005. Longer-term
yields, such as for the 3, 5, 10, and 20 year treasuries, were generally
up at
year-end 2005 compared to year-end 2004, with the 3, 5, and 10 year notes
up
112, 72, and 15 basis points, respectively, while the 20 year bond yield
dipped
24 basis points. For the Company, this has had a tightening effect on net
interest margin and spread in the comparison. Net interest margin for 2005
decreased 5 basis points to 3.69% from 3.74% led by a 15 basis point decline
in
net interest spread to 3.32% from 3.47%.
The
information required by this item is incorporated by reference to Part II,
Item
7 under the caption “Market Risk Management” on
pages 36 and 37 of this Form 10-K.
MANAGEMENT’S
RESPONSIBILITY FOR FINANCIAL REPORTING
The
management of Farmers Capital Bank Corporation has the responsibility for
preparing the accompanying consolidated financial statements and for their
integrity and objectivity. The statements were prepared in accordance with
accounting principles generally accepted in the United States of America.
The
consolidated financial statements include amounts that are based on management's
best estimates and judgments. Management also prepared other information
in the
annual report and is responsible for its accuracy and consistency with the
financial statements.
The
Company’s 2006 consolidated financial statements have been audited by Crowe
Chizek and Company LLC independent accountants. Management has made available
to
Crowe Chizek and Company LLC all financial records and related data, as well
as
the minutes of Boards of Directors’ meetings. Management believes that all
representations made to Crowe Chizek and Company LLC during the audit were
valid
and appropriate.
|
|
G.
Anthony Busseni
|
C.
Douglas Carpenter
|
President
and CEO
|
Senior
Vice President, Secretary, and CFO
|
|
|
|
|
March
12, 2007
|
|
Board
of
Directors and Shareholders
Farmers
Capital Bank Corporation
Frankfort,
Kentucky
We
have
audited the accompanying consolidated balance sheets of Farmers Capital Bank
Corporation as of December 31, 2006 and 2005, and the related consolidated
statements of income, comprehensive income, changes in shareholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2006.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements
based
on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31,
2006
and 2005, and the results of its operations and its cash flows for each of
the
three years in the period ended December 31, 2006, in conformity with U.S.
generally accepted accounting principles.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Farmers Capital Bank
Corporation’s internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control-Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission and
our
report dated March 12, 2007 expressed an adverse opinion.
Crowe
Chizek and Company LLC
Louisville,
Kentucky
March
12,
2007
|
|
|
|
|
|
December
31, (In thousands, except share data)
|
|
2006
|
|
2005
|
|
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
115,640
|
|
$
|
71,496
|
|
Interest
bearing deposits in other banks
|
|
|
1,783
|
|
|
2,565
|
|
Federal
funds sold and securities purchased under agreements to
resell
|
|
|
39,405
|
|
|
56,957
|
|
Total
cash and cash equivalents
|
|
|
156,828
|
|
|
131,018
|
|
Investment
securities:
|
|
|
|
|
|
|
|
Available
for sale, amortized cost of $328,499 (2006) and $317,759
(2005)
|
|
|
326,485
|
|
|
315,067
|
|
Held
to maturity, fair value of $7,849 (2006) and $13,814
(2005)
|
|
|
7,788
|
|
|
13,610
|
|
Total
investment securities
|
|
|
334,273
|
|
|
328,677
|
|
Loans,
net of unearned income
|
|
|
1,197,836
|
|
|
962,571
|
|
Allowance
for loan losses
|
|
|
(11,999
|
)
|
|
(11,069
|
)
|
Loans,
net
|
|
|
1,185,837
|
|
|
951,502
|
|
Premises
and equipment, net
|
|
|
37,775
|
|
|
28,832
|
|
Company-owned
life insurance
|
|
|
32,929
|
|
|
30,049
|
|
Goodwill
|
|
|
42,822
|
|
|
28,437
|
|
Other
intangible assets, net
|
|
|
9,755
|
|
|
7,271
|
|
Assets
of discontinued operations
|
|
|
|
|
|
143,569
|
|
Other
assets
|
|
|
24,147
|
|
|
24,588
|
|
Total
assets
|
|
$
|
1,824,366
|
|
$
|
1,673,943
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
Noninterest
bearing
|
|
$
|
242,938
|
|
$
|
183,248
|
|
Interest
bearing
|
|
|
1,211,882
|
|
|
1,008,403
|
|
Total
deposits
|
|
|
1,454,820
|
|
|
1,191,651
|
|
Federal
funds purchased and securities sold under agreements to
repurchase
|
|
|
67,941
|
|
|
71,336
|
|
Other
short-term borrowings
|
|
|
8,777
|
|
|
779
|
|
Subordinated
notes payable to unconsolidated trusts
|
|
|
25,774
|
|
|
25,774
|
|
Other
long-term debt
|
|
|
62,218
|
|
|
49,517
|
|
Dividends
payable
|
|
|
3,472
|
|
|
2,244
|
|
Accrued
purchase price-Citizens Bancorp, Inc.
|
|
|
|
|
|
21,846
|
|
Liabilities
of discontinued operations
|
|
|
|
|
|
144,409
|
|
Other
liabilities
|
|
|
22,923
|
|
|
12,151
|
|
Total
liabilities
|
|
|
1,645,925
|
|
|
1,519,707
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
Common
stock, par value $.125 per share; 9,608,000 shares
authorized;
9,388,900
and 8,856,249 shares issued at
December
31, 2006 and 2005, respectively
|
|
|
1,174
|
|
|
1,107
|
|
Capital
surplus
|
|
|
56,679
|
|
|
39,829
|
|
Retained
earnings
|
|
|
167,387
|
|
|
156,796
|
|
Treasury
stock, at cost, 1,493,448 and 1,467,351 shares at
December
31, 2006 and 2005, respectively
|
|
|
(42,399
|
)
|
|
(41,579
|
)
|
Accumulated
other comprehensive loss
|
|
|
(4,400
|
)
|
|
(1,917
|
)
|
Total
shareholders’ equity
|
|
|
178,441
|
|
|
154,236
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
1,824,366
|
|
$
|
1,673,943
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$
|
77,303
|
|
$
|
52,579
|
|
$
|
43,872
|
|
Interest
on investment securities:
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
9,025
|
|
|
7,483
|
|
|
7,321
|
|
Nontaxable
|
|
|
3,657
|
|
|
3,778
|
|
|
3,739
|
|
Interest
on deposits in other banks
|
|
|
53
|
|
|
61
|
|
|
17
|
|
Interest
on federal funds sold and securities purchased under agreements
to
resell
|
|
|
2,302
|
|
|
1,750
|
|
|
347
|
|
Total
interest income
|
|
|
92,340
|
|
|
65,651
|
|
|
55,296
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
32,554
|
|
|
19,130
|
|
|
13,381
|
|
Interest
on federal funds purchased and securities sold under agreements
to
repurchase
|
|
|
4,348
|
|
|
2,573
|
|
|
1,293
|
|
Interest
on subordinated notes payable to unconsolidated trusts
|
|
|
1,747
|
|
|
623
|
|
|
|
|
Interest
on other borrowed funds
|
|
|
2,783
|
|
|
2,083
|
|
|
2,055
|
|
Total
interest expense
|
|
|
41,432
|
|
|
24,409
|
|
|
16,729
|
|
Net
interest income
|
|
|
50,908
|
|
|
41,242
|
|
|
38,567
|
|
Provision
for loan losses
|
|
|
965
|
|
|
622
|
|
|
856
|
|
Net
interest income after provision for loan losses
|
|
|
49,943
|
|
|
40,620
|
|
|
37,711
|
|
Noninterest
Income
|
|
|
|
|
|
|
|
|
|
|
Service
charges and fees on deposits
|
|
|
9,191
|
|
|
8,543
|
|
|
7,675
|
|
Allotment
processing fees
|
|
|
2,601
|
|
|
2,656
|
|
|
1,124
|
|
Other
service charges, commissions, and fees
|
|
|
2,617
|
|
|
2,245
|
|
|
2,652
|
|
Data
processing income
|
|
|
1,719
|
|
|
1,786
|
|
|
1,709
|
|
Trust
income
|
|
|
1,790
|
|
|
1,616
|
|
|
1,589
|
|
Investment
securities (losses) gains, net
|
|
|
(195
|
)
|
|
(3
|
)
|
|
391
|
|
Gains
on sale of mortgage loans, net
|
|
|
649
|
|
|
653
|
|
|
370
|
|
Income
from company-owned life insurance
|
|
|
1,343
|
|
|
1,189
|
|
|
1,412
|
|
Other
|
|
|
744
|
|
|
1,182
|
|
|
242
|
|
Total
noninterest income
|
|
|
20,459
|
|
|
19,867
|
|
|
17,164
|
|
Noninterest
Expense
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
28,978
|
|
|
22,347
|
|
|
21,074
|
|
Occupancy
expenses, net
|
|
|
3,664
|
|
|
2,751
|
|
|
2,482
|
|
Equipment
expenses
|
|
|
2,929
|
|
|
2,587
|
|
|
2,295
|
|
Data
processing and communications expenses
|
|
|
4,980
|
|
|
4,161
|
|
|
3,962
|
|
Bank
franchise tax
|
|
|
1,831
|
|
|
1,377
|
|
|
1,373
|
|
Correspondent
bank fees
|
|
|
692
|
|
|
883
|
|
|
775
|
|
Amortization
of intangibles
|
|
|
2,009
|
|
|
934
|
|
|
385
|
|
Other
|
|
|
8,294
|
|
|
7,124
|
|
|
6,466
|
|
Total
noninterest expense
|
|
|
53,377
|
|
|
42,164
|
|
|
38,812
|
|
Income
from continuing operations before income taxes
|
|
|
17,025
|
|
|
18,323
|
|
|
16,063
|
|
Income
tax expense from continuing operations
|
|
|
3,360
|
|
|
3,791
|
|
|
2,999
|
|
Income
from continuing operations
|
|
|
13,665
|
|
|
14,532
|
|
|
13,064
|
|
Income
from discontinued operations before income taxes (including gain
on
disposals of $9,873 in 2006)
|
|
|
11,842
|
|
|
1,723
|
|
|
351
|
|
Income
tax expense from discontinued operations (including $3,456 related
to gain
on disposals)
|
|
|
4,135
|
|
|
483
|
|
|
23
|
|
Income
from discontinued operations
|
|
|
7,707
|
|
|
1,240
|
|
|
328
|
|
Net
income
|
|
$
|
21,372
|
|
$
|
15,772
|
|
$
|
13,392
|
|
Net
Income Per Common Share
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations - basic
|
|
$
|
1.82
|
|
$
|
2.13
|
|
$
|
1.94
|
|
Income
from discontinued operations - basic
|
|
|
1.03
|
|
|
.18
|
|
|
.05
|
|
Net
income per common share - basic
|
|
|
2.85
|
|
|
2.31
|
|
|
1.99
|
|
Income
from continuing operations - diluted
|
|
|
1.82
|
|
|
2.12
|
|
|
1.93
|
|
Income
from discontinued operations - diluted
|
|
|
1.02
|
|
|
.18
|
|
|
.05
|
|
Net
income per common share - diluted
|
|
|
2.84
|
|
|
2.30
|
|
|
1.98
|
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,511
|
|
|
6,831
|
|
|
6,737
|
|
Diluted
|
|
|
7,526
|
|
|
6,864
|
|
|
6,780
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
Net
income
|
|
$
|
21,372
|
|
$
|
15,772
|
|
$
|
13,392
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gain (loss) on available for sale securities arising during
the
period on securities held at end of period, net of tax of $306,
$1,410,
and $547, respectively
|
|
|
568
|
|
|
(2,622
|
)
|
|
(1,015
|
)
|
Reclassification
adjustment for prior period unrealized loss (gain) previously reported
in
other comprehensive income recognized during current period, net
of tax of
$22, $3, and $219, respectively
|
|
|
40
|
|
|
5
|
|
|
(407
|
)
|
Other
comprehensive income (loss)
|
|
|
608
|
|
|
(2,617
|
)
|
|
(1,422
|
)
|
Comprehensive
income
|
|
$
|
21,980
|
|
$
|
13,155
|
|
$
|
11,970
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other
|
|
Total
|
|
Years
Ended
|
|
Common
Stock
|
|
Capital
|
|
Retained
|
|
Treasury
Stock
|
|
Comprehensive
|
|
Shareholders’
|
|
December
31, 2006, 2005, and 2004
|
|
Shares
|
|
Amount
|
|
Surplus
|
|
Earnings
|
|
Shares
|
|
Amount
|
|
Income
(Loss)
|
|
Equity
|
|
Balance
at January 1, 2004
|
|
|
8,161
|
|
$
|
1,020
|
|
$
|
18,670
|
|
$
|
145,489
|
|
|
1,445
|
|
$
|
(40,830
|
)
|
$
|
2,122
|
|
$
|
126,471
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
13,392
|
|
|
|
|
|
|
|
|
|
|
|
13,392
|
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,422
|
)
|
|
(1,422
|
)
|
Cash
dividends declared, $1.32 per share
|
|
|
|
|
|
|
|
|
|
|
|
(8,896
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,896
|
)
|
Purchase
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
(178
|
)
|
|
|
|
|
(178
|
)
|
Stock
options exercised, including related tax benefits
|
|
|
70
|
|
|
9
|
|
|
1,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,773
|
|
Shares
issued pursuant to Employee Stock Purchase Plan
|
|
|
3
|
|
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
|
|
Stock
option expense
|
|
|
|
|
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217
|
|
Balance
at December 31, 2004
|
|
|
8,234
|
|
|
1,029
|
|
|
20,744
|
|
|
149,985
|
|
|
1,450
|
|
|
(41,008
|
)
|
|
700
|
|
|
131,450
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
15,772
|
|
|
|
|
|
|
|
|
|
|
|
15,772
|
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,617
|
)
|
|
(2,617
|
)
|
Cash
dividends declared, $1.32 per share
|
|
|
|
|
|
|
|
|
|
|
|
(8,961
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,961
|
)
|
Purchase
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
(571
|
)
|
|
|
|
|
(571
|
)
|
Stock
options exercised, including related tax benefits
|
|
|
31
|
|
|
4
|
|
|
770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
774
|
|
Shares
issued pursuant to Employee Stock Purchase Plan
|
|
|
7
|
|
|
1
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
187
|
|
Shares
issued in connection with the purchase of Citizens Bancorp,
Inc.
|
|
|
584
|
|
|
73
|
|
|
18,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,202
|
|
Balance
at December 31, 2005
|
|
|
8,856
|
|
|
1,107
|
|
|
39,829
|
|
|
156,796
|
|
|
1,467
|
|
|
(41,579
|
)
|
|
(1,917
|
)
|
|
154,236
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
21,372
|
|
|
|
|
|
|
|
|
|
|
|
21,372
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
608
|
|
|
608
|
|
Cash
dividends declared, $1.43 per share
|
|
|
|
|
|
|
|
|
|
|
|
(10,781
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,781
|
)
|
Purchase
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
(820
|
)
|
|
|
|
|
(820
|
)
|
Stock
options exercised, including related tax benefits
|
|
|
60
|
|
|
8
|
|
|
1,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,544
|
|
Shares
issued pursuant to Employee Stock Purchase Plan
|
|
|
8
|
|
|
1
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
223
|
|
Stock
option expense
|
|
|
|
|
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154
|
|
Shares
issued in connection with the purchase of Citizens National Bancshares,
Inc.
|
|
|
464
|
|
|
58
|
|
|
14,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,996
|
|
Adjustment
to initially apply SFAS No. 158, net of tax of $1,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,091
|
)
|
|
(3,091
|
)
|
Balance
at December 31, 2006
|
|
|
9,388
|
|
$
|
1,174
|
|
$
|
56,679
|
|
$
|
167,387
|
|
|
1,493
|
|
$
|
(42,399
|
)
|
$
|
(4,400
|
)
|
$
|
178,441
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
Years
Ended December 31, (In thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
21,372
|
|
$
|
15,772
|
|
$
|
13,392
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
5,826
|
|
|
4,085
|
|
|
3,190
|
|
Net
amortization (accretion) of investment security premiums and
discounts:
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
(424
|
)
|
|
323
|
|
|
1,294
|
|
Held
to maturity
|
|
|
(25
|
)
|
|
(39
|
)
|
|
(38
|
)
|
Provision
for loan losses
|
|
|
965
|
|
|
622
|
|
|
856
|
|
Deferred
income tax (benefit) expense
|
|
|
(1,848
|
)
|
|
(194
|
)
|
|
965
|
|
Noncash
stock option expense
|
|
|
125
|
|
|
|
|
|
196
|
|
Mortgage
loans originated for sale
|
|
|
(29,539
|
)
|
|
(35,456
|
)
|
|
(20,243
|
)
|
Proceeds
from sale of mortgage loans
|
|
|
26,973
|
|
|
35,849
|
|
|
19,052
|
|
Gains
on sale of mortgage loans, net
|
|
|
(649
|
)
|
|
(653
|
)
|
|
(370
|
)
|
Gain
on sale of credit card portfolio
|
|
|
|
|
|
(700
|
)
|
|
|
|
(Gain)
loss on sale of premises and equipment
|
|
|
(174
|
)
|
|
14
|
|
|
16
|
|
Loss
(gain) on sale of available for sale investment securities,
net
|
|
|
195
|
|
|
3
|
|
|
(391
|
)
|
Increase
in accrued interest receivable
|
|
|
(3,450
|
)
|
|
(1,705
|
)
|
|
(788
|
)
|
Income
from company-owned life insurance
|
|
|
(1,301
|
)
|
|
(1,162
|
)
|
|
(1,401
|
)
|
Decrease
(increase) in other assets
|
|
|
6,157
|
|
|
2,869
|
|
|
(2,304
|
)
|
Increase
in accrued interest payable
|
|
|
2,594
|
|
|
618
|
|
|
375
|
|
Increase
(decrease) in other liabilities
|
|
|
4,577
|
|
|
(1,226
|
)
|
|
1,255
|
|
Gain
on sales of discontinued operations
|
|
|
(9,873
|
)
|
|
|
|
|
|
|
Net
cash provided by discontinued operating activities
|
|
|
1,390
|
|
|
1,638
|
|
|
2,124
|
|
Net
cash provided by operating activities
|
|
|
22,891
|
|
|
20,658
|
|
|
17,180
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from maturities and calls of investment securities:
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
121,699
|
|
|
164,014
|
|
|
236,636
|
|
Held
to maturity
|
|
|
5,847
|
|
|
4,314
|
|
|
4,748
|
|
Proceeds
from sale of available for sale investment securities
|
|
|
19,263
|
|
|
3,038
|
|
|
66,916
|
|
Purchases
of investment securities:
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
(138,081
|
)
|
|
(158,252
|
)
|
|
(262,919
|
)
|
Loans
originated for investment, net of principal collected
|
|
|
(112,426
|
)
|
|
(37,461
|
)
|
|
(66,637
|
)
|
Purchase
of company-owned life insurance
|
|
|
(1,579
|
)
|
|
|
|
|
|
|
Payment
of prior year accrued purchase price-Citizens Bancorp,
Inc.
