form10-q063008.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT
Pursuant
to Section 13 OR 15(d) of
The
Securities Exchange Act of 1934
For the
quarterly period ended June 30, 2008
|
Farmers
Capital Bank Corporation
|
(Exact
name of registrant as specified in its
charter)
|
Kentucky
|
|
0-14412
|
|
61-1017851
|
(State
or other jurisdiction
|
|
(Commission
|
|
(IRS
Employer
|
of
incorporation)
|
|
File
Number)
|
|
Identification
No.)
|
P.O.
Box 309 Frankfort, KY
|
|
40602
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant’s
telephone number, including area code – (502)-227-1668
Not
Applicable
|
(Former
name or former address, if changed since last
report.)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ Accelerated
filer x
Non-accelerated
filer ¨ (Do not check if a smaller reporting
company) Smaller
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Common
stock, par value $0.125 per share
7,348,744
shares outstanding at August 6, 2008
TABLE OF
CONTENTS
|
|
|
|
|
|
|
3
|
|
4
|
|
5
|
|
6
|
|
7
|
|
8
|
|
|
|
13
|
|
|
|
28
|
|
|
|
28
|
|
|
|
|
|
|
|
28
|
|
|
|
29
|
|
|
|
29
|
|
|
|
30
|
|
|
|
31
|
|
|
June
30,
|
|
|
December
31,
|
|
(In thousands, except share data)
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
79,795 |
|
|
$ |
44,896 |
|
Interest
bearing deposits in other banks
|
|
|
2,281 |
|
|
|
2,290 |
|
Federal
funds sold and securities purchased under agreements to
resell
|
|
|
29,631 |
|
|
|
31,954 |
|
Total
cash and cash equivalents
|
|
|
111,707 |
|
|
|
79,140 |
|
Investment
securities:
|
|
|
|
|
|
|
|
|
Available
for sale, amortized cost of $547,016 (2008) and $542,259
(2007)
|
|
|
544,267 |
|
|
|
542,633 |
|
Held
to maturity, fair value of $3,053 (2008) and $3,863 (2007)
|
|
|
3,304 |
|
|
|
3,844 |
|
Total
investment securities
|
|
|
547,571 |
|
|
|
546,477 |
|
Loans,
net of unearned income
|
|
|
1,305,079 |
|
|
|
1,291,985 |
|
Allowance
for loan losses
|
|
|
(14,965 |
) |
|
|
(14,216 |
) |
Loans,
net
|
|
|
1,290,114 |
|
|
|
1,277,769 |
|
Premises
and equipment, net
|
|
|
40,808 |
|
|
|
38,663 |
|
Company-owned
life insurance
|
|
|
34,775 |
|
|
|
34,171 |
|
Goodwill
|
|
|
52,408 |
|
|
|
52,408 |
|
Other
intangibles, net
|
|
|
8,242 |
|
|
|
9,543 |
|
Other
assets
|
|
|
36,718 |
|
|
|
30,076 |
|
Total
assets
|
|
$ |
2,122,343 |
|
|
$ |
2,068,247 |
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest
bearing
|
|
$ |
223,400 |
|
|
$ |
192,432 |
|
Interest
bearing
|
|
|
1,290,214 |
|
|
|
1,281,665 |
|
Total
deposits
|
|
|
1,513,614 |
|
|
|
1,474,097 |
|
Federal
funds purchased and other short-term borrowings
|
|
|
83,926 |
|
|
|
80,755 |
|
Securities
sold under agreements to repurchase and other long-term
borrowings
|
|
|
278,987 |
|
|
|
267,339 |
|
Subordinated
notes payable to unconsolidated trusts
|
|
|
48,970 |
|
|
|
48,970 |
|
Dividends
payable
|
|
|
2,426 |
|
|
|
2,436 |
|
Other
liabilities
|
|
|
24,276 |
|
|
|
26,159 |
|
Total
liabilities
|
|
|
1,952,199 |
|
|
|
1,899,756 |
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
Stock, no par value; 1,000,000 shares authorized; none
issued
|
|
|
|
|
|
|
|
|
Common
stock, par value $.125 per share; 9,608,000 shares
authorized; 7,348,744
|
|
|
|
|
|
|
|
|
and
7,384,865 shares issued and outstanding at June 30, 2008
|
|
|
|
|
|
|
|
|
and
December 31, 2007, respectively
|
|
|
919 |
|
|
|
923 |
|
Capital
surplus
|
|
|
48,046 |
|
|
|
48,176 |
|
Retained
earnings
|
|
|
126,152 |
|
|
|
122,498 |
|
Accumulated
other comprehensive loss
|
|
|
(4,973 |
) |
|
|
(3,106 |
) |
Total
shareholders’ equity
|
|
|
170,144 |
|
|
|
168,491 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
2,122,343 |
|
|
$ |
2,068,247 |
|
See
accompanying notes to unaudited consolidated financial
statements.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(In
thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
21,960 |
|
|
$ |
24,215 |
|
|
$ |
44,736 |
|
|
$ |
46,752 |
|
Interest
on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
5,964 |
|
|
|
2,897 |
|
|
|
11,831 |
|
|
|
5,521 |
|
Nontaxable
|
|
|
827 |
|
|
|
844 |
|
|
|
1,651 |
|
|
|
1,701 |
|
Interest
on deposits in other banks
|
|
|
10 |
|
|
|
15 |
|
|
|
24 |
|
|
|
29 |
|
Interest
of federal funds sold and securities purchased under agreements to
resell
|
|
|
276 |
|
|
|
540 |
|
|
|
830 |
|
|
|
1,910 |
|
Total
interest income
|
|
|
29,037 |
|
|
|
28,511 |
|
|
|
59,072 |
|
|
|
55,913 |
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
9,757 |
|
|
|
11,254 |
|
|
|
20,709 |
|
|
|
22,205 |
|
Interest
on federal funds purchased and other short-term borrowings
|
|
|
447 |
|
|
|
1,252 |
|
|
|
1,153 |
|
|
|
2,499 |
|
Interest
on securities sold under agreements to repurchase and other long-term
borrowings
|
|
|
2,818 |
|
|
|
701 |
|
|
|
5,644 |
|
|
|
1,362 |
|
Interest
on subordinated notes payable to unconsolidated trusts
|
|
|
664 |
|
|
|
454 |
|
|
|
1,460 |
|
|
|
902 |
|
Total
interest expense
|
|
|
13,686 |
|
|
|
13,661 |
|
|
|
28,966 |
|
|
|
26,968 |
|
Net
interest income
|
|
|
15,351 |
|
|
|
14,850 |
|
|
|
30,106 |
|
|
|
28,945 |
|
Provision
for loan losses
|
|
|
483 |
|
|
|
330 |
|
|
|
1,585 |
|
|
|
(166 |
) |
Net
interest income after provision for loan losses
|
|
|
14,868 |
|
|
|
14,520 |
|
|
|
28,521 |
|
|
|
29,111 |
|
Noninterest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges and fees on deposits
|
|
|
2,486 |
|
|
|
2,624 |
|
|
|
4,864 |
|
|
|
5,117 |
|
Allotment
processing fees
|
|
|
1,166 |
|
|
|
1,168 |
|
|
|
2,331 |
|
|
|
2,125 |
|
Other
service charges, commissions, and fees
|
|
|
1,119 |
|
|
|
1,036 |
|
|
|
2,226 |
|
|
|
2,020 |
|
Data
processing income
|
|
|
305 |
|
|
|
307 |
|
|
|
585 |
|
|
|
584 |
|
Trust
income
|
|
|
533 |
|
|
|
485 |
|
|
|
1,050 |
|
|
|
973 |
|
Investment
securities gains, net
|
|
|
214 |
|
|
|
|
|
|
|
580 |
|
|
|
|
|
Gains
on sale of mortgage loans, net
|
|
|
101 |
|
|
|
175 |
|
|
|
226 |
|
|
|
292 |
|
Income
from company-owned life insurance
|
|
|
312 |
|
|
|
321 |
|
|
|
613 |
|
|
|
668 |
|
Other
|
|
|
(45 |
) |
|
|
(8 |
) |
|
|
103 |
|
|
|
(4 |
) |
Total
noninterest income
|
|
|
6,191 |
|
|
|
6,108 |
|
|
|
12,578 |
|