|
|
|
(21,846
|
)
|
|
|
|
|
|
|
Net
cash acquired in purchase of Citizens National Bancshares,
Inc.
|
|
|
1,066
|
|
|
|
|
|
|
|
Purchase
of Citizens Bancorp, Inc., net of cash acquired
|
|
|
(29
|
)
|
|
10,620
|
|
|
|
|
Purchase
of Citizens Bank (Kentucky), Inc., net of cash acquired
|
|
|
|
|
|
(2
|
)
|
|
(5,820
|
)
|
Purchase
of FiNET, Inc.
|
|
|
|
|
|
(203
|
)
|
|
(6,586
|
)
|
Investment
in unconsolidated trusts
|
|
|
|
|
|
(774
|
)
|
|
|
|
Additions
to mortgage servicing rights, net
|
|
|
(47
|
)
|
|
|
|
|
|
|
Purchases
of premises and equipment
|
|
|
(9,682
|
)
|
|
(3,341
|
)
|
|
(4,018
|
)
|
Proceeds
from sale of equipment
|
|
|
720
|
|
|
124
|
|
|
988
|
|
Net
cash received on disposal of discontinued operations
|
|
|
47
|
|
|
|
|
|
|
|
Net
cash provided by (used in) discontinued investing
activities
|
|
|
9,384
|
|
|
15,058
|
|
|
(25,810
|
)
|
Net
cash used in investing activities
|
|
|
(125,664
|
)
|
|
(2,865
|
)
|
|
(62,502
|
)
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in deposits
|
|
|
123,728
|
|
|
29,891
|
|
|
(7,506
|
)
|
Net
(decrease) increase in federal funds purchased and securities sold
under
agreements to repurchase
|
|
|
(6,275
|
)
|
|
11,778
|
|
|
(2,734
|
)
|
Proceeds
from long-term debt
|
|
|
26,198
|
|
|
27,774
|
|
|
1,800
|
|
Repayments
of long-term debt
|
|
|
(13,496
|
)
|
|
(7,750
|
)
|
|
(9,707
|
)
|
Net
increase (decrease) in other borrowed funds
|
|
|
7,997
|
|
|
(1,011
|
)
|
|
1,373
|
|
Dividends
paid
|
|
|
(9,553
|
)
|
|
(8,949
|
)
|
|
(8,879
|
)
|
Purchase
of common stock
|
|
|
(820
|
)
|
|
(571
|
)
|
|
(178
|
)
|
Shares
issued under Employee Stock Purchase Plan
|
|
|
223
|
|
|
187
|
|
|
93
|
|
Stock
options exercised
|
|
|
1,529
|
|
|
771
|
|
|
1,755
|
|
Net
cash provided by (used in) discontinued financing
activities
|
|
|
3,710
|
|
|
(12,607
|
)
|
|
17,965
|
|
Net
cash provided by (used in) financing activities
|
|
|
133,241
|
|
|
39,513
|
|
|
(6,018
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
30,468
|
|
|
57,306
|
|
|
(51,340
|
)
|
Less:
net (increase) decrease in cash and cash equivalents of discontinued
operations
|
|
|
(4,658
|
)
|
|
(4,089
|
)
|
|
5,721
|
|
Net
increase (decrease) in cash and cash equivalents from continuing
operations
|
|
|
25,810
|
|
|
53,217
|
|
|
(45,619
|
)
|
Cash
and cash equivalents from continuing operations at beginning of
year
|
|
|
131,018
|
|
|
77,801
|
|
|
123,420
|
|
Cash
and cash equivalents from continuing operations at end of
year
|
|
$
|
156,828
|
|
$
|
131,018
|
|
$
|
77,801
|
|
Supplemental
Disclosures
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
29,695
|
|
$
|
26,973
|
|
$
|
18,813
|
|
Income
taxes
|
|
|
4,900
|
|
|
2,725
|
|
|
2,525
|
|
Transfers
from loans to repossessed assets
|
|
|
1,973
|
|
|
2,751
|
|
|
3,454
|
|
Cash
dividend declared and unpaid at year-end
|
|
|
3,472
|
|
|
2,244
|
|
|
2,232
|
|
Issuance
of 464 and 584 shares of common stock to acquire Citizens National
Bancshares, Inc. and Citizens Bancorp, Inc., respectively
|
|
|
14,996
|
|
|
18,202
|
|
|
|
|
Acquisition
purchase price payable at year-end
|
|
|
|
|
|
21,846
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
The
accounting and reporting policies of Farmers Capital Bank Corporation and
subsidiaries conform to accounting principles generally accepted in the United
States of America and general practices applicable to the banking industry.
Significant accounting policies are summarized below.
Principles
of Consolidation and Nature of Operations
The
consolidated financial statements include the accounts of Farmers Capital
Bank
Corporation (the "Company"), a financial holding company, and its bank and
nonbank subsidiaries. Bank subsidiaries include Farmers Bank & Capital Trust
Co. (“Farmers Bank”) in Frankfort, KY and its wholly-owned subsidiaries Leasing
One Corporation (“Leasing One”) and Farmers Capital Insurance Corporation
(“Farmers Insurance”). Leasing One is a commercial leasing company in Frankfort,
KY and Farmers Insurance is an insurance agency in Frankfort, KY; Farmers
Bank
and Trust Company in Georgetown, KY (“Farmers Georgetown”) 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; Kentucky Banking
Centers, Inc. (“KBC”) in Glasgow, KY, which was sold during 2006; Citizens Bank
of Northern Kentucky, Inc. in Newport, KY (“Citizens Northern”); and Citizens
National Bank of Jessamine County in Nicholasville, KY (“Citizens Jessamine”).
The Company has three active nonbank subsidiaries, FCB Services, Inc. (“FCB
Services”), Kentucky General Holdings, LLC (“Kentucky General”), and FFKT
Insurance Services, Inc. (“FFKT Insurance”). FCB Services is a data processing
subsidiary located in Frankfort, KY, which provides services to the Company’s
banks as well as other unaffiliated entities. Kentucky General holds a 50%
voting interest in KHL Holdings, LLC, which is the parent company of Kentucky
Home Life Insurance Company. FFKT Insurance is a captive property and casualty
insurance company insuring primarily deductible exposures and uncovered
liability related to properties of the Company. All significant intercompany
transactions and balances are eliminated in consolidation.
The
Company provides financial services at its 35 locations in 22 communities
throughout Central and Northern Kentucky to individual, business, agriculture,
government, and educational customers. Its primary deposit products are
checking, savings, and term certificate accounts. Its primary lending products
are residential mortgage, commercial lending and leasing, and installment
loans.
Substantially all loans and leases are secured by specific items of collateral
including business assets, consumer assets, and commercial and residential
real
estate. Commercial loans and leases are expected to be repaid from cash flow
from operations of businesses. Farmers Bank has served as the general depository
for the Commonwealth of Kentucky for over 70 years and also provides investment
and other services to the Commonwealth. Other services include, but are not
limited to, cash management services, issuing letters of credit, safe deposit
box rental, and providing funds transfer services. Other financial instruments,
which potentially represent concentrations of credit risk, include deposit
accounts in other financial institutions and federal funds sold.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates used in the preparation of the financial
statements are based on various factors including the current interest rate
environment and the general strength of the local economy. Changes in the
overall interest rate environment can significantly affect the Company's
net
interest income and the value of its recorded assets and liabilities. Actual
results could differ from those estimates used in the preparation of the
financial statements. The allowance for loan losses and the fair values of
financial instruments are estimates that are particularly subject to
change.
Reclassifications
Certain
amounts in the accompanying consolidated financial statements presented for
prior years have been reclassified to conform to the 2006 presentation. These
reclassifications do not affect net income or total shareholders' equity
as
previously reported.
Segment
Information
The
Company provides a broad range of financial services to individuals,
corporations, and others through its 35 banking locations throughout Central
and
Northern Kentucky. These services primarily include the activities of lending
and leasing, receiving deposits, providing cash management services, safe
deposit box rental, and trust activities. Operations are managed and financial
performance is evaluated at the subsidiary level. The Company’s chief decision
makers monitor the results of the various banking products and services of
its
subsidiaries. Accordingly, all of the Company’s operations are considered by
management to be aggregated in one reportable operating segment: commercial
and
retail banking.
Cash
Flows
For
purposes of reporting cash flows, cash and cash equivalents include the
following: cash on hand, deposits from other financial institutions that
have an
initial maturity of less than 90 days when acquired by the Company, federal
funds sold, and securities
purchased
under agreements to resell. Generally, federal funds sold and securities
purchased under agreements to resell are purchased and sold for one-day periods.
Net cash flows are reported for loan and deposit transactions.
Investment
Securities
Investments
in debt and equity securities are classified into three categories. Securities
that management has the positive intent and ability to hold until maturity
are
classified as held to maturity. Securities that are bought and held specifically
for the purpose of selling them in the near term are classified as trading
securities. The Company had no securities classified as trading during 2006,
2005, or 2004. All other securities are classified as available for sale.
Securities are designated as available for sale if they might be sold before
maturity. Securities classified as available for sale are carried at estimated
market value. Unrealized holding gains and losses for available for sale
securities are reported net of deferred income taxes in other comprehensive
income. Investments classified as held to maturity are carried at amortized
cost. Interest income includes amortization and accretion of purchase premiums
or discounts. Premiums and discounts on securities are amortized using the
interest method over the expected life of the securities. Realized gains
and
losses on the sales of securities are recorded on the trade date and computed
on
the basis of specific identification of the adjusted cost of each security
and
are included in noninterest income. A decline in the market value of any
available for sale or held to maturity security below cost that is deemed
other
than temporary results in a charge to earnings and the establishment of a
new
cost basis for the security. Federal Home Loan Bank (“FHLB”) and Federal Reserve
Board stock is carried at cost.
Loans
and Interest Income
Loans
that management has the intent and ability to hold for the foreseeable future
or
until maturity or pay-off are reported at their unpaid principal amount
outstanding adjusted for any charge-offs and any deferred fees or costs on
originated loans. Interest income on loans is recognized using the interest
method based on loan principal amounts outstanding during the period. Interest
income also includes amortization and accretion of any premiums or discounts
over the expected life of acquired loans at the time of purchase or business
acquisition. Net fees and incremental direct costs associated with loan
origination are deferred and amortized as yield adjustments over the contractual
term of the loans. Generally, the accrual of interest on loans is discontinued
when it is determined that the collection of interest or principal is doubtful,
or when a default of interest or principal has existed for 90 days or more,
unless such loan is well secured and in the process of collection. Past due
status is based on the contractual terms of the loan. Cash payments received
on
nonaccrual loans generally are applied to principal, and interest income
is only
recorded once principal recovery is reasonably assured. Loans are returned
to
accrual status when all the principal and interest amounts contractually
due are
brought current and future payments are reasonably assured.
Loans
Held for Sale
The
Company’s operations include a limited amount of mortgage banking. Mortgage
banking activities include the origination of fixed-rate residential mortgage
loans for sale to various third-party investors. Mortgage loans originated
and
intended for sale in the secondary market, principally under programs with
the
Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association, and other commercial lending institutions are carried at the
lower
of cost or estimated market value determined in the aggregate and are included
in net loans on the balance sheet until sold. Mortgage loans held for sale
included in net loans totaled $2,921,000 and $929,000 at December 31, 2006
and
December 31, 2005, respectively. Mortgage banking revenues, including
origination fees, servicing fees, net gains or losses
on
sales of mortgages, and other fee income were 1.0%, .9%, and .6% of
the
Company’s total revenue for the years ended December 31, 2006, 2005, and 2004,
respectively.
Provision
and Allowance for Loan Losses
The
provision for loan losses represents charges made to earnings to maintain
an
allowance for loan losses at an adequate level based on credit losses
specifically identified in the loan portfolio, as well as management’s best
estimate of probable loan losses in the remainder of the portfolio at the
balance sheet date. The allowance for loan losses is a valuation allowance
increased by the provision for loan losses and decreased by net charge-offs.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are
credited to the allowance.
Management
estimates the allowance balance required using a risk-rated methodology.
Many
factors are considered when estimating the allowance. These include, but
are not
limited to, past loan loss experience, an assessment of the financial condition
of individual borrowers, a determination of the value and adequacy of underlying
collateral, the condition of the local economy, an analysis of the levels
and
trends of the loan portfolio, and a review of delinquent and classified loans.
The allowance for loan losses consists of specific and general components.
The
specific component relates to loans that are individually classified as impaired
or loans otherwise classified as substandard or doubtful. The general component
covers non-classified loans and is based on historical loss experience adjusted
for current risk factors. Allocations of the allowance may be made for specific
loans, but the entire allowance is available for any loan that, in management’s
judgment, should be charged off. Actual loan losses could differ significantly
from the amounts estimated by management.
The
risk-rated methodology includes segregating watch list and past due loans
from
the general portfolio and allocating specific amounts to these loans depending
on their status. For example, watch list loans, which may be identified by
the
internal loan review risk-rating system or by regulatory examiner
classification, are assigned a certain loss percentage while loans past due
30
days or more
are
assigned a different loss percentage. Each of these percentages considers
past
experience as well as current factors. The remainder of the general loan
portfolio is segregated into three components having similar risk
characteristics as follows: commercial loans, consumer loans, and real estate
loans. Each of these components is assigned a loss percentage based on their
respective three year historical loss percentage. Additional allocations
to the
allowance may then be made for subjective factors, such as those mentioned
above, as determined by senior managers who are knowledgeable about these
matters.
The
Company accounts for impaired loans in accordance with the Financial Accounting
Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”)
No. 114, Accounting
by Creditors for Impairment of a Loan,
as
amended by SFAS No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition.
SFAS
No. 114, as amended, requires that impaired loans be measured at the present
value of expected future cash flows, discounted at the loan’s effective interest
rate, at the loan’s observable market price, or at the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when full
payment under the contractual terms is not expected. Generally, impaired
loans
are also in nonaccrual status. In certain circumstances, however, the Company
may continue to accrue interest on an impaired loan. Cash receipts on impaired
loans are typically applied to the recorded investment in the loan, including
any accrued interest receivable. Loans that are part of a large group of
smaller-balance homogeneous loans, such as residential mortgage and consumer
loans, are collectively evaluated for impairment and, accordingly, they are
not
separately identified for impairment disclosures.
Mortgage
Servicing Rights
Mortgage
servicing rights are recognized in other intangible assets on the Company’s
consolidated balance sheet for the allocated cost of retained servicing rights
on loans sold. Mortgage servicing rights are expensed in proportion to, and
over
the period of, estimated net servicing revenues. Impairment is evaluated
based
on the fair value of the rights, using groupings of the underlying loans
as to
interest rates. Any impairment of a grouping is reported as a valuation
allowance. The Company acquired $626,000 of capitalized mortgage servicing
rights from the purchase of Citizens Bancorp during 2005. Capitalized mortgage
servicing rights were $496,000 and $618,000 at December 31, 2006 and 2005.
No
impairment of the asset was determined to exist on either of these
dates.
Business
Combinations
The
Company accounts for its business acquisitions as a purchase in accordance
with
SFAS No. 141, whereby the purchase price is allocated to the tangible and
intangible assets acquired and liabilities assumed based on their estimated
fair
value. The excess of the purchase price over estimated fair value of the
net
identifiable assets is allocated to goodwill. The Company engages third-party
appraisal firms to assist in determining the fair values of certain assets
acquired and liabilities assumed. Determining fair value of assets and
liabilities requires many assumptions and estimates. These estimates and
assumptions are sometimes refined subsequent to the initial recording of
the
transaction with adjustments to goodwill as information is gathered and final
appraisals are completed.
Goodwill
and Other Intangible Assets
Goodwill
results from business acquisitions and represents the excess of the purchase
price over the fair value of acquired tangible assets and liabilities and
identifiable intangible assets. Goodwill is assessed at least annually for
impairment and any such impairment is recognized in the period
identified.
Other
intangible assets consist of core deposit and acquired customer relationship
intangible assets arising from business acquisitions. They are initially
measured at fair value and then are amortized on an accelerated method over
their estimated useful lives.
Other
Real Estate
Other
real estate owned and held for sale, included with other assets in the
accompanying consolidated balance sheets, includes properties acquired by
the
Company through actual loan foreclosures. Other real estate owned is carried
at
the lower of cost or fair value less estimated costs to sell. Fair value
is the
amount that the Company could reasonably expect to receive in a current sale
between a willing buyer and a willing seller, other than in a forced or
liquidation sale. Fair value of assets is measured by the market value based
on
comparable sales. If fair value declines subsequent to foreclosure, a valuation
allowance is recorded through expense. Costs after acquisition are expensed.
Other real estate owned included in the consolidated balance sheets was
$5,031,000 and $8,786,000 at December 31, 2006 and 2005,
respectively.
Income
Taxes
Income
tax expense is the total of current year income tax due or refundable and
the
change in deferred tax assets and liabilities, except for the deferred tax
assets and liabilities related to business combinations or components of
other
comprehensive income. Deferred
income tax assets and liabilities result from temporary differences between
the
tax basis of assets and liabilities and their reported amounts in the
consolidated financial statements that will result in taxable or deductible
amounts in future years. Deferred tax assets and liabilities are measured
using
enacted tax rates expected to apply to taxable income in years in which those
temporary differences are expected to be recovered or settled. As changes
in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through income tax expense.
The
Company files a consolidated federal income tax return with its subsidiaries.
Federal income tax expense or benefit has been allocated to subsidiaries
on a
separate return basis.
Premises
and Equipment
Premises,
equipment, and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Depreciation is computed primarily on the
straight-line method over the estimated useful lives generally ranging from
two
to seven years for furniture and equipment and generally ten to 50 years
for
buildings and related components. Leasehold improvements are amortized over
the
shorter of the estimated useful lives or terms of the related leases on the
straight-line method. Maintenance, repairs, and minor improvements are charged
to operating expenses as incurred and major improvements are capitalized.
The
cost of assets sold or retired and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is included in
noninterest income. Land is carried at cost.
Company-owned
Life Insurance
The
Company has purchased life insurance policies on certain key employees with
their knowledge and consent. Company-owned life insurance is recorded at
its
cash surrender value, i.e. the amount that can be realized, on the consolidated
balance sheet. The related change in cash surrender value and proceeds received
under the policies are reported on the consolidated statement of income under
the caption “Income from company-owned life insurance”.
Net
Income Per Common Share
Basic
net
income per common share is determined by dividing net income by the weighted
average total number of shares of common stock outstanding. Diluted net income
per common share is determined by dividing net income by the total weighted
average number of shares of common stock outstanding, plus the total weighted
average number of shares that would be issued upon exercise of dilutive stock
options assuming proceeds are used to repurchase shares pursuant to the treasury
stock method. Net income per common share computations were as follows at
December 31, 2006, 2005, and 2004:
|
|
|
|
|
|
|
|
(In
thousands, except per share data)
Years
Ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Net
income, basic and diluted
|
|
$
|
21,372
|
|
$
|
15,772
|
|
$
|
13,392
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding
|
|
|
7,511
|
|
|
6,831
|
|
|
6,737
|
|
Effect
of dilutive stock options
|
|
|
15
|
|
|
33
|
|
|
43
|
|
Average
diluted shares outstanding
|
|
|
7,526
|
|
|
6,864
|
|
|
6,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share, basic
|
|
$
|
2.85
|
|
$
|
2.31
|
|
$
|
1.99
|
|
Net
income per share, diluted
|
|
|
2.84
|
|
|
2.30
|
|
|
1.98
|
|
Income
from continuing operations, basic and diluted
|
|
$
|
13,665
|
|
$
|
14,532
|
|
$
|
13,064
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share from continuing operations, basic
|
|
$
|
1.82
|
|
$
|
2.13
|
|
$
|
1.94
|
|
Income
per share from continuing operations, diluted
|
|
|
1.82
|
|
|
2.12
|
|
|
1.93
|
|
Income
from discontinued operations, basic and diluted
|
|
$
|
7,707
|
|
$
|
1,240
|
|
$
|
328
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share from discontinued operations, basic
|
|
$
|
1.03
|
|
$
|
.18
|
|
$
|
.05
|
|
Income
per share from discontinued operations, diluted
|
|
|
1.02
|
|
|
.18
|
|
|
.05
|
|
Stock
options for 62,621, 38,049, and 40,049 shares of common stock were not included
in the determination of dilutive earnings per share for 2006, 2005, and 2004
because they were antidilutive.
Comprehensive
Income
Comprehensive
income is defined as the change in equity (net assets) of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. For the Company this includes net income, the after tax
effect
of changes in the net unrealized gains and losses on available for sale
investment securities, and the changes in the funded status of postretirement
benefit plans.
Treasury
Stock
The
purchase of the Company’s common stock is recorded at cost.
Trust Assets
Assets
of
the Company’s trust departments, other than cash on deposit at our subsidiaries,
are not included in the accompanying financial statements because they are
not
assets of the Company.
Stock-Based
Compensation
During
1997 the Company’s Board of Directors approved a nonqualified stock option plan
(the "Plan"), subsequently approved by the Company’s shareholders, that has
periodically provided for the granting of stock options to key employees
and
officers of the Company. All stock options are awarded at a price equal to
the
fair market value of the Company’s common stock at the date options are granted
and expire ten years from the grant date. Total options granted were 450,000,
54,000, and 40,049 in the years 1997, 2000, and 2004, respectively. As of
December 31, 2006 the Plan allows for additional option grants of up to 14,641
shares.
Effective
January 1, 2006 the Company adopted SFAS No. 123(R), Share-based
Payment,
using
the modified prospective transition method. Accordingly, the Company has
recorded stock-based employee compensation cost using the fair value method
starting in 2006. For 2006, adopting this Standard resulted in a reduction
of
income before taxes of $154,000, a reduction in net income of $100,000, and
a
decrease in basic and diluted earnings per share (continuing operations)
of
$.01.
Prior
to
January 1, 2006, the Company accounted for its Plan under the recognition
and
measurement provisions of APB Opinion No. 25 and related interpretations
as
allowed by SFAS No. 123. Under the modified prospective transition method
of
SFAS No. 123(R), prior year financial statement amounts are not restated.
The
table below presents the effect on net income and earnings per share for
the
periods prior to adoption as if expense was measured using the fair value
recognition provisions of SFAS No. 123.
|
|
|
|
|
|
(In
thousands, except per share data)
Years
Ended December 31,
|
|
2005
|
|
2004
|
|
Net
Income
|
|
|
|
|
|
As
reported
|
|
$
|
15,772
|
|
$
|
13,392
|
|
Add:
Stock-based compensation expense included in reported net
income
|
|
|
|
|
|
141
|
|
Less:
Stock-based compensation expense determined under fair value based
method
for all awards, net of related tax effects
|
|
|
(112
|
)
|
|
(208
|
)
|
Proforma
|
|
$
|
15,660
|
|
$
|
13,325
|
|
Net
Income Per Common Share
|
|
|
|
|
|
|
|
Basic,
as reported
|
|
$
|
2.31
|
|
$
|
1.99
|
|
Basic,
proforma
|
|
|
2.29
|
|
|
1.98
|
|
|
|
|
|
|
|
|
|
Diluted,
as reported
|
|
|
2.30
|
|
|
1.98
|
|
Diluted,
proforma
|
|
|
2.28
|
|
|
1.97
|
|
Income
From Continuing Operations
|
|
As
reported
|
|
$
|
14,532
|
|
$
|
13,064
|
|
Add:
Stock-based compensation expense included in reported net
income
|
|
|
|
|
|
127
|
|
Less:
Stock-based compensation expense determined under fair value based
method
for all awards, net of related tax effects
|
|
|
(100
|
)
|
|
(190
|
)
|
Proforma
|
|
$
|
14,432
|
|
$
|
13,001
|
|
Income
Per Common Share From Continuing Operations
|
|
|
|
|
|
|
|
Basic,
as reported
|
|
$
|
2.13
|
|
$
|
1.94
|
|
Basic,
proforma
|
|
|
2.11
|
|
|
1.93
|
|
|
|
|
|
|
|
|
|
Diluted,
as reported
|
|
|
2.12
|
|
|
1.93
|
|
Diluted,
proforma
|
|
|
2.10
|
|
|
1.92
|
|
Income
From Discontinued Operations
|
As
reported
|
|
$
|
1,240
|
|
$
|
328
|
|
Add:
Stock-based compensation expense included in reported net
income
|
|
|
|
|
|
14
|
|
Less:
Stock-based compensation expense determined under fair value based
method
for all awards, net of related tax effects
|
|
|
(12
|
)
|
|
(18
|
)
|
Proforma
|
|
$
|
1,228
|
|
$
|
324
|
|
Income
Per Common Share From Discontinued Operations
|
|
|
|
|
|
|
|
Basic
and diluted, as reported
|
|
$
|
.18
|
|
$
|
.05
|
|
Basic
and diluted, proforma
|
|
|
.18
|
|
|
.05
|
|
The
fair
value of options granted are estimated as of the measurement date using the
Black-Scholes option pricing model with the following weighted average
assumptions used and estimated fair market value for each of the grants and
the
Employee Stock Purchase Plan (“ESPP”).
|
|
|
|
|
|
|
|
|
Grant
|
|
|
ESPP
|
|
|
|
1997
|
|
2000
|
|
2004
|
|
|
2006
|
|
2005
|
|
2004
|
|
Dividend
yield
|
|
|
3.18
|
%
|
|
3.12
|
%
|
|
3.80
|
%
|
|
|
3.88
|
|
|
3.82
|
%
|
|
3.80
|
%
|
Expected
volatility
|
|
|
23.4
|
|
|
29.6
|
|
|
10.5
|
|
|
|
14.0
|
|
|
13.0
|
|
|
10.8
|
|
Risk-free
interest rate
|
|
|
5.75
|
|
|
6.71
|
|
|
2.78
|
|
|
|
4.70
|
|
|
2.98
|
|
|
1.47
|
|
Expected
life (in years)
|
|
|
7
|
|
|
7
|
|
|
3
|
|
|
|
.25
|
|
|
.25
|
|
|
.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value
|
|
$
|
16.11
|
|
$
|
9.25
|
|
$
|
1.79
|
|
|
$
|
5.75
|
|
$
|
5.97
|
|
$
|
5.72
|
|
The
Plan
provides for the granting of options to purchase up to 450,000 shares of
the
Company’s common stock at a price equal to the fair market value of the
Company’s common stock on the date the option is granted. The term of the
options expires after ten years from the date on which the options are granted.
Options granted under the Plan vest ratably over various time periods ranging
from three to seven years. All options granted must be held for a minimum
of one
year before they can be exercised. Forfeited options are available for the
granting of additional stock options under the Plan. Options forfeited from
the
initial grant in 1997 were used to grant options during 2000 and 2004. At
December 31, 2006 there were 13,355 options available for future grants under
the Plan.
The
Company’s ESPP was approved by its shareholders at the Company’s 2004 annual
meeting. The purpose of the ESPP is to provide a means by which eligible
employees may purchase, at a discount, shares of common stock of the Company
through payroll withholding. The purchase price of the shares is equal to
85% of
their fair market value on specified dates as defined in the plan. The ESPP
was
effective beginning July 1, 2004. There were 8,161, 6,883, and 3,190 shares
issued under the plan during 2006, 2005, and 2004, respectively. Compensation
cost related to the ESPP included in the proforma net income disclosure in
the
table above was $25,000 and $12,000 for 2005 and 2004,
respectively.
Adoption
of New Accounting Standards
Effective
January 1, 2006 the Company adopted SFAS No. 123 (R), Share-based
Payment.
Please
refer to the caption “Stock-Based Compensation” above for additional discussion
of the impact of adopting this Statement.
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).
This
Statement requires an employer to recognize the overfunded or underfunded
status
of a defined benefit postretirement plan (other than a multiemployer plan)
as an
asset or liability in its balance sheet, beginning with year-end 2006, and
to
recognize changes in the funded status in the year in which the changes occur
through comprehensive income beginning in 2007. Additionally, defined benefit
plan assets and obligations are to be measured as of the date of the employer’s
fiscal year-end, starting in 2008. The table below shows the effect on
individual line items in the 2006 balance sheet upon adoption of this
Statement.
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Before
Application
of
SFAS No. 158
|
|
Adjustments
|
|
After
Application
of
SFAS No. 158
|
|
Liability
for postretirement benefits
|
|
$
|
4,534
|
|
$
|
4,755
|
|
$
|
9,289
|
|
Deferred
income tax (liability) asset
|
|
|
(410
|
) |
|
(1,664
|
)
|
|
1,254
|
|
Accumulated
other comprehensive loss
|
|
|
(1,309
|
)
|
|
(3,091
|
)
|
|
(4,400
|
)
|
Total
assets |
|
|
1,832,112 |
|
|
1,254 |
|
|
1,824,366 |
|
Total
liabilities |
|
|
1,641,580 |
|
|
4,345 |
|
|
1,645,925 |
|
Total
shareholders’ equity
|
|
|
181,532
|
|
|
(3,091
|
)
|
|
178,441
|
|
In
September 2006, the United States Securities and Exchange Commission (SEC)
released Staff Accounting Bulletin (“SAB”) No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements, which
is
effective for fiscal years ending on or after November 15, 2006. SAB 108
provides guidance on how the effects of prior-year uncorrected financial
statement misstatements should be considered in quantifying a current year
misstatement. SAB 108 requires public companies to quantify misstatements
using
both an income statement (rollover) and balance sheet (iron curtain) approach
and evaluate whether either approach results in a misstatement that, when
all
relevant quantitative and qualitative factors are considered, is material.
If
prior year errors that had been previously considered immaterial now are
considered material based on either approach, no restatement is required
so long
as management properly applied its previous approach and all relevant facts
and
circumstances were considered. Adjustments considered immaterial in prior
years
under the method previously used, but now considered material under the dual
approach required by SAB 108, are to be recorded upon initial adoption of
SAB
108 as a cumulative effect adjustment recorded in opening retained earnings
as
of January 1, 2006. The adoption of SAB 108 had no effect on the Company’s
consolidated financial statements for the year ending December 31,
2006.
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 does not expect the adoption of this Statement
will have a material impact on its result of operations and consolidated
financial condition.
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 does not expect the adoption of this Statement will have a material
impact on its result of operations and consolidated 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 does not expect the
adoption of this Statement will have a material impact on its result of
operations and consolidated 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
does not expect the adoption of this Statement will have a material impact
on
its result of operations and consolidated financial condition.
2.
Discontinued Operations
In
June
2006, the Company announced that it had entered into a definitive agreement
to
sell KBC, its wholly-owned bank subsidiary in Glasgow, Kentucky, in a cash
transaction valued at $20,000,000. The Company completed the sale on November
30, 2006 that resulted in a pretax gain of $9,400,000.
In
August
2006, Farmers Georgetown entered into a definitive agreement to sell its
Owingsville and Sharpsburg branches in Bath County (the “Branches”). The sale,
which was completed on December 1, 2006, included deposits of $26,600,000,
loans
of $9,600,000, fixed assets of $818,000, and other assets of $1,800,000.
The
Company recorded a pretax gain on the sale of the Branches of
$431,000.
In
accordance with SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets”,
the
financial position and results of operations of KBC and Farmers Georgetown’s
Branches are removed from the detail line items of the Company’s financial
statements and presented separately as discontinued operations. Following
are
condensed combined balance sheets and statements of income for KBC and Farmers
Georgetown’s Branches for the periods indicated.
Condensed
Combined Balance Sheets - Discontinued Operations
|
|
|
|
|
|
(In
thousands)
|
|
November
30, 2006
|
|
December
31, 2005
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
13,544
|
|
$
|
3,718
|
|
Investment
securities
|
|
|
32,276
|
|
|
36,027
|
|
Loans,
net
|
|
|
88,631
|
|
|
94,043
|
|
Premises
and equipment, net
|
|
|
4,978
|
|
|
5,164
|
|
Other
assets
|
|
|
5,118
|
|
|
4,616
|
|
Total
assets
|
|
$
|
144,547
|
|
$
|
143,568
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
146,208
|
|
$
|
141,589
|
|
Other
borrowed funds
|
|
|
1,459
|
|
|
2,368
|
|
Other
liabilities
|
|
|
921
|
|
|
451
|
|
Total
liabilities
|
|
|
148,588
|
|
|
144,408
|
|
|
|
|
|
|
|
|
|
Net
liabilities
|
|
$
|
4,041
|
|
$
|
840
|
|
Condensed
Combined Statements of Income - Discontinued Operations
|
|
|
|
|
|
|
|
Eleven
months ended
November
30
|
|
Twelve
months ended
December
31
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
9,008
|
|
$
|
8,443
|
|
$
|
6,712
|
|
Interest
expense
|
|
|
3,696
|
|
|
3,370
|
|
|
2,553
|
|
Net
interest income
|
|
|
5,312
|
|
|
5,073
|
|
|
4,159
|
|
Provision
for loan losses
|
|
|
17
|
|
|
96
|
|
|
1,274
|
|
Noninterest
income
|
|
|
1,272
|
|
|
1,305
|
|
|
1,266
|
|
Noninterest
expense
|
|
|
4,597
|
|
|
4,559
|
|
|
3,799
|
|
Income
tax expense
|
|
|
679
|
|
|
483
|
|
|
24
|
|
Net
income
|
|
$
|
1,291
|
|
$
|
1,240
|
|
$
|
328
|
|
The
following summarizes the amortized cost and estimated fair values of the
securities portfolio at December 31, 2006. The summary is divided into available
for sale and held to maturity securities.