|
|
11,775 |
|
Noninterest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
7,557 |
|
|
|
7,619 |
|
|
|
15,108 |
|
|
|
15,129 |
|
Occupancy
expenses, net
|
|
|
1,064 |
|
|
|
1,023 |
|
|
|
2,200 |
|
|
|
2,089 |
|
Equipment
expenses
|
|
|
753 |
|
|
|
761 |
|
|
|
1,467 |
|
|
|
1,542 |
|
Data
processing and communications expense
|
|
|
1,252 |
|
|
|
1,160 |
|
|
|
2,563 |
|
|
|
2,326 |
|
Bank
franchise tax
|
|
|
477 |
|
|
|
525 |
|
|
|
896 |
|
|
|
1,039 |
|
Correspondent
bank fees
|
|
|
293 |
|
|
|
186 |
|
|
|
508 |
|
|
|
345 |
|
Amortization
of intangibles
|
|
|
650 |
|
|
|
848 |
|
|
|
1,301 |
|
|
|
1,666 |
|
Other
|
|
|
2,346 |
|
|
|
2,187 |
|
|
|
4,729 |
|
|
|
4,511 |
|
Total
noninterest expense
|
|
|
14,392 |
|
|
|
14,309 |
|
|
|
28,772 |
|
|
|
28,647 |
|
Income
before income taxes
|
|
|
6,667 |
|
|
|
6,319 |
|
|
|
12,327 |
|
|
|
12,239 |
|
Income
tax expense
|
|
|
1,767 |
|
|
|
1,407 |
|
|
|
3,051 |
|
|
|
2,717 |
|
Net
Income
|
|
$ |
4,900 |
|
|
$ |
4,912 |
|
|
$ |
9,276 |
|
|
$ |
9,522 |
|
Per
Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income, basic and diluted
|
|
$ |
.67 |
|
|
$ |
.62 |
|
|
$ |
1.26 |
|
|
$ |
1.21 |
|
Cash
dividends declared
|
|
|
.33 |
|
|
|
.33 |
|
|
|
.66 |
|
|
|
.66 |
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,350 |
|
|
|
7,884 |
|
|
|
7,362 |
|
|
|
7,888 |
|
Diluted
|
|
|
7,350 |
|
|
|
7,892 |
|
|
|
7,362 |
|
|
|
7,899 |
|
See
accompanying notes to unaudited consolidated financial
statements.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
Income
|
|
$ |
4,900 |
|
|
$ |
4,912 |
|
|
$ |
9,276 |
|
|
$ |
9,522 |
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding loss on available for sale securities arising during the period,
net of tax of $3,423, $110, $1,020, and $884, respectively
|
|
|
(6,357 |
) |
|
|
(2,061 |
) |
|
|
(1,895 |
) |
|
|
(1,642 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for prior period unrealized (gain) loss recognized during
current period, net of tax of $95, $4, $73, and $5,
respectively
|
|
|
(176 |
) |
|
|
8 |
|
|
|
(135 |
) |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in unfunded portion of postretirement benefit obligation, net of tax of
$44 , $34, $88, and $69
|
|
|
82 |
|
|
|
64 |
|
|
|
163 |
|
|
|
129 |
|
Other
comprehensive loss
|
|
|
(6,451 |
) |
|
|
(1,989 |
) |
|
|
(1,867 |
) |
|
|
(1,503 |
) |
Comprehensive
(Loss) Income
|
|
$ |
(1,551 |
) |
|
$ |
2,923 |
|
|
$ |
7,409 |
|
|
$ |
8,019 |
|
See
accompanying notes to unaudited consolidated financial statements.
Six
months ended June 30, (In thousands)
|
|
2008
|
|
|
2007
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
9,276 |
|
|
$ |
9,522 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,215 |
|
|
|
3,607 |
|
Net
discount accretion available for sale investment
securities
|
|
|
(368 |
) |
|
|
(632 |
) |
Provision
for loan losses
|
|
|
1,585 |
|
|
|
(166 |
) |
Noncash
compensation expense
|
|
|
27 |
|
|
|
30 |
|
Mortgage
loans originated for sale
|
|
|
(11,436 |
) |
|
|
(12,177 |
) |
Proceeds
from sale of mortgage loans
|
|
|
8,127 |
|
|
|
10,005 |
|
Deferred
income tax expense
|
|
|
1,705 |
|
|
|
2,497 |
|
Gain
on sale of mortgage loans, net
|
|
|
(226 |
) |
|
|
(292 |
) |
Loss
on disposal of premises and equipment, net
|
|
|
19
|
|
|
|
104 |
|
Gain
on sale of repossessed assets, net
|
|
|
(44 |
) |
|
|
(90 |
) |
Gain
on sale of available for sale investment securities, net
|
|
|
(580 |
) |
|
|
|
|
Decrease
(increase) in accrued interest receivable
|
|
|
603 |
|
|
|
(478 |
) |
Income
from company-owned life insurance
|
|
|
(604 |
) |
|
|
(631 |
) |
Increase
in other assets
|
|
|
(3,568 |
) |
|
|
(296 |
) |
(Decrease)
increase in accrued interest payable
|
|
|
(944 |
) |
|
|
579 |
|
Decrease
in other liabilities
|
|
|
(689 |
) |
|
|
(5,527 |
) |
Net
cash provided by operating activities
|
|
|
6,098 |
|
|
|
6,055 |
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Proceeds
from maturities and calls of investment securities:
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
140,078 |
|
|
|
209,054 |
|
Held
to maturity
|
|
|
540 |
|
|
|
1,388 |
|
Proceeds
from sale of available for sale investment securities
|
|
|
21,512 |
|
|
|
20,785 |
|
Purchase
of available for sale investment securities
|
|
|
(165,399 |
) |
|
|
(209,764 |
) |
Loans
originated for investment, net of principal collected
|
|
|
(16,289 |
) |
|
|
(72,383 |
) |
Purchase
of PNC Military Allotment operations, net of cash acquired
|
|
|
|
|
|
|
(1,876 |
) |
Purchase
price refinements of previous acquisitions
|
|
|
|
|
|
|
(18 |
) |
Additions
to mortgage servicing rights, net
|
|
|
(31 |
) |
|
|
(59 |
) |
Purchase
of premises and equipment
|
|
|
(4,013 |
) |
|
|
(3,828 |
) |
Proceeds
from sale of repossessed assets
|
|
|
1,509 |
|
|
|
1,547 |
|
Proceeds
from sale of equipment
|
|
|
19 |
|
|
|
315 |
|
Net
cash used in investing activities
|
|
|
(22,074 |
) |
|
|
(54,839 |
) |
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in deposits
|
|
|
39,517 |
|
|
|
(14,449 |
) |
Net
increase in federal funds purchased and other short-term
borrowings
|
|
|
3,171 |
|
|
|
24,863 |
|
Proceeds
from long-term debt
|
|
|
19,000 |
|
|
|
8,000 |
|
Repayments
of long-term debt
|
|
|
(7,352 |
) |
|
|
(5,521 |
) |
Dividends
paid
|
|
|
(4,869 |
) |
|
|
(6,078 |
) |
Purchase
of common stock
|
|
|
(1,049 |
) |
|
|
(725 |
) |
Shares
issued under Employee Stock Purchase Plan
|
|
|
125 |
|
|
|
126 |
|
Stock
options exercised
|
|
|
|
|
|
|
243 |
|
Net
cash provided by financing activities
|
|
|
48,543 |
|
|
|
6,459 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
32,567 |
|
|
|
(42,325 |
) |
Cash
and cash equivalents at beginning of year
|
|
|
79,140 |
|
|
|
156,828 |
|
Cash
and cash equivalents at end of period
|
|
$ |
111,707 |
|
|
$ |
114,503 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
29,910 |
|
|
$ |
26,389 |
|
Income
taxes
|
|
|
4,200 |
|
|
|
5,300 |
|
Transfers
from loans to repossessed assets
|
|
|
5,894 |
|
|
|
997 |
|
Cash
dividend declared and unpaid
|
|
|
2,426 |
|
|
|
2,602 |
|
See
accompanying notes to unaudited consolidated financial statements.