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
December
31, 2006 (In thousands)
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Available
For Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S. government-sponsored agencies
|
|
$
|
142,128
|
|
$
|
74
|
|
$
|
370
|
|
$
|
141,832
|
|
Obligations
of states and political subdivisions
|
|
|
87,974
|
|
|
939
|
|
|
766
|
|
|
88,147
|
|
Mortgage-backed
securities
|
|
|
88,607
|
|
|
87
|
|
|
1,978
|
|
|
86,716
|
|
U.S.
Treasury securities
|
|
|
484
|
|
|
|
|
|
|
|
|
484
|
|
Money
market mutual funds
|
|
|
1,396
|
|
|
|
|
|
|
|
|
1,396
|
|
Equity
securities
|
|
|
7,910
|
|
|
|
|
|
|
|
|
7,910
|
|
Total
securities - available for sale
|
|
$
|
328,499
|
|
$
|
1,100
|
|
$
|
3,114
|
|
$
|
326,485
|
|
Held
To Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of states and political subdivisions
|
|
$
|
7,788
|
|
$
|
61
|
|
$
|
0
|
|
$
|
7,849
|
|
The
following summarizes the amortized cost and estimated fair values of the
securities portfolio at December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
December
31, 2005 (In thousands)
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Available
For Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S. government-sponsored agencies
|
|
$
|
124,668
|
|
$
|
66
|
|
$
|
1,050
|
|
$
|
123,684
|
|
Obligations
of states and political subdivisions
|
|
|
85,546
|
|
|
1,243
|
|
|
758
|
|
|
86,031
|
|
Mortgage-backed
securities
|
|
|
100,218
|
|
|
121
|
|
|
2,314
|
|
|
98,025
|
|
U.S.
Treasury securities
|
|
|
104
|
|
|
|
|
|
|
|
|
104
|
|
Money
market mutual funds
|
|
|
925
|
|
|
|
|
|
|
|
|
925
|
|
Equity
securities
|
|
|
6,298
|
|
|
|
|
|
|
|
|
6,298
|
|
Total
securities - available for sale
|
|
$
|
317,759
|
|
$
|
1,430
|
|
$
|
4,122
|
|
$
|
315,067
|
|
Held
To Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of states and political subdivisions
|
|
$
|
13,610
|
|
$
|
204
|
|
$
|
0
|
|
$
|
13,814
|
|
The
amortized cost and estimated fair value of the securities portfolio at December
31, 2006, by contractual maturity, are detailed below. The summary is divided
into available for sale and held to maturity securities. Expected maturities
may
differ from contractual maturities because borrowers may have the right to
call
or prepay obligations with or without call or prepayment penalties. Equity
securities in the available for sale portfolio consist primarily of restricted
FHLB and Federal Reserve Board stocks, which have no stated maturity and
are not
included in the maturity schedule that follows. Mortgage-backed
securities are stated separately due to the nature of payment and prepayment
characteristics of these securities, as principal is not due at a single
date.
|
|
|
|
|
|
|
|
Available
For Sale
|
|
Held
To Maturity
|
|
|
|
Amortized
|
|
Estimated
|
|
Amortized
|
|
Estimated
|
|
December
31, 2006 (In thousands)
|
|
Cost
|
|
Fair
Value
|
|
Cost
|
|
Fair
Value
|
|
Due
in one year or less
|
|
$
|
90,698
|
|
$
|
90,669
|
|
$
|
3,778
|
|
$
|
3,801
|
|
Due
after one year through five years
|
|
|
69,822
|
|
|
69,306
|
|
|
2,885
|
|
|
2,923
|
|
Due
after five years through ten years
|
|
|
61,224
|
|
|
61,460
|
|
|
|
|
|
|
|
Due
after ten years
|
|
|
10,238
|
|
|
10,424
|
|
|
1,125
|
|
|
1,125
|
|
Mortgage-backed
securities
|
|
|
88,607
|
|
|
86,716
|
|
|
|
|
|
|
|
Total
|
|
$
|
320,589
|
|
$
|
318,575
|
|
$
|
7,788
|
|
$
|
7,849
|
|
Gross
gains of $26,000, $5,000, and $527,000
in 2006,
2005, and 2004, respectively, were realized on the sale of investment
securities. Gross losses of $221,000, $8,000, and $136,000
were
realized during 2006, 2005, and 2004, respectively.
Investment
securities with a carrying value of $288,968,000 and $226,701,000 at December
31, 2006 and 2005 were pledged to secure public and trust deposits, repurchase
agreements, and for other purposes.
Investment
securities with unrealized losses at year-end 2006 and 2005 not recognized
in
income are presented in the table below. The table segregates investment
securities that have been in a continuous unrealized loss position for less
than
twelve months from those that have been in a continuous unrealized loss position
for twelve months or more. The table also includes the fair value of the
related
securities.
|
|
|
|
|
|
|
|
|
|
Less
than 12 Months
|
|
12
Months or More
|
|
Total
|
|
December
31, 2006 (In thousands)
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Obligations
of U.S. government-sponsored agencies
|
|
$
|
25,591
|
|
$
|
34
|
|
$
|
34,949
|
|
$
|
336
|
|
$
|
60,540
|
|
$
|
370
|
|
Obligations
of states and political subdivisions
|
|
|
12,756
|
|
|
63
|
|
|
25,793
|
|
|
703
|
|
|
38,549
|
|
|
766
|
|
Mortgage-backed
securities
|
|
|
2,467
|
|
|
6
|
|
|
68,993
|
|
|
1,972
|
|
|
71,460
|
|
|
1,978
|
|
Total
|
|
$
|
40,814
|
|
$
|
103
|
|
$
|
129,735
|
|
$
|
3,011
|
|
$
|
170,549
|
|
$
|
3,114
|
|
|
|
|
|
|
|
|
|
|
|
Less
than 12 Months
|
|
12
Months or More
|
|
Total
|
|
December
31, 2005 (In thousands)
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Obligations
of U.S. government-sponsored agencies
|
|
$
|
54,184
|
|
$
|
388
|
|
$
|
44,159
|
|
$
|
662
|
|
$
|
98,343
|
|
$
|
1,050
|
|
Obligations
of states and political subdivisions
|
|
|
23,287
|
|
|
285
|
|
|
13,107
|
|
|
473
|
|
|
36,394
|
|
|
758
|
|
Mortgage-backed
securities
|
|
|
31,326
|
|
|
413
|
|
|
54,583
|
|
|
1,901
|
|
|
85,909
|
|
|
2,314
|
|
Total
|
|
$
|
108,797
|
|
$
|
1,086
|
|
$
|
111,849
|
|
$
|
3,036
|
|
$
|
220,646
|
|
$
|
4,122
|
|
Unrealized
losses included in the tables above have not been recognized in income since
they have been identified as temporary. The Company periodically evaluates
securities for other-than-temporary impairment. Consideration is given to
the
length of time and the extent to which the fair value has been less than
cost,
the financial condition and near-term prospects of the issuer, and the intent
and ability of the Company to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair value. The
Company attributes the unrealized losses mainly to increases in market interest
rates over the yield available at the time the underlying securities were
purchased and does not expect to incur a loss unless the securities are sold.
Management has the intent and ability to hold these securities for the
foreseeable future. The fair value is expected to recover as the securities
approach their maturity or repricing date or if market yields for such
investments decline. The Company does not believe any of the securities are
impaired due to reasons of credit quality.
Major
classifications of loans are summarized as follows.
|
|
|
|
|
|
December
31, (In thousands)
|
|
2006
|
|
2005
|
|
Commercial,
financial, and agricultural
|
|
$
|
197,613
|
|
$
|
173,797
|
|
Real
estate - construction
|
|
|
176,779
|
|
|
88,693
|
|
Real
estate mortgage - residential
|
|
|
381,081
|
|
|
331,508
|
|
Real
estate mortgage - farmland and other commercial
enterprises
|
|
|
351,793
|
|
|
274,411
|
|
Installment
loans
|
|
|
57,116
|
|
|
56,169
|
|
Lease
financing
|
|
|
37,522
|
|
|
42,501
|
|
Total
loans
|
|
|
1,201,904
|
|
|
967,079
|
|
Less
unearned income
|
|
|
(4,068
|
)
|
|
(4,508
|
)
|
Total
loans, net of unearned income
|
|
$
|
1,197,836
|
|
$
|
962,571
|
|
Loans
to
directors, executive officers, and principal shareholders (including loans
to
affiliated companies of which they are principal owners) and loans to members
of
the immediate family of such persons were $25,903,000 and $25,103,000 at
December 31, 2006 and 2005, respectively. Such loans were made in the normal
course of business on substantially the same terms, including interest rates
and
collateral, as those prevailing at the time for comparable transactions with
other customers and did not involve more than the normal risk of
collectibility.
An
analysis of the activity with respect to these loans is presented in the
table
below.
|
|
|
|
(In
thousands)
|
|
Amount
|
|
Balance,
December 31, 2005
|
|
$
|
25,103
|
|
New
loans
|
|
|
15,081
|
|
Repayments
|
|
|
(18,938
|
)
|
Loans
no longer meeting disclosure requirements, new loans meeting disclosure
requirements, and other adjustments
|
|
|
4,657
|
|
Balance,
December 31, 2006
|
|
$
|
25,903
|
|
The
Company’s recorded investment in impaired loans, measured using the fair value
of collateral method as defined in SFAS No. 114, was $5,073,000 at December
31,
2006 and $768,000 at December 31, 2005. The amount of year-end impaired loans
with an allocated allowance for loan losses was $1,920,000 and $768,000 and
the
related allowance for such loans was $105,000 and $50,000 for 2006 and 2005,
respectively. There was $3,153,000 in impaired loans at year-end 2006 in
which
there was no allocated allowance for loan losses. The recorded investment
in
impaired loans averaged $5,151,000, $768,000, and $4,497,000, respectively,
for
the years ended December 31, 2006, 2005, and 2004. Interest income recognized
on
impaired loans totaled $323,000, $0, and $34,000 for the years 2006, 2005,
and
2004, respectively.
The
Company's charge-off policy for impaired loans does not differ from the
charge-off policy for loans outside the definition of SFAS No. 114. Loans
that
are delinquent in excess of 120 days are charged off unless the collateral
securing the debt is of such value that any loss appears to be
unlikely.
An
analysis of the allowance for loan losses follows.
|
|
|
|
|
|
|
|
Years
Ended December 31, (In thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Balance,
beginning of year
|
|
$
|
11,069
|
|
$
|
11,043
|
|
$
|
10,088
|
|
Acquisition
of Citizens National Bancshares, Inc.
|
|
|
1,066
|
|
|
|
|
|
|
|
Acquisition
of Citizens Bancorp, Inc.
|
|
|
|
|
|
1,410
|
|
|
|
|
Acquisition
of Citizens Bank (Kentucky), Inc.
|
|
|
|
|
|
|
|
|
2,005
|
|
Provision
for loan losses
|
|
|
965
|
|
|
622
|
|
|
856
|
|
Recoveries
|
|
|
678
|
|
|
439
|
|
|
462
|
|
Loans
charged off
|
|
|
(1,779
|
)
|
|
(2,445
|
)
|
|
(2,368
|
)
|
Balance,
end of year
|
|
$
|
11,999
|
|
$
|
11,069
|
|
$
|
11,043
|
|
Nonperforming
loans were as follows.
|
|
|
|
|
|
December
31, (In thousands)
|
|
2006
|
|
2005
|
|
Nonaccrual
loans
|
|
$
|
1,462
|
|
$
|
2,269
|
|
Loans
past due 90 days or more and still accruing
|
|
|
2,856
|
|
|
2,383
|
|
Total
nonperforming loans
|
|
$
|
4,318
|
|
$
|
4,652
|
|
6.
|
Premises
and Equipment
|
Premises
and equipment consist of the following.
|
|
|
|
|
|
December
31, (In thousands)
|
|
2006
|
|
2005
|
|
Land,
buildings, and leasehold improvements
|
|
$
|
45,652
|
|
$
|
37,034
|
|
Furniture
and equipment
|
|
|
21,470
|
|
|
19,413
|
|
Total
premises and equipment
|
|
|
67,122
|
|
|
56,447
|
|
Less
accumulated depreciation and amortization
|
|
|
(29,347
|
)
|
|
(27,615
|
)
|
Premises
and equipment, net
|
|
$
|
37,775
|
|
$
|
28,832
|
|
Depreciation
and amortization of premises and equipment was $3,617,000, $3,140,000, and
$2,869,000, in 2006, 2005, and 2004, respectively.
Time
deposits of $100,000 or more at December 31, 2006 and 2005 were $215,369,000
and
$157,554,000, respectively. Interest expense on time deposits of $100,000
or
more was $6,865,000, $3,895,000, and $2,788,000 for 2006, 2005, and 2004,
respectively.
At
December 31, 2006 the scheduled maturities of time deposits were as
follows.
|
|
|
|
(In
thousands)
|
|
Amount
|
|
2007
|
|
$
|
482,687
|
|
2008
|
|
|
137,745
|
|
2009
|
|
|
61,138
|
|
2010
|
|
|
15,772
|
|
2011
|
|
|
9,125
|
|
Thereafter
|
|
|
4,482
|
|
Total
|
|
$
|
710,949
|
|
Deposits
from directors, executive officers, and principal shareholders (including
deposits from affiliated companies of which they are principal owners) and
deposits from members of the immediate family of such persons were $39,403,000
and $28,213,000 at December 31, 2006 and 2005, respectively. Such deposits
were
accepted in the normal course of business on substantially the same terms
as
those prevailing at the time for comparable transactions with other
customers.
Federal
funds purchased and securities sold under agreements to repurchase represent
borrowings by the Company that generally mature one business day following
the
date of the transaction. Information pertaining to such borrowings is as
follows.
|
|
|
|
|
|
December
31, (Dollars in thousands)
|
|
2006
|
|
2005
|
|
Average
balance during the year
|
|
$
|
92,092
|
|
$
|
81,318
|
|
Average
interest rate during the year
|
|
|
4.72
|
%
|
|
3.16
|
%
|
Average
interest rate at year-end
|
|
|
4.47
|
|
|
3.90
|
|
Maximum
month-end balance during the year
|
|
$
|
90,149
|
|
$
|
165,167
|
|
During
2005 the Company completed two private offerings of trust preferred securities
through two separate Delaware statutory trusts sponsored by the Company.
Farmers
Capital Bank Trust I (“Trust I”) sold $10.0 million of preferred securities
and Farmers Capital Bank Trust II (“Trust II”) sold $15.0 million of preferred
securities (Trust I and Trust II are hereafter collectively referred to as
the
“Trusts”). The proceeds from the offerings were used to fund the cash portion of
the Citizens Bancorp acquisition. The Company owns all of the common securities
of each of the Trusts.
The
Trusts used the proceeds from the sale of preferred securities, plus capital
contributed to establish the trusts, to purchase the Company’s subordinated
notes in amounts and bearing terms that parallel the amounts and terms of
the
respective preferred securities. The subordinated notes mature in 2035 and
bear
a floating interest rate (current three-month LIBOR plus 150 basis points
in the
case of the notes held by Trust I and current three-month LIBOR plus 165
basis
points in the case of the notes held by Trust II). Interest on the notes
is
payable quarterly.
The
subordinated notes are redeemable in whole or in part, without penalty, at
the
Company’s option on or after September 30, 2010 and mature on September 30,
2035. The notes are junior in right of payment of all present and future
senior
indebtedness. At December 31, 2006 and 2005 the balance of the subordinated
notes payable to Trust I and Trust II was $10.3 million and $15.5 million
respectively. The interest rates in effect as of the last determination date
in
2006 were 6.87% and 7.02% for Trust I and Trust II, respectively. For 2005
these
rates were 5.52% and 5.67% for Trust I and Trust II, respectively.
Under
FASB Interpretation No. 46 (revised), “Consolidation
of Variable Interest Entities”,
the
Company does not consolidate the Trusts into its financial statements.
Accordingly, the Company does not report the securities issued by the Trusts
as
liabilities, but instead reports as liabilities the subordinated notes issued
by
the Company and held by the Trusts. The Company accounts for its investment
in
each of the Trusts as assets. The Company records interest expense on the
corresponding notes issued to the Trusts on its statement of
income.
In
March
2005, the Federal Reserve Board adopted final rules that continue to allow
the
inclusion of trust preferred securities in Tier 1 capital for regulatory
capital
adequacy purposes in an amount not to exceed 25% of Tier 1 capital, net of
goodwill and any related deferred tax liabilities. The amount of trust preferred
securities and certain other elements in excess of the limit may be included
in
Tier 2 capital, subject to restrictions.
The
table
below displays a summary of the ending balance and average rate for borrowed
funds on the dates indicated. For FHLB advances, the subsidiary banks pledge
FHLB stock and fully disbursed, otherwise unencumbered, 1-4 family first
mortgage loans as collateral for these advances as required by the FHLB.