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
Six
months ended
|
|
Common
Stock
|
|
|
Capital
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders’
|
June
30, 2008 and 2007
|
|
Shares
|
|
|
Amount
|
|
|
Surplus
|
|
|
Earnings
|
|
|
Loss
|
|
|
Equity
|
Balance
at January 1, 2008
|
|
|
7,385 |
|
|
$ |
923 |
|
|
$ |
48,176 |
|
|
$ |
122,498 |
|
|
$ |
(3,106 |
) |
|
$ |
168,491 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,276 |
|
|
|
|
|
|
|
9,276 |
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,867 |
) |
|
|
(1,867 |
) |
Cash
dividends declared,
$.66
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,859 |
) |
|
|
|
|
|
|
(4,859 |
) |
Purchase
of common stock
|
|
|
(43 |
) |
|
|
(5 |
) |
|
|
(281 |
) |
|
|
(763 |
) |
|
|
|
|
|
|
(1,049 |
) |
Shares
issued pursuant to Employee Stock Purchase plan
|
|
|
7 |
|
|
|
1 |
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
125 |
|
Noncash
compensation expense attributed to stock option & Employee Stock
Purchase Plan grants
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
27 |
|
Balance
at June 30, 2008
|
|
|
7,349 |
|
|
$ |
919 |
|
|
$ |
48,046 |
|
|
$ |
126,152 |
|
|
$ |
(4,973 |
) |
|
$ |
170,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2007
|
|
|
7,895 |
|
|
$ |
988 |
|
|
$ |
53,201 |
|
|
$ |
128,652 |
|
|
$ |
(5,778 |
) |
|
$ |
177,063 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,522 |
|
|
|
|
|
|
|
9,522 |
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,503 |
) |
|
|
(1,503 |
) |
Cash
dividends declared,
$.66
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,208 |
) |
|
|
|
|
|
|
(5,208 |
) |
Purchase
of common stock
|
|
|
(23 |
) |
|
|
(3 |
) |
|
|
(144 |
) |
|
|
(578 |
) |
|
|
|
|
|
|
(725 |
) |
Stock
options exercised,
including
related tax benefits
|
|
|
10 |
|
|
|
1 |
|
|
|
243 |
|
|
|
|
|
|
|
|
|
|
|
244 |
|
Shares
issued pursuant to Employee Stock Purchase plan
|
|
|
5 |
|
|
|
|
|
|
|
126 |
|
|
|
|
|
|
|
|
|
|
|
126 |
|
Noncash
compensation expense attributed to stock option & Employee Stock
Purchase Plan grants
|
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
30 |
|
Balance
at June 30, 2007
|
|
|
7,887 |
|
|
$ |
986 |
|
|
$ |
53,456 |
|
|
$ |
132,388 |
|
|
$ |
(7,281 |
) |
|
$ |
179,549 |
|
See
accompanying notes to unaudited consolidated financial
statements.
1. Basis
of Presentation and Nature of Operations
The
consolidated financial statements include the accounts of Farmers Capital Bank
Corporation (the "Company"), a financial holding company, and its bank and
nonbank subsidiaries. Bank subsidiaries and their significant nonbank
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. 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; First Citizens Bank in Elizabethtown, KY; United Bank & Trust Co. in
Versailles, KY; The Lawrenceburg Bank and Trust Company in Harrodsburg, KY;
Citizens Bank of Northern Kentucky, Inc. in Newport, KY; and Citizens Bank of
Jessamine County in Nicholasville, KY. The Company has three active nonbank
subsidiaries, FCB Services, Inc. (“FCB Services”), Kentucky General Holdings,
LLC (“Kentucky General”), and FFKT Insurance Services, Inc. (“FFKT Insurance”).
FCB Services is a data processing subsidiary located in Frankfort, KY, which
provides services to the Company’s banks as well as other unaffiliated entities.
Kentucky General holds a 50% voting interest in KHL Holdings, LLC, which is the
parent company of Kentucky Home Life Insurance Company. FFKT Insurance is a
captive property and casualty insurance company insuring primarily deductible
exposures and uncovered liability related to properties of the Company. All
significant intercompany transactions and balances are eliminated in
consolidation.
The
Company provides financial services at its 36 locations in 23 communities
throughout Central and Northern Kentucky to individual, business, agriculture,
government, and educational customers. Its primary deposit products are
checking, savings, and term certificate accounts. Its primary lending
products are residential mortgage, commercial lending and leasing, and
installment loans. Substantially all loans and leases are secured by specific
items of collateral including business assets, consumer assets, and commercial
and residential real estate. Commercial loans and leases are expected to be
repaid from cash flow from operations of businesses. Farmers Bank has served as
the general depository for the Commonwealth of Kentucky for over 70 years and
also provides investment and other services to the Commonwealth. Other services
include, but are not limited to, cash management services, issuing letters of
credit, safe deposit box rental, and providing funds transfer
services. Other financial instruments, which potentially represent
concentrations of credit risk, include deposit accounts in other financial
institutions and federal funds sold.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates used in the preparation of the
financial statements are based on various factors including the current interest
rate environment and the general strength of the local
economy. Changes in the overall interest rate environment can
significantly affect the Company’s net interest income and the value of its
recorded assets and liabilities. Actual results could differ from
those estimates used in the preparation of the financial
statements.
The
financial information presented as of any date other than December 31 has been
prepared from the books and records without audit. The accompanying
condensed consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not
include all of the information and the footnotes required by accounting
principles generally accepted in the United States of America for complete
statements. In the opinion of management, all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of such
financial statements, have been included. The results of operations
for the interim periods are not necessarily indicative of the results to be
expected for the full year.
For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2007.
Certain
reclassifications have been made to the consolidated financial statements of
prior periods to conform to the current period presentation. These
reclassifications do not affect net income or total shareholders’ equity as
previously reported.
3.
|
Recently
Issued But Not Yet Effective Accounting
Standards
|
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007),
“Business Combinations”
and SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”. In March 2008, the FASB issued SFAS
No. 161, “Disclosures about
Derivative Instruments and Hedging Activities”. During May 2008, the FASB
issued SFAS No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” and SFAS No. 163,
“Accounting for Financial
Guarantee Insurance Contracts”.
SFAS No.
141(R) establishes principals and requirements for how an acquirer recognizes
and measures in its financial statements the identifiable assets acquired,
liabilities assumed, and any noncontrolling interest in an acquiree. The
statement also provides guidance for recognizing and measuring goodwill or gain
from a bargain purchase in a business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS No. 141(R) is
to be applied prospectively for fiscal years beginning after December 15, 2008.
The Company does not expect this statement to have a material impact on the
Company’s consolidated results of operations or financial position upon
adoption.
SFAS No.
160 amends Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial
Statements” to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The statement also amends certain of ARB No. 51’s consolidation
procedures for consistency with the requirements of SFAS No. 141(R). This
statement is effective for the fiscal years beginning after December 15, 2008
and is to be applied prospectively as of the beginning of the fiscal year in
which the statement is initially adopted, except for presentation and disclosure
requirements which are to be applied retrospectively for all periods presented.
The Company does not expect this statement to have a material impact on the
Company’s consolidated results of operations or financial position upon
adoption.
SFAS No.
161 amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities” to provide enhanced disclosures about
1) how and why an entity uses derivative instruments; 2) how derivative
instruments and related hedged items are accounted for under SFAS No. 133 and
related interpretations; and 3) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance, and cash
flows. This statement is effective for fiscal years and interim periods
beginning after November 15, 2008, with early adoption encouraged. The Company
does not expect this statement to have a material impact on the Company’s
consolidated results of operations or financial position upon
adoption.
SFAS No.
162 is intended to improve financial reporting by identifying a consistent
framework, or hierarchy, for selecting accounting principles to be used in
preparing financial statements that are presented in conformity with U.S.
generally accepted accounting principles (GAAP) for nongovernmental entities.
The hierarchy under Statement 162 is as follows:
|
·
|
FASB
SFAS and Interpretations, FASB Statement 133 Implementation Issues, FASB
Staff Positions, AICPA Accounting Research Bulletins and Accounting
Principles Board Opinions that are not superseded by actions of the FASB,
and Rules and interpretive releases of the SEC for SEC
registrants.
|
|
·
|
FASB
Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and
Accounting Guides and Statements of
Position.
|
|
·
|
AICPA
Accounting Standards Executive Committee Practice Bulletins that have been
cleared by the FASB, consensus positions of the EITF, and Appendix D EITF
topics.
|
|
·
|
Implementation
guides (Q&As) published by the FASB staff, AICPA Accounting
Interpretations, AICPA Industry Audit and Accounting Guides and Statements
of Position not cleared by the FASB, and practices that are widely
recognized and prevalent either generally or in the
industry.
|
SFAS No.
162 is effective 60 days following the Securities and Exchange Commission’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles”.
The Company does not expect this statement to have a material impact on
the Company’s consolidated results of operations or financial position upon
adoption.
SFAS No.
163 clarifies how SFAS No. 60, “Accounting and Reporting by
Insurance Enterprises”, applies to financial guarantee insurance
contracts issued by insurance enterprises, including the recognition and
measurement of premium revenue and claim liabilities. It also requires expanded
disclosures about financial guarantee insurance contracts. This statement is
effective for financial statements issued for fiscal years and interim periods
beginning after December 15, 2008. Early application is not permitted. The
Company does not expect this statement to have a material impact on the
Company’s consolidated results of operations or financial position upon
adoption.
4.
|
Adoption
of New Accounting Standards
|
Effective
January 1, 2008 the Company adopted SFAS No. 157, “Fair Value Measurements” and
SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities”. Please refer to
Note 6 for additional information related to the impact of adopting these
Statements.
Effective
January 1, 2008, the Company adopted FASB Emerging Issues Task Force (“EITF”)
06-4, “Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements”. This EITF Issue addresses accounting for
separate agreements which split life insurance policy benefits between an
employer and employee. The Issue requires the employer to recognize a liability
for future benefits payable to the employee under these agreements. The effects
of applying this issue must be recognized through either a change in accounting
principle through an adjustment to equity or through the retrospective
application to all prior periods. The Company currently does not have split life
insurance policies. The adoption of this EITF Issue did not have an impact on
the Company’s consolidated financial position or results of
operations.
5. 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 June 30, 2008 and 2007.
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
(In
thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income, basic and diluted
|
|
$ |
4,900 |
|
|
$ |
4,912 |
|
|
$ |
9,276 |
|
|
$ |
9,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding
|
|
|
7,350 |
|
|
|
7,884 |
|
|
|
7,362 |
|
|
|
7,888 |
|
Effect
of dilutive stock options
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
11 |
|
Average
diluted shares outstanding
|
|
|
7,350 |
|
|
|
7,892 |
|
|
|
7,362 |
|
|
|
7,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share, basic and diluted
|
|
$ |
.67 |
|
|
$ |
.62 |
|
|
$ |
1.26 |
|
|
$ |
1.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Fair
Value Measurements
Effective
January 1, 2008 the Company adopted SFAS No. 157 and SFAS No. 159. SFAS No. 157
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. SFAS No. 157 applies whenever
other standards require or permit assets or liabilities to be measured at fair
value, but does not require any new fair value measurements. The Company applied
SFAS No. 157 prospectively as of the beginning of the year. SFAS No. 159 permits
entities to choose to measure certain financial assets and liabilities at fair
value. The Company has not elected the fair value option for any financial
assets or liabilities.
In
February 2008, the FASB issued Staff Position (“FSP”) 157-2, “Effective Date of FASB Statement No.
157”. This FSP delays the effective date of SFAS No.
157 for all nonfinancial assets and nonfinancial liabilities, except
those
that are recognized or disclosed at
fair value on a recurring basis (at
least annually) to fiscal years beginning
after November 15, 2008, and interim periods within those fiscal
years.
SFAS No.
157 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. SFAS No. 157 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair
value:
|
Level
1:
|
Quoted
prices for identical assets or liabilities in active markets that the
entity has the ability to access at the measurement
date.
|
|
Level
2:
|
Significant
other observable inputs other than Level 1 prices such as quoted prices
for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data.
|
|
Level
3:
|
Significant
unobservable inputs that reflect a reporting entity’s own assumptions
about the assumptions that market participants would use in pricing the
asset or liability.
|
Following
is a description of the valuation method used for instruments measured at fair
value on a recurring basis. For this disclosure, the Company only has available
for sale investment securities that meet the requirement.
Available for sale
investment securities
Valued
primarily by independent third party pricing services under the market valuation
approach that include, but not limited to, the following inputs:
|
·
|
U.S.
Treasury securities are priced using dealer quotes from active market
makers and real-time trading
systems.
|
|
·
|
Marketable
equity securities are priced utilizing real-time data feeds from active
market exchanges for identical
securities.
|
|
·
|
Government-sponsored
agency debt securities, obligations of states and political subdivisions,
corporate bonds, and other similar investment securities are priced with
available market information through processes using benchmark yields,
matrix pricing, prepayment speeds, cash flows, live trading data, and
market spreads sourced from new issues, dealer quotes, and trade prices,
among others sources.
|
|
·
|
Investments
in the Federal Reserve Bank, Federal Home Loan Bank, and other similar
stock totaling $9.7 million at June 30, 2008 is carried at cost and not
included in the table below, as they are outside the scope of SFAS No.
157.
|
Available
for sale investment securities are the Company’s only balance sheet item that
meets the disclosure requirements for instruments measured at fair value on a
recurring basis. Disclosures are as follows in the table below.
|
|
|
|
|
Fair
Value Measurements at June 30, 2008 Using
|
|
(In
thousands)
Description
|
|
Fair
Value
June
30, 2008
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale investment securities
|
|
$ |
534,537 |
|
|
$ |
16,072 |
|
|
$ |
518,465 |
|
|
$ |
0 |
|
The
Company may be required to measure and disclose certain other assets and
liabilities at fair value on a nonrecurring basis to comply with GAAP, primarily
to adjust assets to fair value under the application of lower of cost or fair
value accounting. Disclosures may also include financial assets and liabilities
acquired in a business combination, which are initially measured at fair value
and evaluated periodically for impairment.
For
disclosures about assets and liabilities measured at fair value on a
nonrecurring basis, the Company’s only current disclosure obligation consists of
impaired loans. Loans are considered impaired when full payment under the
contractual terms is not expected. In general, impaired loans are also on
nonaccrual status. Impaired loans are 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. If the value of an impaired loan is less than the
unpaid balance, the difference is credited to the allowance for loan losses with
a corresponding charge to provision for loan losses. Loan losses are charged
against the allowance for loan losses when management believes the
uncollectibility of a loan is confirmed.
Impaired
loans in the amount of $32.2 million have been written down to their estimated
fair value of $29.8 million at June 30, 2008. At December 31, 2007 impaired
loans of $30.0 million had an estimated fair value of $28.2 million. The
provision for loans losses for the six months ended June 30, 2008 includes $511
thousand related to the higher impaired loans. Impaired loans are measured at
fair value based on the underlying collateral and are considered level 3
inputs.
FORWARD-LOOKING
STATEMENTS
This
report contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involve risks and
uncertainties. In general, forward-looking statements relate to a
discussion of future financial results or projections, future economic
performance, future operational plans and objectives, and statements regarding
the underlying assumptions of such statements. Although the Company
believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
included herein will prove to be accurate. Factors that could cause actual
results to differ from the results discussed in the forward-looking statements
include, but are not limited to: economic conditions (both generally and more
specifically in the markets in which the Company and its subsidiaries operate)
and lower interest margins; competition for the Company’s customers from other
providers of financial services; deposit outflows or reduced demand for
financial services and loan products; government legislation, regulation, and
changes in monetary and fiscal policies (which changes from time to time and
over which the Company has no control); changes in interest rates; changes in
prepayment speeds of loans or investment securities; inflation; material
unforeseen changes in the liquidity, results of operations, or financial
condition of the Company’s customers; changes in the level of non-performing
assets and charge-offs; changes in the number of common shares outstanding; the
capability of the Company to successfully enter into a definitive agreement for
and close anticipated transactions; the possibility that acquired entities may
not perform as well as expected; unexpected claims or litigation against the
Company; technological or operational difficulties; the impact of new accounting
pronouncements and changes in policies and practices that may be adopted by
regulatory agencies; acts of war or terrorism; and other risks or uncertainties
detailed in the Company’s filings with the Securities and Exchange Commission,
all of which are difficult to predict and many of which are beyond the control
of the Company. The Company expressly disclaims any intent or
obligation to update any forward-looking statements after the date hereof to
conform such statements to actual results or to changes in the Company’s
opinions or expectations.