Based
on this collateral and the Company’s holdings of FHLB stock, the Company is
eligible to borrow up to an additional $107,376,000 at year-end 2006. In
addition, the Company has a $15.0 million unsecured line of credit with an
unrelated financial institution available for general corporate purposes.
This
line of credit matures in June 2007 and bears interest at the three-month
LIBOR
rate plus 125 basis points.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
December
31, (Dollars in thousands)
|
|
2006
|
|
Rate
|
|
2005
|
|
Rate
|
|
Short-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased and securities sold under agreements to
repurchase
|
|
$
|
67,941
|
|
|
4.47
|
%
|
$
|
71,336
|
|
|
3.90
|
%
|
FHLB
advances
|
|
|
8,000
|
|
|
5.49
|
|
|
|
|
|
|
|
Other
|
|
|
777
|
|
|
2.00
|
|
|
779
|
|
|
3.20
|
|
Total
short-term
|
|
$
|
76,718
|
|
|
4.55
|
%
|
$
|
72,115
|
|
|
3.89
|
%
|
Long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
$
|
61,174
|
|
|
4.51
|
%
|
$
|
49,162
|
|
|
4.16
|
%
|
Subordinated
notes payable
|
|
|
25,774
|
|
|
6.96
|
|
|
25,774
|
|
|
5.61
|
|
Other
|
|
|
1,044
|
|
|
2.32
|
|
|
355
|
|
|
2.32
|
|
Total
long-term
|
|
$
|
87,992
|
|
|
5.20
|
%
|
$
|
75,291
|
|
|
4.65
|
%
|
Long-term
FHLB advances are made pursuant to several different credit programs, which
have
their own interest rates and range of maturities. Interest rates on FHLB
advances are generally fixed and range between 2.32% and 7.10%, averaging
4.51%,
over a remaining maturity period of up to 14 years as of December 31, 2006.
Approximately $21.0 million
of the total long-term advances from FHLB are convertible to a floating interest
rate. These advances may convert, at FHLB’s option, to a floating interest rate
indexed to LIBOR only if LIBOR equals or exceeds 7%. At year-end 2006,
three-month LIBOR was at 5.36%.
Maturities
of long-term borrowings at December 31, 2006 are as follows.
|
|
|
|
(In
thousands)
|
|
Amount
|
|
2007
|
|
$
|
20,679
|
|
2008
|
|
|
10,663
|
|
2009
|
|
|
10,658
|
|
2010
|
|
|
654
|
|
2011
|
|
|
5,484
|
|
Thereafter
|
|
|
39,854
|
|
Total
|
|
$
|
87,992
|
|
9. Income
Taxes
The
components of income tax expense are as follows.
Continuing
Operations
|
|
|
|
|
|
|
|
December
31, (In thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Currently
payable
|
|
$
|
5,208
|
|
$
|
3,985
|
|
$
|
2,034
|
|
Deferred
|
|
|
(1,848
|
)
|
|
(194
|
)
|
|
965
|
|
Total
applicable to continuing operations
|
|
|
3,360
|
|
|
3,791
|
|
|
2,999
|
|
Deferred
tax charged to components of shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
Unfunded
status of postretirement benefits
|
|
|
1,664
|
|
|
|
|
|
|
|
Net
unrealized securities gains (losses)
|
|
|
237
|
|
|
(1,362
|
)
|
|
(713
|
)
|
Total
income taxes from continuing operations
|
|
$
|
5,261
|
|
$
|
2,429
|
|
$
|
2,286
|
|
Discontinued
Operations
|
|
|
|
|
|
|
|
December
31, (In thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Currently
payable
|
|
$
|
4,287
|
|
$
|
294
|
|
$
|
276
|
|
Deferred
|
|
|
(152
|
)
|
|
189
|
|
|
(253
|
)
|
Total
applicable to discontinued operations
|
|
|
4,135
|
|
|
483
|
|
|
23
|
|
Deferred
tax charged to components of shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized securities gains (losses)
|
|
|
90
|
|
|
(47
|
)
|
|
(52
|
)
|
Total
income taxes from discontinued operations
|
|
$
|
4,225
|
|
$
|
436
|
|
$
|
(29
|
)
|
An
analysis of the difference between the effective income tax rates and the
statutory federal income tax rate follows.
Continuing
Operations
|
|
|
|
|
|
|
|
December
31,
|
|
2006
|
|
2005
|
|
2004
|
|
Federal
statutory rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Changes
from statutory rates resulting from:
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt
interest
|
|
|
(9.7
|
)
|
|
(8.3
|
)
|
|
(9.4
|
)
|
Nondeductible
interest to carry tax-exempt obligations
|
|
|
1.2
|
|
|
.7
|
|
|
.6
|
|
Tax
credits
|
|
|
(3.8
|
)
|
|
(3.6
|
)
|
|
(4.1
|
)
|
Premium
income not subject to tax
|
|
|
(2.4
|
)
|
|
(.2
|
)
|
|
|
|
Company-owned
life insurance
|
|
|
(2.4
|
)
|
|
(1.9
|
)
|
|
(2.5
|
)
|
Other,
net
|
|
|
1.8
|
|
|
(1.0
|
)
|
|
(.9
|
)
|
Effective
tax rate on pretax income from continuing operations
|
|
|
19.7
|
%
|
|
20.7
|
%
|
|
18.7
|
%
|
Discontinued
Operations
|
|
|
|
|
|
|
|
December
31,
|
|
2006
|
|
2005
|
|
2004
|
|
Federal
statutory rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Changes
from statutory rates resulting from:
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt
interest
|
|
|
(.7
|
)
|
|
(5.4
|
)
|
|
(23.2
|
)
|
Nondeductible
interest to carry tax-exempt obligations
|
|
|
.1
|
|
|
.6
|
|
|
2.1
|
|
Company-owned
life insurance
|
|
|
(.2
|
)
|
|
(1.1
|
)
|
|
(6.7
|
)
|
Other,
net
|
|
|
.7
|
|
|
(1.1
|
)
|
|
(.6
|
)
|
Effective
tax rate on pretax income from discontinued operations
|
|
|
34.9
|
%
|
|
28.0
|
%
|
|
6.6
|
%
|
The
tax
effects of the significant temporary differences that comprise deferred tax
assets and liabilities at December 31, 2006 and 2005 follows.
|
|
|
|
|
|
|
|
December
31, (In thousands)
|
|
2006
|
|
2005
|
|
|
|
|
|
Continuing
Operations
|
|
Discontinued
Operations
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
$
|
4,122
|
|
$
|
3,832
|
|
$
|
488
|
|
Unrealized
losses on available for sale investment securities, net
|
|
|
705
|
|
|
943
|
|
|
90
|
|
Deferred
directors’ fees
|
|
|
131
|
|
|
137
|
|
|
|
|
Postretirement
benefit obligations
|
|
|
3,251
|
|
|
1,277
|
|
|
40
|
|
Stock
options
|
|
|
513
|
|
|
902
|
|
|
67
|
|
Commissions
|
|
|
12
|
|
|
67
|
|
|
|
|
Self-funded
insurance
|
|
|
279
|
|
|
200
|
|
|
|
|
Paid
time off
|
|
|
455
|
|
|
|
|
|
|
|
Other
|
|
|
157
|
|
|
46
|
|
|
|
|
Total
deferred tax assets
|
|
|
9,625
|
|
|
7,404
|
|
|
685
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
925
|
|
|
971
|
|
|
287
|
|
Prepaid
expenses
|
|
|
590
|
|
|
557
|
|
|
41
|
|
Discount
on investment securities
|
|
|
1,040
|
|
|
860
|
|
|
178
|
|
Deferred
loan fees
|
|
|
1,000
|
|
|
1,093
|
|
|
241
|
|
Lease
financing operations
|
|
|
1,942
|
|
|
2,368
|
|
|
|
|
Intangibles
|
|
|
2,874
|
|
|
2,331
|
|
|
|
|
Total
deferred tax liabilities
|
|
|
8,371
|
|
|
8,180
|
|
|
747
|
|
Net
deferred tax asset (liability)
|
|
$
|
1,254
|
|
$
|
(776
|
)
|
$
|
(62
|
)
|
In
assessing the realizability of deferred tax assets, management considers
whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future
taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in
making this assessment. Based upon the level of historical taxable income
and
projections for future taxable income over the periods in which the deferred
tax
assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences at December
31, 2006.
10. Retirement
Plans
The
Company maintains an Employee Stock Ownership Plan (“ESOP”) and a salary savings
plan for its employees. The Company may at its discretion contribute an amount
(up to the maximum imposed by federal law) to the ESOP which will be allocated
to all participants in the ratio that each participant’s compensation bears to
all participants’ compensation. Such discretionary contributions will be
utilized to purchase shares of the Company’s common stock to be held in the
participants’ accounts. There were no contributions to the ESOP in any of the
years in the three-year period ended December 31, 2006. The fair market value
of
Company shares held by the ESOP was $2,459,000 and $2,218,000 at year-end
December 31, 2006 and 2005, respectively. The Company will terminate the
ESOP
during 2007 and merge it into the Company’s salary savings plan.
The
Company’s salary savings plan covers substantially all employees. The Company
matches all eligible voluntary tax deferred employee contributions up to
4% of
the participant's compensation. The Company may, at the discretion of the
Board,
contribute an additional amount based upon a percentage of covered employees'
salaries. The Company made a 4% discretionary contribution to the plan during
each of the years in the three-year period ended December 31, 2006.
Discretionary contributions are allocated among participants in the ratio
that
each participant’s compensation bears to all participants’ compensation.
Eligible employees are presented with various investment alternatives related
to
the salary savings plan. Those alternatives include various stock and bond
mutual funds that vary from traditional growth funds to more stable income
funds. Company shares are not an available investment alternative in the
salary
savings plan.
In
connection with the acquisition of Citizens Northern, the Company acquired
a
nonqualified supplemental retirement plan for certain key employees. Benefits
provided under this plan are unfunded, and payments to plan participants
are
made by the Company. The amount payable at year-end 2006 was
$561,000.
The
total
retirement plan expense for 2006, 2005, and 2004 was $1,427,000, $1,012,000,
and
1,099,000, respectively.
A
summary
of the activity in the Company’s stock option plan for 2006 is presented
below.
|
|
|
|
|
|
2006
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
Average
Price
|
|
Outstanding
at January 1
|
|
|
189,447
|
|
$
|
27.67
|
|
Granted
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(3,714
|
)
|
|
32.47
|
|
Exercised
|
|
|
(60,211
|
)
|
|
25.37
|
|
Outstanding
at December 31
|
|
|
125,522
|
|
$
|
28.62
|
|
|
|
|
|
|
|
|
|
Options
exercisable at year-end
|
|
|
120,379
|
|
$
|
28.58
|
|
Options
outstanding at year-end 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
|
|
|
61,615
|
|
|
.75
|
|
$
|
24.50
|
|
|
61,615
|
|
$
|
24.50
|
|
$29.75
|
|
|
27,858
|
|
|
3.00
|
|
|
29.75
|
|
|
22,715
|
|
|
29.75
|
|
$34.80
|
|
|
36,049
|
|
|
7.83
|
|
|
34.80
|
|
|
36,049
|
|
|
34.80
|
|
Outstanding
at year-end
|
|
|
125,522
|
|
|
3.28
|
|
$
|
28.62
|
|
|
120,379
|
|
$
|
28.58
|
|
The
aggregate intrinsic value for options outstanding and options exercisable
at
December 31, 2006 was $715,000 and $693,000, respectively.
The
following table presents further information regarding the Company’s stock
option Plan during each of the years indicated.
|
|
|
|
|
|
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Tax
benefit realized from options exercised
|
|
$
|
168
|
|
$
|
109
|
|
$
|
283
|
|
Total
intrinsic value of options exercised
|
|
|
479
|
|
|
311
|
|
|
810
|
|
Total
fair value of options vested
|
|
|
63
|
|
|
135
|
|
|
404
|
|
Cash
received from options exercised
|
|
|
1,529
|
|
|
771
|
|
|
1,755
|
|
There
were no modifications or cash paid to settle stock option awards during 2006,
2005, or 2004.
12.
|
Postretirement
Benefits
|
Prior
to
2003, the Company provided lifetime medical and dental benefits upon retirement
for certain retired employees meeting the eligibility requirements as of
December 31, 1989. During 2003, the Company implemented an additional
postretirement health insurance program. Under this postretirement health
insurance plan, any employee meeting the service requirements of 20 years
of
full time service to the Company and is at least age 55 upon retirement will
be
eligible to continue their health insurance coverage. The coverage offered
to
eligible retirees will be identical to the coverage that is offered to active
employees. The retiree will pay 50% of the cost and the Company will pay
50%.
The Company pays for the entire costs of the benefits under the first plan.
Both
plans are unfunded.
In
connection with the acquisition of Citizens Northern, the Company acquired
a
nonqualified supplemental retirement plan for certain key employees. Benefits
provided under this plan are unfunded, and payments to plan participants
are
made by the Company.
The
following schedules set forth a reconciliation of the changes in the plans
benefit obligation and funded status for the years ended December 31, 2006
and
2005.
|
|
Postretirement
Medical Benefits
|
|
Supplemental
Retirement Plan
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Change
in Benefit Obligation
|
|
|
|
|
|
|
|
|
|
Obligation
at beginning of year
|
|
$
|
7,354
|
|
$
|
6,414
|
|
$
|
374
|
|
|
|
|
Service
cost
|
|
|
258
|
|
|
186
|
|
|
41
|
|
|
|
|
Interest
cost
|
|
|
415
|
|
|
376
|
|
|
22
|
|
|
|
|
Prior
service cost
|
|
|
222
|
|
|
215
|
|
|
|
|
|
|
|
Actuarial
loss
|
|
|
814
|
|
|
462
|
|
|
124
|
|
|
|
|
Participant
contributions
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
Benefit
payments
|
|
|
(367
|
)
|
|
(299
|
)
|
|
|
|
|
|
|
Acquisition
|
|
|
|
|
|
|
|
|
|
|
$
|
374
|
|
Obligation
at end of year
|
|
$
|
8,728
|
|
$
|
7,354
|
|
$
|
561
|
|
$
|
374
|
|
Reconciliation
of Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation
|
|
$
|
(8,728
|
)
|
$
|
(7,354
|
)
|
$
|
(561
|
)
|
$
|
(374
|
)
|
Unrecognized
transition obligation
|
|
|
609
|
|
|
710
|
|
|
|
|
|
|
|
Unamortized
prior service cost
|
|
|
2,121
|
|
|
2,167
|
|
|
|
|
|
|
|
Unrecognized
net actuarial loss
|
|
|
1,721
|
|
|
929
|
|
|
304
|
|
|
|
|
Adjustment
to accumulated other comprehensive loss upon the adoption of SFAS
No.
158
|
|
|
(4,451
|
)
|
|
|
|
|
(304
|
)
|
|
|
|
Plan
liability
|
|
$
|
(8,728
|
)
|
$
|
(3,548
|
)
|
$
|
(561
|
)
|
$
|
(374
|
)
|
The
following table provides disclosure of the net periodic benefit cost as of
December 31.
|
|
|
|
|
|
|
|
Postretirement
Medical Benefits
|
|
Supplemental
Retirement Plan
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
Service
cost
|
|
$
|
258
|
|
$
|
186
|
|
$
|
41
|
|
Interest
cost
|
|
|
415
|
|
|
376
|
|
|
21
|
|
Amortization
of transition obligation
|
|
|
102
|
|
|
101
|
|
|
|
|
Recognized
prior service cost
|
|
|
268
|
|
|
250
|
|
|
|
|
Recognized
net actuarial loss
|
|
|
21
|
|
|
7
|
|
|
17
|
|
Net
periodic benefit cost
|
|
$
|
1,064
|
|
$
|
920
|
|
$
|
79
|
|
Major
assumptions:
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.75
|
%
|
|
5.75
|
%
|
|
5.75
|
%
|
Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plans. For measurement purposes, the rate of increase
in
pre-Medicare medical care claims costs was 9% in 2007 grading down by 1%
to 5%
for 2011 and thereafter. For Medicare Supplement claims costs, it was 7%
in 2007
grading down by .5% to 5% for 2011 and thereafter. For dental claims cost,
it
was 5% for 2007 and thereafter. A 1% change in the assumed health care cost
trend rates would have the following incremental effects:
|
|
|
|
|
|
(In
thousands)
|
|
1%
Increase
|
|
1%
Decrease
|
|
Effect
on total of service and interest cost components of net periodic
postretirement health care benefit cost
|
|
$
|
167
|
|
$
|
(131
|
)
|
Effect
on postretirement benefit obligation
|
|
|
1,341
|
|
|
(1,091
|
)
|
The
following table presents estimated future benefit payments in the period
indicated.
|
|
|
|
|
|
(In
thousands)
|
|
Postretirement Medical
Benefits
|
|
Supplemental
Retirement Plan
|
|
2007
|
|
$
|
363
|
|
$
|
20
|
|
2008
|
|
|
372
|
|
|
20
|
|
2009
|
|
|
401
|
|
|
20
|
|
2010
|
|
|
428
|
|
|
20
|
|
2011
|
|
|
434
|
|
|
20
|
|
2012-2016
|
|
|
2,397
|
|
|
206
|
|
Total
|
|
$
|
4,395
|
|
$
|
306
|
|
Amounts
recognized in accumulated other comprehensive loss as of December 31, 2006
are
as follows:
|
|
|
|
|
|
(In
thousands)
|
|
Postretirement Medical
Benefits
|
|
Supplemental
Retirement Plan
|
|
Unrecognized
net actuarial loss
|
|
$
|
1,721
|
|
$
|
304
|
|
Unrecognized
transition obligation
|
|
|
609
|
|
|
|
|
Unrecognized
prior service cost
|
|
|
2,121
|
|
|
|
|
Total
|
|
$
|
4,451
|
|
$
|
304
|
|
The
estimated costs that will be amortized from accumulated other comprehensive
loss
into net periodic cost over the next fiscal year are as
follows:
|
|
|
|
|
|
(In
thousands)
|
|
Postretirement Medical
Benefits
|
|
Supplemental
Retirement Plan
|
|
Unrecognized
net actuarial loss
|
|
$
|
4
|
|
|
|
|
Unrecognized
prior service cost
|
|
|
287
|
|
|
|
|
Net
actuarial loss
|
|
|
|
|
$
|
23
|
|
Total
|
|
$
|
291
|
|
$
|
23
|
|
13.
Leases
The
Company leases certain branch sites and certain banking equipment under various
operating leases. All of the branch site leases have renewal options of varying
lengths and terms. In addition, the Company leases certain data processing
equipment that meets the capitalization criteria of SFAS No. 13, “Accounting
for Leases”,
as
amended, and has been recorded as an asset in premises and
equipment
and a liability in other long-term debt on the balance sheet. The following
table presents estimated future minimum rental commitments under these leases
for the period indicated.
|
|
|
|
|
|
(In
thousands)
|
|
Operating Leases
|
|
Capital Lease
|
|
2007
|
|
$
|
613
|
|
$
|
254
|
|
2008
|
|
|
540
|
|
|
254
|
|
2009
|
|
|
477
|
|
|
254
|
|
2010
|
|
|
402
|
|
|
254
|
|
2011
|
|
|
358
|
|
|
84
|
|
Thereafter
|
|
|
2,104
|
|
|
|
|
|
|
$
|
4,494
|
|
|
1,100
|
|
Less:
amount representing interest
|
|
|
|
|
|
56
|
|
Long-term
obligation under capital lease
|
|
|
|
|
$
|
1,044
|
|
The
Company is a party to financial instruments with off-balance sheet risk in
the
normal course of business to meet the financing needs of its customers. The
financial instruments include commitments to extend credit and standby letters
of credit.
These
financial instruments involve to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
balance sheets. The contract amounts of these instruments reflect the extent
of
involvement the Company has in particular classes of financial
instruments.
Commitments
to extend credit are agreements to lend to a customer as long as there is
no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require
the
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amount does not necessarily represent
future cash requirements. Total commitments to extend credit were $217,285,000
and $160,736,000 at December 31, 2006 and 2005, respectively. The Company
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained upon extension of credit, if deemed necessary by the
Company, is based on management's credit evaluation of the counter-party.
Collateral held varies, but may include accounts receivable, marketable
securities, inventory, premises and equipment, residential real estate, and
income producing commercial properties.
Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party. Since many of the commitments
are expected to expire without being drawn upon, the total commitment amount
does not necessarily represent future cash requirements. The credit risk
involved in issuing letters of credit is essentially the same as that received
when extending credit to customers. The fair value of these instruments is
not
considered material for disclosure under FASB Interpretation No. 45. The
Company
had $16,863,000 and $11,632,000 in irrevocable letters of credit outstanding
at
December 31, 2006 and 2005, respectively.
The
contractual amount of financial instruments with off-balance sheet risk was
as
follows at year-end.
|
|
|
|
|
|
December
31,
|
|
2006
|
|
2005
|
|
(In
thousands)
|
|
Fixed
Rate
|
|
Variable
Rate
|
|
Fixed
Rate
|
|
Variable
Rate
|
|
Commitments
to extend credit
|
|
$
|
84,590
|
|
$
|
132,695
|
|
$
|
34,707
|
|
$
|
126,029
|
|
Standby
letters of credit
|
|
|
15,102
|
|
|
1,761
|
|
|
11,049
|
|
|
583
|
|
Total
|
|
$
|
99,692
|
|
$
|
134,456
|
|
$
|
45,756
|
|
$
|
126,612
|
|
15. Concentration
of Credit Risk
The
Company's bank subsidiaries actively engage in lending, primarily in their
home
counties and adjacent areas. Collateral is received to support these loans
when
deemed necessary. The more significant categories of collateral include cash
on
deposit with the Company's banks, marketable securities, income producing
property, home mortgages, and consumer durables. Loans outstanding, commitments
to make loans, and letters of credit range across a large number of industries
and individuals. The obligations are significantly diverse and reflect no
material concentration in one or more areas, other than most of the Company’s
loans are in the Commonwealth of Kentucky.
Loss
contingencies, including claims and legal actions arising in the ordinary
course
of business, are recorded as liabilities when the likelihood of loss is probable
and an amount or range of loss can be reasonably estimated. As of December
31,
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.
Payment
of dividends by the Company's subsidiary banks is subject to certain regulatory
restrictions as set forth in national and state banking laws and regulations.
Generally, capital distributions are limited to undistributed net income
for the
current and prior two years, subject to the capital requirements described
below. At December 31, 2006, combined retained earnings of the subsidiary
banks
were $60,905,000 of which $25,733,000 was available for the payment of dividends
in 2007 without obtaining prior approval from bank regulatory
agencies.
Included
in cash and due from banks is certain noninterest bearing deposits that are
held
at the Federal Reserve Bank and correspondent banks in accordance with
regulatory reserve requirements specified by the Federal Reserve Board of
Governors. The reserve requirement was $16,897,000 and $16,010,000 at December
31, 2006 and 2005, respectively.
The
Company and its subsidiary banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements will initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a
direct material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the banks must meet specific capital guidelines that involve quantitative
measures of the banks’ assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The Company and its
subsidiary banks’ capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and
other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and its subsidiary banks to maintain minimum amounts and ratios (set
forth in the tables below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
to
average assets (as defined). The Company and each of the subsidiary banks
meet
all capital adequacy requirements to which they are subject as of December
31,
2006.
As
of
December 31, 2006, the most recent notification from the FDIC categorized
the
banks as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the banks must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth
in
the tables. There are no conditions or events since that notification that
management believes have changed the institutions’ category.
The
capital amounts and ratios of the consolidated Company and the banks are
presented in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To
Be Well Capitalized
|
|
|
|
|
|
For
Capital
|
|
Under
Prompt Corrective
|
|
|
|
Actual
|
|
Adequacy
Purposes
|
|
Action
Provisions
|
|
December
31, 2006 (Dollars in thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Tier
1 Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
155,264
|
|
|
12.23
|
%
|
$
|
50,793
|
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
Farmers
Bank & Capital Trust Co.
|
|
|
38,411
|
|
|
10.94
|
|
|
14,046
|
|
|
4.00
|
|
$
|
21,069
|
|
|
6.00
|
%
|
Farmers
Bank and Trust Company
|
|
|
26,975
|
|
|
11.04
|
|
|
9,771
|
|
|
4.00
|
|
|
14,656
|
|
|
6.00
|
|
Lawrenceburg
National Bank
|
|
|
11,888
|
|
|
10.78
|
|
|
4,413
|
|
|
4.00
|
|
|
6,619
|
|
|
6.00
|
|
First
Citizens Bank
|
|
|
18,072
|
|
|
11.62
|
|
|
6,223
|
|
|
4.00
|
|
|
9,335
|
|
|
6.00
|
|
United
Bank & Trust Co.
|
|
|
14,084
|
|
|
11.19
|
|
|
5,034
|
|
|
4.00
|
|
|
7,552
|
|
|
6.00
|
|
Citizens
National Bank of Jessamine County
|
|
|
11,429
|
|
|
9.50
|
|
|
4,813
|
|
|
4.00
|
|
|
7,220
|
|
|
6.00
|
|
Citizens
Bank of Northern Kentucky
|
|
|
17,345
|
|
|
10.05
|
|
|
6,902
|
|
|
4.00
|
|
|
10,353
|
|
|
6.00
|
|
Total
Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
167,263
|
|
|
13.17
|
%
|
$
|
101,587
|
|
|
8.00
|
%
|
|
N/A
|
|
|
N/A
|
|
Farmers
Bank & Capital Trust Co.
|
|
|
41,931
|
|
|
11.94
|
|
|
28,092
|
|
|
8.00
|
|
$
|
35,115
|
|
|
10.00
|
%
|
Farmers
Bank and Trust Company
|
|
|
28,839
|
|
|
11.81
|
|
|
19,541
|
|
|
8.00
|
|
|
24,427
|
|
|
10.00
|
|
Lawrenceburg
National Bank
|
|
|
13,269
|
|
|
12.03
|
|
|
8,825
|
|
|
8.00
|
|
|
11,032
|
|
|
10.00
|
|
First
Citizens Bank
|
|
|
19,341
|
|
|
12.43
|
|
|
12,447
|
|
|
8.00
|
|
|
15,559
|
|
|
10.00
|
|
United
Bank & Trust Co.
|
|
|
15,332
|
|
|
12.18
|
|
|
10,069
|
|
|
8.00
|
|
|
12,586
|
|
|
10.00
|
|
Citizens
National Bank of Jessamine County
|
|
|
12,673
|
|
|
10.53
|
|
|
9,626
|
|
|
8.00
|
|
|
12,033
|
|
|
10.00
|
|
Citizens
Bank of Northern Kentucky
|
|
|
18,657
|
|
|
10.81
|
|
|
13,804
|
|
|
8.00
|
|
|
17,255
|
|
|
10.00
|
|
Tier
1 Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
155,264
|
|
|
8.47
|
%
|
$
|
73,314
|
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
Farmers
Bank & Capital Trust Co.
|
|
|
38,411
|
|
|
6.55
|
|
|
23,449
|
|
|
4.00
|
|
$
|
29,312
|
|
|
5.00
|
%
|
Farmers
Bank and Trust Company
|
|
|
26,975
|
|
|
8.05
|
|
|
13,406
|
|
|
4.00
|
|
|
16,757
|
|
|
5.00
|
|
Lawrenceburg
National Bank
|
|
|
11,888
|
|
|
6.86
|
|
|
6,935
|
|
|
4.00
|
|
|
8,669
|
|
|
5.00
|
|
First
Citizens Bank
|
|
|
18,072
|
|
|
8.41
|
|
|
8,594
|
|
|
4.00
|
|
|
10,743
|
|
|
5.00
|
|
United
Bank & Trust Co.
|
|
|
14,084
|
|
|
7.90
|
|
|
7,128
|
|
|
4.00
|
|
|
8,910
|
|
|
5.00
|
|
Citizens
National Bank of Jessamine County
|
|
|
11,429
|
|
|
7.61
|
|
|
6,005
|
|
|
4.00
|
|
|
7,507
|
|
|
5.00
|
|
Citizens
Bank of Northern Kentucky
|
|
|
17,345
|
|
|
8.17
|
|
|
8,489
|
|
|
4.00
|
|
|
10,611
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To
Be Well Capitalized
|
|
|
|
|
|
For
Capital
|
|
Under
Prompt Corrective
|
|
|
|
Actual
|
|
Adequacy
Purposes
|
|
Action
Provisions
|
|
December
31, 2005 (Dollars in thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Tier
1 Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
143,861
|
|
|
12.68
|
%
|
$
|
45,395
|
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
Farmers
Bank & Capital Trust Co.
|
|
|
38,022
|
|
|
12.25
|
|
|
12,416
|
|
|
4.00
|
|
$
|
18,624
|
|
|
6.00
|
%
|
Farmers
Bank and Trust Company
|
|
|
22,316
|
|
|
10.69
|
|
|
8,347
|
|
|
4.00
|
|
|
12,521
|
|
|
6.00
|
|
Lawrenceburg
National Bank
|
|
|
12,112
|
|
|
11.26
|
|
|
4,304
|
|
|
4.00
|
|
|
6,456
|
|
|
6.00
|
|
First
Citizens Bank
|
|
|
14,323
|
|
|
10.56
|
|
|
5,425
|
|
|
4.00
|
|
|
8,138
|
|
|
6.00
|
|
United
Bank & Trust Co.
|
|
|
14,068
|
|
|
11.13
|
|
|
5,055
|
|
|
4.00
|
|
|
7,583
|
|
|
6.00
|
|
Citizens
Bank of Northern Kentucky
|
|
|
15,591
|
|
|
9.53
|
|
|
6,545
|
|
|
4.00
|
|
|
9,817
|
|
|
6.00
|
|
Total
Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
156,323
|
|
|
13.77
|
%
|
$
|
90,791
|
|
|
8.00
|
%
|
|
N/A
|
|
|
N/A
|
|
Farmers
Bank & Capital Trust Co.
|
|
|
41,458
|
|
|
13.36
|
|
|
24,832
|
|
|
8.00
|
|
$
|
31,040
|
|
|
10.00
|
%
|
Farmers
Bank and Trust Company
|
|
|
24,482
|
|
|
11.73
|
|
|
16,694
|
|
|
8.00
|
|
|
20,868
|
|
|
10.00
|
|
Lawrenceburg
National Bank
|
|
|
13,459
|
|
|
12.51
|
|
|
8,608
|
|
|
8.00
|
|
|
10,760
|
|
|
10.00
|
|
First
Citizens Bank
|
|
|
15,625
|
|
|
11.52
|
|
|
10,850
|
|
|
8.00
|
|
|
13,563
|
|
|
10.00
|
|
United
Bank & Trust Co.
|
|
|
15,528
|
|
|
12.29
|
|
|
10,111
|
|
|
8.00
|
|
|
12,639
|
|
|
10.00
|
|
Citizens
Bank of Northern Kentucky
|
|
|
17,017
|
|
|
10.40
|
|
|
13,089
|
|
|
8.00
|
|
|
16,362
|
|
|
10.00
|
|
Tier
1 Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
143,861
|
|
|
9.59
|
%
|
$
|
59,992
|
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
Farmers
Bank & Capital Trust Co.
|
|
|
38,022
|
|
|
6.55
|
|
|
23,216
|
|
|
4.00
|
|
$
|
29,020
|
|
|
5.00
|
%
|
Farmers
Bank and Trust Company
|
|
|
22,316
|
|
|
7.62
|
|
|
11,715
|
|
|
4.00
|
|
|
14,644
|
|
|
5.00
|
|
Lawrenceburg
National Bank
|
|
|
12,112
|
|
|
7.22
|
|
|
6,711
|
|
|
4.00
|
|
|
8,388
|
|
|
5.00
|
|
First
Citizens Bank
|
|
|
14,323
|
|
|
7.44
|
|
|
7,702
|
|
|
4.00
|
|
|
9,627
|
|
|
5.00
|
|
United
Bank & Trust Co.
|
|
|
14,068
|
|
|
7.49
|
|
|
7,514
|
|
|
4.00
|
|
|
9,392
|
|
|
5.00
|
|
Citizens
Bank of Northern Kentucky
|
|
|
15,591
|
|
|
7.99
|
|
|
7,805
|
|
|
4.00
|
|
|
9,756
|
|
|
5.00
|
|
18. Fair
Value of Financial Instruments
The
following table presents the estimated fair values of the Company’s financial
instruments made in accordance with the requirements of SFAS No. 107,
Disclosures
About Fair Value of Financial Instruments.
This
Statement requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet for which it
is
practicable to estimate that value. The estimated fair value amounts have
been
determined by the Company using available market information and present
value
or other valuation techniques. These derived fair values are subjective in
nature, involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from the disclosure
requirements. Accordingly, the aggregate fair value amounts presented are
not
intended to represent the underlying value of the Company.
The
following methods and assumptions were used to estimate the fair value of
each
class of financial instruments for which it is practicable to estimate that
value.
Cash
and
Cash Equivalents, Accrued Interest Receivable, and Accrued Interest
Payable
The
carrying amount is a reasonable estimate of fair value.
Investment
Securities
Fair
value equals quoted market price, if available. If a quoted market price
is not
available, fair value is estimated using quoted market prices for similar
securities.
Loans
The
fair
value of loans is estimated by discounting the future cash flows using current
discount rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Deposit
Liabilities
The
fair
value of demand deposits, savings accounts, and certain money market deposits
is
the amount payable on demand at the reporting date. The fair value of fixed
maturity certificates of deposit is estimated by discounting the future cash
flows using the rates currently offered for certificates of deposit with
similar
remaining maturities.
Commitments
to Extend Credit and Standby Letters of Credit
Pricing
of these financial instruments is based on the credit quality and relationship,
fees, interest rates, probability of funding, compensating balance, and other
covenants or requirements. Loan commitments generally have fixed expiration
dates, variable interest rates and contain termination and other clauses
that
provide for relief from funding in the event there is a significant
deterioration in the credit quality of the customer. Many loan commitments
are
expected to, and typically do, expire without being drawn upon. The rates
and
terms of the Company's commitments to lend and standby letters of credit
are
competitive with others in the various markets in which the Company operates.
There are no unamortized fees relating to these financial instruments, as
such
the carrying value and fair value are both zero.
Federal
Funds Purchased, Securities Sold Under Agreements to Repurchase, FHLB, and
Other
Borrowed Funds
The
fair
value of federal funds purchased, securities sold under agreements to
repurchase, and other borrowed funds is estimated using rates currently
available for debt with similar terms and remaining maturities.