RESULTS
OF OPERATIONS
Second Quarter 2008 Compared
to Second Quarter 2007
The
Company reported net income per share of $.67 for the three months ended June
30, 2008, an increase of $.05 or 8.1% compared to $.62 for the same three-month
period a year earlier. Highlights of the quarterly comparison are as
follows.
|
§
|
Net
income for the second quarter of 2008 was unchanged at $4.9 million
compared to the same quarter a year
earlier.
|
|
§
|
The
$.05 or 8.1% increase in per share earnings in the comparison is the
result of the Company’s purchase of 559 thousand of its outstanding shares
through a tender offer during the third quarter of 2007, which
significantly reduced the weighted average number of shares
outstanding.
|
|
§
|
Net
interest income increased $501 thousand or 3.4% mainly as a result of the
Company’s leverage transaction that occurred during the fourth quarter of
2007.
|
|
§
|
The
provision for loan losses increased $153 thousand or 46.4% due to higher
nonperforming loans in the comparable
periods.
|
|
§
|
Income
tax expense was up $360 thousand or 25.6% due mainly to an increase in
taxable sources of income and, to a lesser extent, lower tax credits. The
effective income tax rate increased 424 basis points to
26.5%.
|
|
§
|
Return
on average assets (“ROA”) and equity (“ROE”) was .92% and 11.35%,
respectively in the current quarter. This represents a decrease of 14
basis points in ROA and an increase of 44 basis points in ROE compared to
the same quarter a year ago.
|
|
§
|
Net
interest spread and margin for the current quarter was 3.17% and 3.43%,
respectively compared to 3.35% and 3.79% a year ago. The 2007 balance
sheet leverage transaction negatively impacted net interest margin by 28
basis points in the current three
months.
|
Net Interest Income
Net
interest income was $15.4 million for the second quarter of 2008, an increase of
$501 thousand or 3.4% from $14.9 million in the same quarter a year earlier. The
increase in net interest income is attributed to the Company’s $200 million
balance sheet leverage transaction during the fourth quarter of 2007. This
transaction added $836 thousand to net interest income in the current quarter
compared to none in the same quarter a year ago since the transaction occurred
late in the year of 2007.
With the
exception of the balance sheet leverage transaction from 2007, interest related
to most of the Company’s earning assets and interest paying liabilities have
declined in the comparison. These declines are due almost entirely to a lower
interest rate environment in the current period compared to a year earlier. The
Company is generally earning and paying less interest from its earning assets
and funding sources as rates have dropped. This includes repricing of variable
and floating rate assets and liabilities that have reset since the prior year as
well as activity related to new earning assets and funding sources that reflect
the overall lower interest rate environment.
Total
interest income was $29.0 million in the second quarter of 2008, an increase of
$526 thousand or 1.8%. Interest on taxable investment securities grew $3.1
million or 106% primarily from the leverage transaction, which offset lower
interest income of $2.5 million from other sources, mainly loans. Interest and
fees on loans was $22.0 million, a decrease of $2.3 million or 9.3% from a year
ago as the impact of lower rates earned offset a $42.1 million or 3.4% increase
in volume. Interest on short-term investments declined $269 thousand or 48.5%
due to a lower average rate earned that offset a $6.1 million or 12.2% increase
in average outstanding balances.
Total
interest expense was $13.7 million in the current quarter, unchanged from a year
ago. Interest expense on securities sold under agreements to repurchase and
other long-term borrowings jumped $2.1 million in the current quarter compared
to a year ago due mainly to the leverage transaction in late 2007. Interest
expense on deposit accounts and short-term borrowings declined $1.5 million or
13.3% and $805 thousand or 64.3%, respectively. The decline of interest expense
on deposit accounts is attributed to lower average rates paid, which offset a
$64.6 million or 5.2% increase in average balances outstanding. For short-term
borrowings, the lower interest expense is attributed to a decline in the average
rate paid of 247 basis points and $26.2 million lower average outstanding
balances.
The net
interest margin on a taxable equivalent basis decreased 36 basis points to 3.43%
during the second quarter of 2008 compared to 3.79% in the same quarter of
2007. The lower net interest margin is attributed in part to an 18
basis point decrease in the spread between rates earned on earning assets and
the rates paid on interest bearing liabilities to 3.17% in the current quarter
from 3.35% in the comparable quarter of 2007. In addition, the impact of
noninterest bearing sources of funds reduced net interest margin by an
additional 15 basis points. The impact of noninterest bearing sources of funds
on net interest margin typically decreases as the cost of funds decline. The
Company expects continued margin compression in the near term as many earning
assets, particularly loans, and funding sources reprice downward to reflect the
overall lower market interest rate environment.
The
following tables present an analysis of net interest income for the quarterly
periods ended June 30.
Distribution
of Assets, Liabilities and Shareholders’ Equity: Interest Rates and
Interest Differential
Quarter
Ended June 30,
|
|
2008
|
|
|
2007
|
|
(In
thousands)
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
Earning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$ |
431,778 |
|
|
$ |
5,964 |
|
|
|
5.54 |
% |
|
$ |
236,538 |
|
|
$ |
2,897 |
|
|
|
4.91 |
% |
Nontaxable1
|
|
|
88,604 |
|
|
|
1,191 |
|
|
|
5.39 |
|
|
|
88,827 |
|
|
|
1,205 |
|
|
|
5.44 |
|
Time
deposits with banks, federal funds sold and securities purchased under
agreements to resell
|
|
|
56,058 |
|
|
|
286 |
|
|
|
2.05 |
|
|
|
49,974 |
|
|
|
555 |
|
|
|
4.45 |
|
Loans1,2,3
|
|
|
1,297,789 |
|
|
|
22,260 |
|
|
|
6.88 |
|
|
|
1,255,692 |
|
|
|
24,429 |
|
|
|
7.80 |
|
Total
earning assets
|
|
|
1,874,229 |
|
|
$ |
29,701 |
|
|
|
6.36 |
% |
|
|
1,631,031 |
|
|
$ |
29,086 |
|
|
|
7.15 |
% |
Allowance
for loan losses
|
|
|
(14,517 |
) |
|
|
|
|
|
|
|
|
|
|
(11,310 |
) |
|
|
|
|
|
|
|
|
Total
earning assets, net of allowance for loan losses
|
|
|
1,859,712 |
|
|
|
|
|
|
|
|
|
|
|
1,619,721 |
|
|
|
|
|
|
|
|
|
Nonearning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
83,623 |
|
|
|
|
|
|
|
|
|
|
|
86,269 |
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
40,507 |
|
|
|
|
|
|
|
|
|
|
|
39,280 |
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
151,801 |
|
|
|
|
|
|
|
|
|
|
|
121,383 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,135,643 |
|
|
|
|
|
|
|
|
|
|
$ |
1,866,653 |
|
|
|
|
|
|
|
|
|
Interest
Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand
|
|
$ |
267,294 |
|
|
$ |
502 |
|
|
|
0.75 |
% |
|
$ |
257,773 |
|
|
$ |
918 |
|
|
|
1.43 |
% |
Savings
|
|
|
267,405 |
|
|
|
876 |
|
|
|
1.31 |
|
|
|
244,759 |
|
|
|
1,387 |
|
|
|
2.27 |
|
Time
|
|
|
777,327 |
|
|
|
8,379 |
|
|
|
4.32 |
|
|
|
744,876 |
|
|
|
8,949 |
|
|
|
4.82 |
|
Federal
funds purchased and other short-term borrowings
|
|
|
80,577 |
|
|
|
447 |
|
|
|
2.23 |
|
|
|
106,811 |
|
|
|
1,252 |
|
|
|
4.70 |
|
Securities
sold under agreements to
repurchase
and other long-term
borrowings
|
|
|
327,214 |
|
|
|
3,482 |
|
|
|
4.27 |
|
|
|
89,513 |
|
|
|
1,155 |
|
|
|
5.18 |
|
Total
interest bearing liabilities
|
|
|
1,719,817 |
|
|
$ |
13,686 |
|
|
|
3.19 |
% |
|
|
1,443,732 |
|
|
$ |
13,661 |
|
|
|
3.80 |
% |
Noninterest
Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth
of Kentucky deposits
|
|
|
42,900 |
|
|
|
|
|
|
|
|
|
|
|
44,806 |
|
|
|
|
|
|
|
|
|
Other
demand deposits
|
|
|
176,702 |
|
|
|
|
|
|
|
|
|
|
|
175,332 |
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
22,640 |
|
|
|
|
|
|
|
|
|
|
|
22,157 |
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,962,059 |
|
|
|
|
|
|
|
|
|
|
|
1,686,027 |
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
173,584 |
|
|
|
|
|
|
|
|
|
|
|
180,626 |
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
|
|
$ |
2,135,643 |
|
|
|
|
|
|
|
|
|
|
$ |
1,866,653 |
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
|
16,015 |
|
|
|
|
|
|
|
|
|
|
|
15,425 |
|
|
|
|
|
TE
basis adjustment
|
|
|
|
|
|
|
(664 |
) |
|
|
|
|
|
|
|
|
|
|
(575 |
) |
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
15,351 |
|
|
|
|
|
|
|
|
|
|
$ |
14,850 |
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
|
|
3.17 |
% |
|
|
|
|
|
|
|
|
|
|
3.35 |
% |
Impact
of noninterest bearing sources of funds
|
|
|
|
|
|
|
|
|
|
|
.26 |
|
|
|
|
|
|
|
|
|
|
|
.44 |
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
3.43 |
% |
|
|
|
|
|
|
|
|
|
|
3.79 |
% |
1Income
and yield stated at a fully tax equivalent basis using the marginal corporate
Federal tax rate of 35%.