The
estimated fair values of the Company's financial instruments are as
follows.
|
|
|
|
|
|
December
31,
|
|
2006
|
|
2005
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
(In
thousands)
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
156,828
|
|
$
|
156,828
|
|
$
|
131,018
|
|
$
|
131,018
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
326,485
|
|
|
326,485
|
|
|
315,067
|
|
|
315,067
|
|
Held
to maturity
|
|
|
7,788
|
|
|
7,849
|
|
|
13,610
|
|
|
13,814
|
|
Loans,
net
|
|
|
1,185,837
|
|
|
1,161,656
|
|
|
951,502
|
|
|
938,816
|
|
Accrued
interest receivable
|
|
|
11,735
|
|
|
11,735
|
|
|
8,285
|
|
|
8,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,454,820
|
|
|
1,452,129
|
|
|
1,191,651
|
|
|
1,189,528
|
|
Federal
funds purchased and securities sold under agreements to
repurchase
|
|
|
67,941
|
|
|
67,941
|
|
|
71,336
|
|
|
71,336
|
|
FHLB
and other borrowings
|
|
|
70,995
|
|
|
79,796
|
|
|
50,296
|
|
|
57,381
|
|
Subordinated
notes payable to unconsolidated trusts
|
|
|
25,774
|
|
|
25,774
|
|
|
25,774
|
|
|
25,774
|
|
Accrued
interest payable
|
|
|
4,773
|
|
|
4,773
|
|
|
2,179
|
|
|
2,179
|
|
19.
|
Parent
Company Financial
Statements
|
Condensed
Balance Sheets
|
|
|
|
|
|
December
31, (In thousands)
|
|
2006
|
|
2005
|
|
Assets
|
|
|
|
|
|
|
|
Cash
on deposit with subsidiaries
|
|
$
|
11,103
|
|
$
|
32,121
|
|
Investment
in subsidiaries
|
|
|
192,459
|
|
|
165,091
|
|
Net
assets of discontinued operations
|
|
|
|
|
|
840
|
|
Other
assets
|
|
|
11,610
|
|
|
8,482
|
|
Total
assets
|
|
$
|
215,172
|
|
$
|
206,534
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Dividends
payable
|
|
$
|
3,472
|
|
$
|
2,244
|
|
Subordinated
notes payable to unconsolidated trusts
|
|
|
25,774
|
|
|
25,774
|
|
Accrued
purchase price-Citizens Bancorp, Inc.
|
|
|
|
|
|
21,846
|
|
Other
liabilities
|
|
|
7,485
|
|
|
2,434
|
|
Total
liabilities
|
|
|
36,731
|
|
|
52,298
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
Common
stock
|
|
|
1,174
|
|
|
1,107
|
|
Capital
surplus
|
|
|
56,679
|
|
|
39,829
|
|
Retained
earnings
|
|
|
167,387
|
|
|
156,796
|
|
Treasury
stock
|
|
|
(42,399
|
)
|
|
(41,579
|
)
|
Accumulated
other comprehensive loss
|
|
|
(4,400
|
)
|
|
(1,917
|
)
|
Total
shareholders’ equity
|
|
|
178,441
|
|
|
154,236
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
215,172
|
|
$
|
206,534
|
|
Condensed
Statements of Income
|
|
|
|
|
|
|
|
Years
Ended December 31, (In thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
Dividends
from subsidiaries
|
|
$
|
9,086
|
|
$
|
7,490
|
|
$
|
8,457
|
|
Interest
income
|
|
|
74
|
|
|
85
|
|
|
80
|
|
Other
dividend income
|
|
|
|
|
|
|
|
|
24
|
|
Investment
securities gains, net
|
|
|
|
|
|
|
|
|
250
|
|
Gain
on sale of discontinued operations
|
|
|
9,442
|
|
|
|
|
|
|
|
Other
noninterest income
|
|
|
2,732
|
|
|
2,110
|
|
|
2,003
|
|
Total
income
|
|
|
21,334
|
|
|
9,685
|
|
|
10,814
|
|
Expense
|
|
|
|
|
|
|
|
|
|
|
Interest
expense-subordinated notes payable to unconsolidated
trusts
|
|
|
1,747
|
|
|
623
|
|
|
|
|
Interest
expense on other borrowed funds
|
|
|
186
|
|
|
|
|
|
|
|
Noninterest
expense
|
|
|
4,021
|
|
|
3,290
|
|
|
3,417
|
|
Total
expense
|
|
|
5,954
|
|
|
3,913
|
|
|
3,417
|
|
Income
before income tax benefit and equity in undistributed income of
subsidiaries
|
|
|
15,380
|
|
|
5,772
|
|
|
7,397
|
|
Income
tax expense (benefit)
|
|
|
2,321
|
|
|
(772
|
)
|
|
(608
|
)
|
Income
before equity in undistributed income of subsidiaries
|
|
|
13,059
|
|
|
6,544
|
|
|
8,005
|
|
Equity
in undistributed income of subsidiaries1
|
|
|
8,313
|
|
|
9,228
|
|
|
5,387
|
|
Net
income
|
|
$
|
21,372
|
|
$
|
15,772
|
|
$
|
13,392
|
|
1Includes
$1,290, $1,240, and $324 related to discontinued operations during 2006,
2005,
and 2004, respectively.
Condensed
Statements of Cash Flows
|
|
|
|
|
|
|
|
Years
Ended December 31, (In thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
21,372
|
|
$
|
15,772
|
|
$
|
13,392
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of discontinued operations
|
|
|
(9,442
|
)
|
|
|
|
|
|
|
Equity
in undistributed income of subsidiaries
|
|
|
(8,313
|
)
|
|
(9,228
|
)
|
|
(5,387
|
)
|
Noncash
stock option expense
|
|
|
52
|
|
|
|
|
|
39
|
|
Gain
on sale of available for sale investment securities
|
|
|
|
|
|
|
|
|
(250
|
)
|
Change
in other assets and liabilities, net
|
|
|
3,925
|
|
|
(793
|
)
|
|
691
|
|
Deferred
income tax (benefit) expense
|
|
|
(742
|
)
|
|
8
|
|
|
(512
|
)
|
Net
cash provided by operating activities
|
|
|
6,852
|
|
|
5,759
|
|
|
7,973
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of available for sale investment securities
|
|
|
|
|
|
|
|
|
925
|
|
Proceeds
from disposal of discontinued operations
|
|
|
19,875
|
|
|
|
|
|
|
|
Investment
in unconsolidated trusts
|
|
|
|
|
|
(774
|
)
|
|
|
|
Investment
in nonbank subsidiaries
|
|
|
|
|
|
(285
|
)
|
|
(1,600
|
)
|
Investment
in bank subsidiary
|
|
|
(629
|
)
|
|
(581
|
)
|
|
(4,000
|
)
|
Payment
of prior year accrued purchase price-Citizens Bancorp,
Inc.
|
|
|
(21,846
|
)
|
|
|
|
|
|
|
Purchase
of Citizens National Bancshares, Inc.
|
|
|
(15,041
|
)
|
|
|
|
|
|
|
Purchase
of Citizens Bank (Kentucky), Inc.
|
|
|
(29
|
)
|
|
(2
|
)
|
|
(14,588
|
)
|
Purchase
of company-owned life insurance
|
|
|
(1,579
|
)
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(19,249
|
)
|
|
(1,642
|
)
|
|
(19,263
|
)
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from short-term borrowings
|
|
|
15,000
|
|
|
|
|
|
|
|
Repayment
of short-term borrowings
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
Dividends
paid
|
|
|
(9,553
|
)
|
|
(8,949
|
)
|
|
(8,879
|
)
|
Purchase
of common stock
|
|
|
(820
|
)
|
|
(571
|
)
|
|
(178
|
)
|
Shares
issued under Employee Stock Purchase Plan
|
|
|
223
|
|
|
187
|
|
|
93
|
|
Stock
options exercised
|
|
|
1,529
|
|
|
771
|
|
|
1,755
|
|
Proceeds
from long-term debt issued to unconsolidated trusts
|
|
|
|
|
|
25,774
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
(8,621
|
)
|
|
17,212
|
|
|
(7,209
|
)
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(21,018
|
)
|
|
21,329
|
|
|
(18,499
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
32,121
|
|
|
10,792
|
|
|
29,291
|
|
Cash
and cash equivalents at end of year
|
|
$
|
11,103
|
|
$
|
32,121
|
|
$
|
10,792
|
|
20.
|
Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
Quarters
Ended 2006
|
|
March
31
|
|
June
30
|
|
Sept.
30
|
|
Dec.
31
|
|
Interest
income
|
|
$
|
20,883
|
|
$
|
21,669
|
|
$
|
22,835
|
|
$
|
26,953
|
|
Interest
expense
|
|
|
8,567
|
|
|
9,427
|
|
|
10,447
|
|
|
12,991
|
|
Net
interest income
|
|
|
12,316
|
|
|
12,242
|
|
|
12,388
|
|
|
13,962
|
|
Provision
for loan losses
|
|
|
(34
|
)
|
|
(46
|
)
|
|
253
|
|
|
792
|
|
Net
interest income after provision for loan losses
|
|
|
12,350
|
|
|
12,288
|
|
|
12,135
|
|
|
13,170
|
|
Noninterest
income
|
|
|
5,056
|
|
|
4,991
|
|
|
5,015
|
|
|
5,397
|
|
Noninterest
expense
|
|
|
12,507
|
|
|
12,434
|
|
|
12,901
|
|
|
15,535
|
|
Income
from continuing operations before income taxes
|
|
|
4,899
|
|
|
4,845
|
|
|
4,249
|
|
|
3,032
|
|
Income
tax expense from continuing operations
|
|
|
910
|
|
|
967
|
|
|
966
|
|
|
517
|
|
Income
from continuing operations
|
|
|
3,989
|
|
|
3,878
|
|
|
3,283
|
|
|
2,515
|
|
Income
from discontinued operations before income taxes1
|
|
|
567
|
|
|
599
|
|
|
713
|
|
|
9,963
|
|
Income
tax expense from discontinued operations2
|
|
|
165
|
|
|
171
|
|
|
250
|
|
|
3,549
|
|
Income
from discontinued operations
|
|
|
402
|
|
|
428
|
|
|
463
|
|
|
6,414
|
|
Net
income
|
|
$
|
4,391
|
|
$
|
4,306
|
|
$
|
3,746
|
|
$
|
8,929
|
|
Income
from continuing operations - basic and diluted
|
|
$
|
.54
|
|
$
|
.52
|
|
$
|
.45
|
|
$
|
.32
|
|
Income
from discontinued operations - basic and diluted
|
|
|
.05
|
|
|
.06
|
|
|
.06
|
|
|
.81
|
|
Net
income per common share, basic and diluted
|
|
|
.59
|
|
|
.58
|
|
|
.51
|
|
|
1.13
|
|
Weighted
average shares outstanding, basic
|
|
|
7,385
|
|
|
7,378
|
|
|
7,393
|
|
|
7,884
|
|
Weighted
average shares outstanding, diluted
|
|
|
7,413
|
|
|
7,400
|
|
|
7,412
|
|
|
7,904
|
|
1Includes
gain on disposals of $9,873 during the quarter ended December 31,
2006.
2Includes
income tax expense of $3,456 during the quarter ended December 31, 2006 related
to gain on disposals.
|
|
|
|
|
|
|
|
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
Quarters
Ended 2005
|
|
March
31
|
|
June
30
|
|
Sept.
30
|
|
Dec.
31
|
|
Interest
income
|
|
$
|
15,127
|
|
$
|
15,722
|
|
$
|
16,369
|
|
$
|
18,433
|
|
Interest
expense
|
|
|
5,237
|
|
|
5,616
|
|
|
6,260
|
|
|
7,296
|
|
Net
interest income
|
|
|
9,890
|
|
|
10,106
|
|
|
10,109
|
|
|
11,137
|
|
Provision
for loan losses
|
|
|
(12
|
)
|
|
31
|
|
|
348
|
|
|
255
|
|
Net
interest income after provision for loan losses
|
|
|
9,902
|
|
|
10,075
|
|
|
9,761
|
|
|
10,882
|
|
Noninterest
income
|
|
|
5,362
|
|
|
4,984
|
|
|
4,852
|
|
|
4,669
|
|
Noninterest
expense
|
|
|
10,547
|
|
|
10,372
|
|
|
10,503
|
|
|
10,742
|
|
Income
from continuing operations before income taxes
|
|
|
4,717
|
|
|
4,687
|
|
|
4,110
|
|
|
4,809
|
|
Income
tax expense from continuing operations
|
|
|
992
|
|
|
1,131
|
|
|
699
|
|
|
969
|
|
Income
from continuing operations
|
|
|
3,725
|
|
|
3,556
|
|
|
3,411
|
|
|
3,840
|
|
Income
from discontinued operations before income taxes
|
|
|
448
|
|
|
440
|
|
|
656
|
|
|
179
|
|
Income
tax expense from discontinued operations
|
|
|
117
|
|
|
108
|
|
|
214
|
|
|
44
|
|
Income
from discontinued operations
|
|
|
331
|
|
|
332
|
|
|
442
|
|
|
135
|
|
Net
income
|
|
$
|
4,056
|
|
$
|
3,888
|
|
$
|
3,853
|
|
$
|
3,975
|
|
Income
from continuing operations - basic
|
|
$
|
.55
|
|
$
|
.52
|
|
$
|
.51
|
|
$
|
.55
|
|
Income
from discontinued operations - basic
|
|
|
.05
|
|
|
.05
|
|
|
.06
|
|
|
.02
|
|
Net
income per common share, basic
|
|
|
.60
|
|
|
.57
|
|
|
.57
|
|
|
.57
|
|
Income
from continuing operations - diluted
|
|
|
.54
|
|
|
.52
|
|
|
.50
|
|
|
.55
|
|
Income
from discontinued operations - diluted
|
|
|
.05
|
|
|
.05
|
|
|
.06
|
|
|
.02
|
|
Net
income per common share, diluted
|
|
|
.59
|
|
|
.57
|
|
|
.56
|
|
|
.57
|
|
Weighted
average shares outstanding, basic
|
|
|
6,791
|
|
|
6,781
|
|
|
6,786
|
|
|
6,963
|
|
Weighted
average shares outstanding, diluted
|
|
|
6,839
|
|
|
6,818
|
|
|
6,821
|
|
|
6,991
|
|
21.
|
Business
Combination - Citizens National Bancshares,
Inc.
|
On
October 1, 2006 the Company acquired 100% of the outstanding common shares
of
Citizens National Bancshares, Inc. (“Citizens Bancshares”), a one-bank holding
company of Citizens Jessamine. Citizens Bancshares was subsequently merged
into
the Company, leaving Citizens Jessamine as a direct subsidiary of the Company.
The results presented in the consolidated financial statements herein include
the results of Citizens Jessamine since the acquisition date.
The
aggregate purchase price of Citizens Bancshares 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 possible as
execution costs are finalized. The table below summarizes the estimated fair
value of assets acquired and liabilities assumed at the date of acquisition.
Pro
forma condensed consolidated results of operations assuming Citizens Bancshares
had been acquired at the beginning of the reported periods are not presented
because the effect of this acquisition was not considered significant for
financial reporting purposes.
(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
|
|
|
14,570
|
|
Core
deposit intangible
|
|
|
4,524
|
|
Other
assets
|
|
|
4,407
|
|
Total
assets
|
|
$
|
176,282
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Deposits
|
|
$
|
139,441
|
|
Short-term
borrowings
|
|
|
2,880
|
|
Other
liabilities
|
|
|
3,724
|
|
Total
liabilities
|
|
|
146,045
|
|
|
|
|
|
|
Net
Assets Acquired
|
|
$
|
30,237
|
|
|
|
|
|
|
22.
|
Goodwill
and Intangible Assets
|
Goodwill
The
change in balance for goodwill is as follows.
|
|
|
|
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
Beginning
of year
|
|
$
|
28,437
|
|
$
|
7,509
|
|
Purchase
price refinements of prior years’ acquisitions
|
|
|
211
|
|
|
206
|
|
Acquired
goodwill
|
|
|
14,174
|
|
|
20,722
|
|
End
of year
|
|
$
|
42,822
|
|
$
|
28,437
|
|
Acquired
Intangible Assets
Acquired
core deposit and customer relationship intangible assets were as follows
as of
December 31 of the year indicated.
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
Amortized
Intangible Assets
(In
thousands)
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Core
deposit intangibles
|
|
$
|
10,890
|
|
$
|
2,541
|
|
$
|
6,112
|
|
$
|
634
|
|
Other
customer relationship intangibles
|
|
|
2,414
|
|
|
1,008
|
|
|
2,414
|
|
|
621
|
|
Total
|
|
$
|
13,304
|
|
$
|
3,549
|
|
$
|
8,526
|
|
$
|
1,255
|
|
Aggregate
amortization expense of core deposit and customer relationship intangible
assets
was $2,009,000 and $934,000 for 2006 and 2005, respectively. Estimated
amortization expense for each of the next five years is as follows.
|
|
|
|
(In
thousands)
|
|
Amount
|
|
2007
|
|
$
|
2,475
|
|
2008
|
|
|
1,880
|
|
2009
|
|
|
1,425
|
|
2010
|
|
|
1,070
|
|
2011
|
|
|
899
|
|
None.
Evaluation
of Disclosure Controls and Procedures
As
of the
end of the period covered by this report, an evaluation was carried out under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness
of our
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).