2Loan
balances include principal balances on nonaccrual loans.
3Loan fees
included in interest income amounted to $818 thousand and $790 thousand in 2008
and 2007, respectively.
Analysis
of Changes in Net Interest Income (tax equivalent basis)
(In
thousands)
|
|
Variance
|
|
|
Variance
Attributed to
|
|
Quarter
Ended June 30,
|
|
|
2008/2007 |
1 |
|
Volume
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
Taxable
investment securities
|
|
$ |
3,067 |
|
|
$ |
2,654 |
|
|
$ |
413 |
|
Nontaxable
investment securities2
|
|
|
(14 |
) |
|
|
(3 |
) |
|
|
(11 |
) |
Time
deposits with banks, federal funds sold and securities
purchased under agreements to resell
|
|
|
(269 |
) |
|
|
392 |
|
|
|
(661 |
) |
Loans2
|
|
|
(2,169 |
) |
|
|
4,634 |
|
|
|
(6,803 |
) |
Total
interest income
|
|
|
615 |
|
|
|
7,677 |
|
|
|
(7,062 |
) |
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand deposits
|
|
|
(416 |
) |
|
|
222 |
|
|
|
(638 |
) |
Savings
deposits
|
|
|
(511 |
) |
|
|
752 |
|
|
|
(1,263 |
) |
Time
deposits
|
|
|
(570 |
) |
|
|
2,034 |
|
|
|
(2,604 |
) |
Federal
funds purchased and other short-term borrowings
|
|
|
(805 |
) |
|
|
(256 |
) |
|
|
(549 |
) |
Securities
sold under agreements to repurchase and other
long-term borrowings
|
|
|
2,327 |
|
|
|
3,711 |
|
|
|
(1,384 |
) |
Total
interest expense
|
|
|
25 |
|
|
|
6,463 |
|
|
|
(6,438 |
) |
Net
interest income
|
|
$ |
590 |
|
|
$ |
1,214 |
|
|
$ |
(624 |
) |
Percentage
change
|
|
|
100.0 |
% |
|
|
205.8 |
% |
|
|
-105.8 |
% |
1The
changes that are not solely due to rate or volume are allocated on a percentage
basis using the absolute values of rate and volume
variances as a basis for allocation.
2Income
stated at fully tax equivalent basis using the marginal corporate Federal tax
rate of 35%.
Provision and Allowance for
Loan Losses
The
provision for loan losses for the quarter ended June 30, 2008 was $483 thousand,
an increase of $153 thousand or 46.4% compared to $330 thousand for the same
quarter of 2007. Net charge-offs were $73 thousand in the current quarter
compared to $361 thousand a year earlier. Lower net charge-offs in the current
quarter were helped by an $828 thousand recovery of a previously charged-off
credit initiated during 2001. On an annualized basis, quarterly net charge-offs
were .02% of average loans outstanding at June 30, 2008. Excluding the unusually
large recovery in the current quarter, the amount was .28%. This compares to
..24%, .11% and .11% at March 31, 2008, year-end 2007, and June 30,
2007.
Nonperforming
loans were $24.0 million at June 30, 2008, an increase of $2.9 million compared
to year-end 2007, but a decline of $5.9 million or 19.8% compared to March 31,
2008. At June 30, 2007 nonperforming loans were $5.8 million. Nonperforming
loans began to spike upward during the third quarter of 2007 and peaked at $29.9
million during the first quarter of 2008. The upward trend in nonperforming
loans beginning during the last half of 2007 and into early 2008 was driven by
overall weaknesses in the general economy, including a softer housing market and
significant credit tightening throughout the financial services industry. For
the Company, this resulted in the real estate development portion of its lending
portfolio that has shown the most signs of stress. The Company’s improvement in
nonperforming loan levels at June 30, 2008 compared to March 31, 2008 is
reflective of managements efforts to minimize the impact of current negative
market factors on the Company by working to resolve credit delinquencies with
existing customers and taking a more measured and cautious approach to new
lending in the near term.
The
allowance for loan losses was $15.0 million or 1.15% of net loans at June 30,
2008. This compares to $14.6 million or 1.13% of net loans and $14.2 million or
1.10% of net loans outstanding at March 31, 2008 and year-end 2007,
respectively. A year ago, the allowance was $11.3 million or .89% of net loans
outstanding. As a percentage of nonperforming loans, the allowance for loan
losses was 62.5%, 48.7%, 67.5%, and 194% at June 30, 2008, March 31, 2008,
December 31, 2007, and June 30, 2007, respectively.
Noninterest Income
Noninterest
income was relatively unchanged at $6.2 million for the second quarter of 2008
compared to the same period a year ago. Gains on the sale of investment
securities of $214 thousand, higher non-deposit service charges of $83 thousand
or 8.0%, and higher trust income of $48 thousand or 9.9% drove the increase in
noninterest income. Significant line items that partially offset these increases
were lower service charges and fees on deposits of $138 thousand or 5.3% and
lower gains on sale of loans of $74 thousand or 42.3%.
Securities
gains for the current quarter include the reversal of $85 thousand of accrued
litigation related to Visa during the fourth quarter of 2007; remaining
securities gains of $129 thousand is attributed to normal asset and liability
management. As a result of its membership in the Visa USA network, the Company
received 12,508 shares of Class B common stock from the Visa IPO completed in
March, of which 4,836 shares were redeemed for a gain of $207 thousand. The
Company continues to own 7,672 shares of Class B common stock that are
convertible into Class A shares. The Class B shares owned include significant
ownership and transfer restrictions, including a provision whereby conversion or
redemption of the shares may be prohibited until up to three years or longer
after the IPO. As of June 30, 2008 the conversion rate from Class B shares into
Class A shares was .71429. If the Company’s Class B shares could be converted
into Class A shares at June 30, 2008, they would have a market value of $446
thousand. The Company will not recognize a gain, if any, on the Visa Class B
stock it currently holds until the shares are redeemed at a time in the future
that is currently not known.
The
increase in non-deposit service charges of $83 thousand was made up mainly of
$79 thousand and $25 thousand higher debit card interchange and ATM fees,
respectively, which offset slight declines from other components of this line
item. The increase in trust income of $48 thousand was due primarily to
increased volume.
Lower
service charges and fees on deposits of $138 thousand were driven by lower
dormant account fees of $309 thousand at one of the Company’s subsidiary banks
that offset higher overdraft charges of $190 thousand. The decrease in dormant
account fees is related to a change in the subsidiary banks’ dormant account
policy during 2007, which for some accounts lengthened the period of transaction
inactivity required to consider it dormant. The policy changed the dormant
period of certain deposit accounts to 12 months from six months. This resulted
in a decrease in the number of dormant accounts and the related fee income. The
decrease in gains on sale of loans is attributed to lower loan sales volume in
the current quarter compared to the comparable quarter a year ago.
Noninterest Expense
Total
noninterest expenses were nearly unchanged at $14.4 million for the second
quarter of 2008 compared to the second quarter a year earlier. Salaries and
employee benefits, the largest component of noninterest expenses, was $7.6
million, a decrease of $62 thousand or .8% as the average number of full time
equivalent employees declined to 576 from 588. Salary and related payroll taxes
declined $69 thousand, which was the primary driver of the lower current expense
amount in the current period.