Based on their evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures and internal
control over financial reporting are, to the best of their knowledge, effective
to ensure that information required to be disclosed by us in reports that
we
file or submit under the Exchange Act is recorded, processed, summarized
and
reported within the time periods specified in SEC rules and forms.
Our
Chief
Executive Officer and Chief Financial Officer have also concluded that there
were no changes in our internal control over financial reporting or in other
factors that occurred during our most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting or any corrective actions with regard to significant
deficiencies and material weaknesses in internal control over financial
reporting.
Notwithstanding
the foregoing, we have a matter that our external auditors have classified
as a
material weakness in internal control over financial reporting as of December
31, 2006 but that we believe is instead a significant deficiency. We refer
you
to the section below entitled “Non-Routine Change; Situation Deemed by
Management to Reflect a Significant Deficiency” for a description of this
matter.
Definition
of “Material Weakness” and of “Significant Deficiency.” The
Public Company Accounting Oversight Board’s Auditing Standard No. 2 has defined
a material weakness as “a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.” The Public Company Accounting Oversight Board’s Auditing Standard
No. 2 has defined a significant deficiency as “a control deficiency, or
combination of control deficiencies, that adversely affects the company’s
ability to initiate, authorize, record, process, or report external financial
data reliably in accordance with generally accepted accounting principles
such
that there is more than a remote likelihood that a misstatement of the company’s
annual or interim financial statements that is more than inconsequential
will
not be prevented or detected.”
Non-Routine
Change; Situation Deemed by Management to Reflect a Significant Deficiency.
A
matter
arose during a recent audit which our external auditors have classified as
a
material weakness but which management views instead as a significant
deficiency. Effective January 1, 2006, we adopted a paid time off (“PTO”) policy
to replace the vacation and sick pay policies previously in effect. At the
time
the PTO policy was initially being developed and considered by us, management
evaluated the terms of the proposed policy and its potential effect on the
Company. Because this change was not routine, management’s evaluation included
making the Chief Financial Officer aware of the potential policy change so
that
he could evaluate potential changes in accounting and financial reporting
that
would result if the policy was adopted. Our Chief Financial Officer did evaluate
the financial reporting implications, discussed the appropriate accounting
treatment with Crowe Chizek and Company LLC (“Crowe Chizek”), our registered
independent public accounting firm, and concluded on the appropriate accounting
and financial reporting. At that time, our internal control over financial
reporting with respect to non-routine changes appeared to be effective.
However,
the PTO policy originally contemplated was changed before it was adopted
by our
board. While our Chief Financial Officer was made aware of and, we believe,
evaluated the changes to the policy, any such evaluation was neither documented
nor confirmed with Crowe Chizek. During the annual audit of the 2006 financial
statements, Crowe Chizek discovered that the terms of the PTO policy put
in
place differed from the terms initially analyzed by management for appropriate
accounting, resulting in an under-accrual of the liability for compensated
absences. This understatement of the liability for compensated absences of
$1.3
million was corrected in the fourth quarter of 2006, prior to our announcement
of fourth quarter and annual earnings. Under the terms of the new PTO policy,
an
employee may now carry over unused vacation and sick days (subject to
limitations based upon rank and tenure) and be paid in cash for any unused
vacation and sick days at the time the employee ceases to work for us (i.e.
at
retirement, death, resignation or termination of employment). In no event
may an
employee carry over into a subsequent year a number of unused PTO days greater
than 125% of the number of PTO days to which such employee is entitled in
the
subject year (the “Carry Over Limitation”). The $1.3 million reflects a
liability that we are obligated to accrue pursuant to generally accepted
accounting principles (“GAAP”) to reflect our (or one of our subsidiary’s)
obligations to our employees with respect to unused PTO days that can be
accumulated and carried over to subsequent years without risk of forfeiture.
Since
we
did not have adequate written documentation of the Chief Financial Officer’s
analysis of potential accounting and financial reporting changes regarding
the
further proposed changes to the PTO policy, we cannot be completely sure
that
the financial reporting error occurred solely because of human error or because
a detailed analysis was not properly done. Further, because of the magnitude
of
the reporting error with respect to our 2006 normalized earnings and because
the
reporting error was discovered by Crowe Chizek, we have concluded that we
had a
significant deficiency in internal control over financial reporting with
respect
to non-routine changes or complex changes. However, we believe (contrary
to the
judgment of Crowe Chizek that this matter constitutes a material weakness)
that
this matter (in light of both the actual and potential magnitude of the error
in
question) constitutes a significant deficiency because
|
·
|
the
amount (including estimated potential amounts), net of tax, that
could
have been accrued for the PTO policy represents only approximately
5.0% of
our 2006 net income;
|
|
·
|
the
under-accrual in question is an isolated event in our accounting
history;
and
|
|
·
|
the
amount required under GAAP in 2006 for the PTO policy is not
representative of the cost that will be accrued in future periods.
Due to
the facts that (i) upon adoption of the new PTO policy each of
our
employees was granted a start-up PTO balance of between one to
two weeks
and (ii) our employees in future periods will not be able to accumulate
PTO days as quickly as was the case in 2006 due to the Carry Over
Limitation, we anticipate that the level of accrual required for
our PTO
policy in future periods will not require a substantial increase
beyond
the amount that has been accrued and reflected in our year end
financial
statements.
|
Remediation
of Significant Deficiency. To
remediate the significant deficiency described above and enhance our internal
control over financial reporting, management has commenced an internal review
of
our processes in order to better ensure proper financial reporting of
non-routine changes and complex changes. We also expect to do the
following:
|
·
|
Revise
our procedures related to internal control over financial reporting
with
respect to any complex or non-routine change (including changes
in
compensation policies) to require the Chief Financial Officer or
other
senior financial reporting employee to document in writing the
results of
their evaluation of potential accounting changes and financial
reporting
changes that would occur from such complex or non-routine change.
|
|
·
|
Implement
a monitoring system for the differences between drafts and final
documentation relating to complex or non-routine changes to evaluate
whether the accounting and financial reporting requirements have
changed.
|
|
·
|
Increase
communication by and among our senior management and financial
reporting
employees and other third parties relevant to the disclosure
process.
|
|
·
|
Retain
our procedures of ensuring that our Chief Financial Officer be
made aware
of and involved in any complex or non-routine contemplated change
so that
any potential tax, accounting and financial reporting issues may
be
evaluated.
|
|
·
|
Retain
our procedure of encouraging our Chief Financial Officer and other
senior
financial reporting employees to contact outside financial experts
and
consultants, if deemed advisable, to discuss potential tax, accounting
and/or financial reporting issues regarding a complex or non-routine
contemplated change.
|
Conclusion.
Notwithstanding the evaluation and initiation of these remediation actions,
the
identified significant deficiency in our internal control over financial
reporting will not be considered remediated until the new controls are fully
implemented, in operation for a sufficient period of time, tested, and concluded
by management to be operating effectively.
Management’s
Report on Internal Control Over Financial Reporting
Management
Responsibility. The
management of Farmers Capital Bank Corporation is responsible for establishing
and maintaining adequate internal control over financial reporting. The
Company’s internal control system is designed to provide reasonable assurance to
Company’s management and Board of Directors regarding the reliability of
financial reporting and the presentation of published financial statements.
However, all internal control systems, no matter how well designed, have
inherent limitations.
General
Description of Internal Control over Financial Reporting. Internal
control over financial reporting refers to a process designed by, or under
the
supervision of, our Chief Executive Officer and Chief Financial Officer and
effected by the Company’s Board of Directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies
and
procedures that:
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately
and
fairly reflect the transactions and dispositions of Company
assets;
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that Company’s receipts and expenditures are
being made only in accordance with the authorization of Company’s
management and members of the Company’s Board of Directors;
and
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisitions, uses or dispositions of Company assets
that
could have a material effect on the Company’s financial
statements.
|
Inherent
Limitations in Internal Control over Financial Reporting. Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence
and
compliance and is subject to lapses in judgment and breakdowns resulting
from
human failures. Internal control over financial reporting also can be
circumvented or overridden by collusion or other improper activities. Because
of
such limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known features of the
financial reporting process, and it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
Management’s
Assessment of the Company’s Internal Control over Financial Reporting.
We
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2006. In making this assessment, we used the
criteria for effective internal control over financial reporting set forth
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in
“Internal Control-Integrated Framework.” This assessment excluded the internal
control over financial reporting for Citizens National Bank of Jessamine
County
("Citizens Jessamine") as permitted by the Securities and Exchange Commission
for current year acquisitions. Citizens National Bancshares, Inc., the former
parent company of Citizens Jessamine, was acquired by the Company on October
1,
2006. Citizens Jessamine represented 9.4% of the Company’s consolidated assets
at December 31, 2006 and 1.1% of the Company’s consolidated net income for 2006.
As
a
result of our assessment of the Company’s internal control over financial
reporting, we conclude that the Company’s internal control over financial
reporting was effective as of December 31, 2006 to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms.
Auditor
Assessment. Our
assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2006 has been audited by Crowe Chizek and Company
LLC. As stated in their report, which appears herein, Crowe Chizek and Company
LLC believes that a material weakness in internal control over financial
reporting existed at December 31, 2006 and, accordingly, that the Company’s
internal control over financial reporting was not effective at that date.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
Board
of
Directors and Shareholders
Farmers
Capital Bank Corporation
Frankfort,
Kentucky
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that Farmers Capital
Bank
Corporation (the “Company”) maintained effective internal control over financial
reporting as of December 31, 2006, based on criteria established in “Internal
Control - Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the Company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
On
October 1, 2006, the Company acquired Citizens National Bancshares, Inc.,
the
former parent company of Citizens National Bank of Jessamine County (“Citizens
Jessamine”). Citizens Jessamine’s assets represented 9.4% of the Company’s
consolidated assets at December 31, 2006, and its income represented 1.1%
of the
Company’s consolidated net income for 2006. As permitted by the Securities and
Exchange Commission for the year of acquisition, the Company excluded Citizens
Jessamine from its assessment of internal controls over financial reporting.
Accordingly, our audit of internal control over financial reporting also
excluded Citizens Jessamine.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A
material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. We have identified the following material weakness that has
not
been identified as a material weakness in management’s assessment. On January 1,
2006, the Company adopted a paid time off (“PTO”) policy to replace the vacation
and sick pay policies previously in effect. As the PTO policy was being
developed, management evaluated the terms of the proposed policy, concluded
on
the appropriate accounting, and discussed the accounting with us. During
the
annual audit of the 2006 financial statements, we discovered that the terms
of
the plan put in place differed from the terms initially analyzed by management
for appropriate accounting, resulting in an under-accrual of the liability
for
compensated absences. The Company’s control over evaluation of final benefit
plan documentation was not effective in this instance. The known error, an
understatement of the liability for compensated absences of $1.3 million,
was
corrected by management prior to completion of the 2006 financial statements.
We
believe that the actual and potential error arising from
this
matter would have been material to the annual or interim financial statements.
This material weakness was considered in determining the nature, timing and
extent of audit tests applied in our audit of the Company’s consolidated 2006
financial statements, and this report does not affect our report dated March
12,
2007, on those financial statements, which expressed an unqualified opinion
thereon.
In
our
opinion, because of the effect of the material weakness described above on
the
achievement of the objectives of the control criteria, management’s assessment
that Farmers Capital Bank Corporation maintained effective internal control
over
financial
reporting
as of December 31, 2006 is not fairly stated, in all material respects, based
on
criteria established in “Internal Control - Integrated Framework” issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also,
in our opinion, because of the effect of the material weakness described
above
on the achievement of the objectives of the control criteria, Farmers Capital
Bank Corporation has not maintained effective internal control over financial
reporting as of December 31, 2006, based on criteria established in “Internal
Control - Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
Crowe
Chizek and Company LLC
Louisville,
Kentucky
March
12,
2007
None.
PART
III
|
|
Positions
and
|
Years
of Service
|
|
|
Offices
With
|
With
the
|
Executive
Officer1
|
Age
|
the
Registrant
|
Registrant
|
G.
Anthony Busseni
|
58
|
President
and CEO, Director2
|
22*
|
|
|
|
|
Allison
B. Gordon
|
43
|
Senior
Vice President3
|
20*
|
The
Company has adopted a Code of Ethics that applies to the Company’s directors,
officers and employees, including the Company’s chief executive officer and
chief financial officer. The Company makes available its Code of Ethics on
its
Internet website at www.farmerscapital.com.
Additional
information required by Item 10 is hereby incorporated by reference from
the
Company's definitive proxy statement in connection with its annual meeting
of
shareholders scheduled for May 8, 2007 which will be filed with the Commission
on or about April 1, 2007, pursuant to Regulation 14A.
*
|
Includes
years of service with the Company and its
subsidiaries.
|
1
|
For
Regulation O purposes, Frank W. Sower, Jr., Chairman of the Company’s
board of directors, is considered an executive officer in name
only.
|
2
|
Also
a director of Farmers Bank, Citizens Jessamine, Farmers Georgetown,
United
Bank, Lawrenceburg Bank, First Citizens Bank, Citizens Northern,
FCB
Services, Farmers Insurance (Chairman), Leasing One (Chairman),
Kentucky
General (Chairman), Pro Mortgage, FFKT Insurance, Kentucky Home
Life
Insurance Company, Citizens Acquisition, and an administrative
trustee of
Farmers Capital Bank Trust I and Farmers Capital Bank Trust
II.
|
3
|
Also
a director of Farmers Bank, Farmers Georgetown, FCB Services, and
an
administrative trustee of Farmers Capital Bank Trust I and Farmers
Capital
Bank Trust II.
|
The
information required by Items 11 through 14 is hereby incorporated by reference
from the Company's definitive proxy statement in connection with its annual
meeting of shareholders scheduled for May 8, 2007 which will be filed with
the
Commission on or about April 1, 2007, pursuant to Regulation
14A.
PART
IV
(a)2.
|
Financial
Statement Schedules
|
All
schedules are omitted for the reason they are not required, or are not
applicable, or the required information is disclosed elsewhere in the financial
statements and related notes thereto.
|
3.1
|
Amended
and Restated Articles of Incorporation of the Registrant (incorporated
by
reference to Quarterly Report on Form 10-Q for the quarterly period
ended
June 30, 2006).
|
|
3.2
|
Amended
and Restated Bylaws of the Registrant (incorporated by reference
to Annual
Report of Form 10-K for the fiscal year ended December 31,
1997).
|
|
3.3
|
Amendments
to Bylaws of the Registrant (incorporated by reference to Quarterly
Report
of Form 10-Q for the quarterly period ended March 31,
2003).
|
|
4
|
Articles
of Incorporation and Bylaws of the Registrant (incorporated by
reference
to Quarterly Report on Form 10-Q for the quarterly period ended
June 30,
2006, the Annual Report on Form 10-K for the fiscal year ended
December
31, 1997, and the Quarterly Report on Form 10-Q for the quarterly
period
ended March 31, 2003).
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
FARMERS
CAPITAL BANK CORPORATION
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
G.
Anthony Busseni |
|
|
|
G.
Anthony Busseni
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
Date:
|
March
6, 2007 |
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in
the
capacities and on the dates indicated.
/s/
G.
Anthony Busseni |
President,
Chief Executive Officer
|
March
6, 2007 |
G.
Anthony Busseni
|
and
Director (principal executive
|
|
|
officer
of the Registrant)
|
|
|
|
|
/s/ Frank
W. Sower, Jr. |
Chairman
|
3-6-07 |
Frank
W. Sower, Jr.
|
|
|
|
|
|
/s/ Frank
R. Hamilton, Jr. |
Director
|
3-7-07 |
Frank
R. Hamilton, Jr.
|
|
|
|
|
|
/s/ Lloyd
C. Hillard, Jr. |
Director
|
3-5-07 |
Lloyd
C. Hillard, Jr.
|
|
|
|
|
|
/s/ Cecil
D. Bell, Jr. |
Director
|
3-2-07 |
Cecil
D. Bell, Jr.
|
|
|
|
|
|
/s/ Shelley Sweeney |
Director
|
3-9-07 |
Shelley
S. Sweeney
|
|
|
|
|
|
/s/ Donald
J. Mullineaux |
Director
|
3/6/07 |
Dr.
Donald J. Mullineaux
|
|
|
|
|
|
/s/ Harold
G Mays |
Director
|
3-3-07 |
Harold
G. Mays
|
|
|
|
|
|
/s/
J.D. Sutterlin |
Director
|
3/2/07 |
Dr.
John D. Sutterlin
|
|
|
|
|
|
/s/ Michael
M. Sullivan |
Director
|
March
5, 2007 |
Michael
M. Sullivan
|
|
|
|
|
|
/s/ J.
Barry Banker |
Director
|
3-5-07 |
J.
Barry Banker
|
|
|
|
|
|
/s/ Robert
Roach Jr. |
Director
|
March
6, 2007 |
Robert
Roach, Jr.
|
|
|
|
|
|
/s/ Doug
Carpenter |
Senior
Vice President, Secretary
|
3-6-07 |
C.
Douglas Carpenter
|
and
CFO (principal financial and
|
|
|
accounting
officer)
|
|
Exhibit
|
|
Page
|
|
|
|
|
|
|
21
|
|
84
|
|
|
|
23
|
|
86
|
|
|
|
31.1
|
|
87
|
|
|
|
31.2
|
|
88
|
|
|
|
32
|
|
89
|