Intangible
amortization expense decreased $198 thousand or 23.3% in the quarterly
comparison which helped to offset relatively minor increases in other expense
line items. Amortization of intangible assets, which relate to customer lists
and core deposits from prior acquisitions, is decreasing as a result of
actuarially determined schedules that allocate a higher amount of amortization
in the earlier periods following an acquisition.
Correspondent
bank fees increased $107 thousand or 57.5% due mainly to a change in billing
method of an upstream correspondent bank during the current quarter. The billing
method included switching from the requirement to maintain a certain minimum
balance with the correspondent to a set fee-based structured arrangement. The
increase of $92 thousand or 7.9% in data processing and communication expenses
is attributed primarily to higher transaction volumes. The $159 thousand or 7.3%
increase in other expenses was driven mainly by higher expenses associated with
other real estate owned.
Income Taxes
Income
tax expense for the second quarter of 2008 was $1.8 million, an increase of $360
thousand compared to the same period a year earlier. The effective federal
income tax rate increased 424 basis points to 26.5% from 22.3%
in the
comparison. The Company’s effective tax rate increased mainly due to an increase
in taxable sources of income and, to a lesser extent, lower tax
credits.
First Six Months of 2008
Compared to First Six Months of 2007
Net
income for the first six months of 2008 was $9.3 million or $1.26 per share
compared to $9.5 million or $1.21 per share for the same six-month period of
2007. Highlights of the six-month comparison are as follows.
|
§
|
The
$.05 or 4.1% increase in per share earnings for the current six-month
period compared to the same period for 2007 is due mainly to the impact of
the Company’s tender offer late in 2007. Net income declined $246 thousand
or 2.6%, but was more than offset by the 559 thousand decrease in the
number of shares outstanding from the tender
offer.
|
|
§
|
Net
interest income increased $1.2 million, driven by the Company’s leverage
transaction that occurred during the fourth quarter of
2007.
|
|
§
|
The
provision for loan losses jumped $1.8 million as overall economic
conditions continue to stress certain portions of the Company’s lending
portfolio, particularly real estate development and related
industries.
|
|
§
|
Noninterest
income increased $803 thousand or 6.8% driven by securities gains of $580
thousand.
|
|
§
|
Noninterest
expenses were relatively unchanged at $28.8
million.
|
|
§
|
Income
tax expense increased $334 thousand or 12.3% due mainly to an increase in
taxable sources of income and, to a lesser extent, lower tax credits. The
effective income tax rate increased 255 basis points to
24.8%.
|
|
§
|
ROA
and ROE was .87% and 10.82%, respectively in the current six months. This
represents a decrease of 17 basis points in ROA and an increase of 11
basis points in ROE compared to the same period a year
ago.
|
|
§
|
Net
interest spread and margin for the current six months was 3.08% and 3.36%,
respectively compared to 3.29% and 3.73% a year ago. The 2007 balance
sheet leverage transaction negatively impacted net interest margin by 23
basis points in the current six
months.
|
Net Interest
Income
Net
interest income was $30.1 million for the first six months of 2008, an increase
of $1.2 million or 4.0% from $28.9 million for the same period during 2007. The
increase in net interest income is driven mainly by the Company’s $200 million
balance sheet leverage transaction during the fourth quarter of 2007. This
transaction added $1.7 million to net interest income in the current six months
compared to zero in the same six-month period a year ago since the transaction
occurred late in the year of 2007.
Interest
related to many of the Company’s earning assets and interest paying liabilities
have declined in the comparison. These declines are due almost entirely to a
lower interest rate environment in the current period compared to a year
earlier. The Company is generally earning and paying less interest from its
earning assets and funding sources as rates have dropped. This includes
repricing of variable and floating rate assets and liabilities that have reset
since the prior year as well as activity related to new earning assets and
funding sources that reflect the overall lower interest rate
environment.
Total
interest income was $59.1 million for the current six months, an increase of
$3.2 million or 5.6%. Interest on taxable investment securities jumped $6.3
million or 114% primarily from the leverage transaction, which offset lower
interest income of $3.2 million from other sources, mainly loans. Interest and
fees on loans was $44.7 million, a decrease of $2.0 million or 4.3% from a year
ago as the impact of a 72 basis point decline in the average rate earned offset
a $69.3 million or 5.6% increase in average outstanding balances. Interest on
short-term investments declined $1.1 million or 56.0% due to a 217 basis point
lower average rate earned combined with $16.4 million or 20.2% lower average
outstanding balances.
Total
interest expense was $29.0 million in the current period, an increase of $2.0
million or 7.4% from a year ago. Interest expense on securities sold under
agreements to repurchase and other long-term borrowings climbed $4.3 million in
the current six months compared to a year ago due mainly to the leverage
transaction in late 2007. Interest expense on deposit accounts and short-term
borrowings declined $1.5 million or 6.7% and $1.3 million or 53.9%,
respectively. The lower interest expense on deposit accounts is attributed to a
decrease in average rates paid, mainly on savings and interest bearing demand
accounts. Interest on time deposits was up $161 thousand or .9%
as
a $44.6
million or 6.1% higher average balance outstanding outweighed a 25 basis point
decrease in the average rate paid.
The net
interest margin on a taxable equivalent basis decreased 37 basis points to 3.36%
during the first six months of 2008 compared to 3.73% in the same period of
2007. The lower net interest margin is attributed in part to a 21
basis point decrease in the spread between rates earned on earning assets and
the rates paid on interest bearing liabilities to 3.08% in the current period
from 3.29% in the comparable six months of 2007. In addition, the impact of
noninterest bearing sources of funds reduced net interest margin by an
additional 16 basis points. The impact of noninterest bearing sources of funds
on net interest margin typically decreases as the cost of funds decline. The
Company expects continued margin compression in the near term as many earning
assets, particularly loans, and funding sources reprice downward to reflect the
overall lower market interest rate environment.
The
following tables present an analysis of net interest income for the six months
ended June 30.
Distribution
of Assets, Liabilities and Shareholders’ Equity: Interest Rates and
Interest Differential
Six
Months Ended June 30,
|
|
2008
|
|
|
2007
|
|
(In
thousands)
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
Earning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$ |
429,459 |
|
|
$ |
11,831 |
|
|
|
5.54 |
% |
|
$ |
229,371 |
|
|
$ |
5,521 |
|
|
|
4.85 |
% |
Nontaxable1
|
|
|
88,876 |
|
|
|
2,372 |
|
|
|
5.37 |
|
|
|
89,384 |
|
|
|
2,432 |
|
|
|
5.49 |
|
Time
deposits with banks, federal funds sold and securities purchased under
agreements to resell
|
|
|
64,763 |
|
|
|
854 |
|
|
|
2.65 |
|
|
|
81,189 |
|
|
|
1,939 |
|
|
|
4.82 |
|
Loans1,2,3
|
|
|
1,296,851 |
|
|
|
45,321 |
|
|
|
7.03 |
|
|
|
1,227,574 |
|
|
|
47,182 |
|
|
|
7.75 |
|
Total
earning assets
|
|
|
1,879,949 |
|
|
$ |
60,378 |
|
|
|
6.46 |
% |
|
|
1,627,518 |
|
|
$ |
57,074 |
|
|
|
7.07 |
% |
Allowance
for loan losses
|
|
|
(14,321 |
) |
|
|
|
|
|
|
|
|
|
|
(11,647 |
) |
|
|
|
|
|
|
|
|
Total
earning assets, net of allowance for loan losses
|
|
|
1,865,628 |
|
|
|
|
|
|
|
|
|
|
|
1,615,871 |
|
|
|
|
|
|
|
|
|
Nonearning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
81,901 |
|
|
|
|
|
|
|
|
|
|
|
82,149 |
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
39,881 |
|
|
|
|
|
|
|
|
|
|
|
38,888 |
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
148,738 |
|
|
|
|
|
|
|
|
|
|
|
109,325 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,136,148 |
|
|
|
|
|
|
|
|
|
|
$ |
1,846,233 |
|
|
|
|
|
|
|
|
|
Interest
Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand
|
|
$ |
267,364 |
|
|
$ |
1,174 |
|
|
|
0.88 |
% |
|
$ |
262,630 |
|
|
$ |
1,951 |
|
|
|
1.50 |
% |
Savings
|
|
|
263,340 |
|
|
|
1,908 |
|
|
|
1.46 |
|
|
|
245,485 |
|
|
|
2,788 |
|
|
|
2.29 |
|
Time
|
|
|
780,273 |
|
|
|
17,627 |
|
|
|
4.54 |
|
|
|
735,682 |
|
|
|
17,466 |
|
|
|
4.79 |
|
Federal
funds purchased and other short-term borrowings
|
|
|
85,225 |
|
|
|
1,153 |
|
|
|
2.72 |
|
|
|
106,245 |
|
|
|
2,499 |
|
|
|
4.74 |
|
Securities
sold under agreements to
repurchase
and other long-term
borrowings
|
|
|
326,175 |
|
|
|
7,104 |
|
|
|
4.38 |
|
|
|
87,967 |
|
|
|
2,264 |
|
|
|
5.19 |
|
Total
interest bearing liabilities
|
|
|
1,722,377 |
|
|
$ |
28,966 |
|
|
|
3.38 |
% |
|
|
1,438,009 |
|
|
$ |
26,968 |
|
|
|
3.78 |
% |
Noninterest
Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth
of Kentucky deposits
|
|
|
39,645 |
|
|
|
|
|
|
|
|
|
|
|
40,671 |
|
|
|
|
|
|
|
|
|
Other
demand deposits
|
|
|
175,463 |
|
|
|
|
|
|
|
|
|
|
|
175,430 |
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
26,254 |
|
|
|
|
|
|
|
|
|
|
|
12,901 |
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,963,739 |
|
|
|
|
|
|
|
|
|
|
|
1,667,011 |
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
172,409 |
|
|
|
|
|
|
|
|
|
|
|
179,222 |
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
|
|
$ |
2,136,148 |
|
|
|
|
|
|
|
|
|
|
$ |
1,846,233 |
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
|
31,412 |
|
|
|
|
|
|
|
|
|
|
|
30,106 |
|
|
|
|
|
TE
basis adjustment
|
|
|
|
|
|
|
(1,306 |
) |
|
|
|
|
|
|
|
|
|
|
(1,161 |
) |
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
30,106 |
|
|
|
|
|
|
|
|
|
|
$ |
28,945 |
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
|
|
3.08 |
% |
|
|
|
|
|
|
|
|
|
|
3.29 |
% |
Impact
of noninterest bearing sources of funds
|
|
|
|
|
|
|
|
|
|
|
.28 |
|
|
|
|
|
|
|
|
|
|
|
.44 |
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
3.36 |
% |
|
|
|
|
|
|
|
|
|
|
3.73 |
% |
1Income
and yield stated at a fully tax equivalent basis using the marginal corporate
Federal tax rate of 35%.
2Loan
balances include principal balances on nonaccrual loans.
3Loan fees
included in interest income amounted to $1.3 million and $1.4 million in 2008
and 2007, respectively.
Analysis
of Changes in Net Interest Income (tax equivalent basis)
(In
thousands)
|
|
Variance
|
|
|
Variance
Attributed to
|
|
Six
Months Ended June 30,
|
|
|
2008/2007 |
1 |
|
Volume
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
Taxable
investment securities
|
|
$ |
6,310 |
|
|
$ |
5,425 |
|
|
$ |
885 |
|
Nontaxable
investment securities2
|
|
|
(60 |
) |
|
|
(12 |
) |
|
|
(48 |
) |
Time
deposits with banks, federal funds sold and securities
purchased under agreements to resell
|
|
|
(1,085 |
) |
|
|
(336 |
) |
|
|
(749 |
) |
Loans2
|
|
|
(1,861 |
) |
|
|
5,977 |
|
|
|
(7,838 |
) |
Total
interest income
|
|
|
3,304 |
|
|
|
11,054 |
|
|
|
(7,750 |
) |
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand deposits
|
|
|
(777 |
) |
|
|
104 |
|
|
|
(881 |
) |
Savings
deposits
|
|
|
(880 |
) |
|
|
534 |
|
|
|
(1,414 |
) |
Time
deposits
|
|
|
161 |
|
|
|
2,063 |
|
|
|
(1,902 |
) |
Federal
funds purchased and other short-term borrowings
|
|
|
(1,346 |
) |
|
|
(427 |
) |
|
|
(919 |
) |
Securities
sold under agreements to repurchase and other
long-term borrowings
|
|
|
4,840 |
|
|
|
5,924 |
|
|
|
(1,084 |
) |
Total
interest expense
|
|
|
1,998 |
|
|
|
8,198 |
|
|
|
(6,200 |
) |
Net
interest income
|
|
$ |
1,306 |
|
|
$ |
2,856 |
|
|
$ |
(1,550 |
) |
Percentage
change
|
|
|
100.0 |
% |
|
|
218.7 |
% |
|
|
-118.7 |
% |
1The
changes that are not solely due to rate or volume are allocated on a percentage
basis using the absolute values of rate and volume variances as a basis for
allocation.
2Income
stated at fully tax equivalent basis using the marginal corporate Federal tax
rate of 35%.
Provision and Allowance for
Loan Losses
The
provision for loan losses for the six months ended June 30, 2008 was $1.6
million, an increase of $1.8 million compared to a $166 thousand negative
provision for the same period of 2007. Net charge-offs were $836 thousand in the
current six-month period compared to $581 thousand a year earlier. Net
charge-offs in the current period were helped by an $828 thousand recovery of a
previously charged-off credit initiated during 2001. On an annualized basis,
year-to-date net charge-offs were .13% of average loans outstanding at June 30,
2008. Excluding the unusually large recovery in the current period, the amount
was .26%. This compares to .24%, .11% and .10% at March 31, 2008, year-end 2007,
and June 30, 2007.
Nonperforming
loans were $24.0 million at June 30, 2008, an increase of $2.9 million compared
to year-end 2007. At June 30, 2007 nonperforming loans were $5.8 million.
Nonperforming loans began to spike upward during the third quarter of 2007 and
peaked at $29.9 million during the first quarter of 2008. The upward trend in
nonperforming loans beginning during the last half of 2007 and into early 2008
was driven by overall weaknesses in the general economy, including a softer
housing market and significant credit tightening throughout the financial
services industry. For the Company, this resulted in the real estate development
portion of its lending portfolio that has shown the most signs of stress. The
$18.2 million increase in nonperforming loan levels at June 30, 2008 compared to
June 30, 2007 is attributed to the factors identified above. Most of the
increase in nonaccrual loans in the six month comparison is attributed to higher
nonaccrual loans of $17.3 million that is concentrated into a relatively few
number of larger-balance credits. Although nonperforming loans have increased
significantly compared to a year ago, the Company experienced a decline of $5.9
million or 19.8% from the first quarter of 2008.
The
allowance for loan losses was $15.0 million or 1.15% of net loans at June 30,
2008. This compares to $14.2 million or 1.10% of net loans outstanding at
year-end 2007. A year ago, the allowance was $11.3 million or .89% of net loans
outstanding. As a percentage of nonperforming loans, the allowance for loan
losses was 62.5%, 67.5%, and 194% at June 30, 2008, December 31, 2007, and June
30, 2007, respectively.
Noninterest
Income
Noninterest
income for the six months ended June 30, 2008 was $12.6 million, an increase of
$803 thousand or 6.8% compared to a year ago. Gains on the sale of investment
securities of $580 thousand, higher allotment processing fees of $206 thousand
or 9.7%, and higher non-deposit service charges of $206 thousand or 10.2% drove
the increase in noninterest income. Significant line items that partially offset
these increases were lower service charges and fees on deposits of $253 thousand
or 4.9% and lower gains on sale of loans of $66 thousand or 22.6%.
Securities
gains include $207 thousand attributed to the mandatory redemption of part of
the Visa, Inc. common stock received during the first quarter of 2008 and $85
thousand attributed to the reversal of previously accrued litigation
representing the Company’s share of the litigation reserve escrow account
established by Visa related to its IPO. Remaining securities gains of $288
thousand are attributed to normal asset and liability management.
As a
result of its membership in the Visa USA network, the Company received 12,508
shares of Class B common stock from the Visa IPO completed in March, of which
4,836 shares were redeemed. The Company continues to own 7,672 shares of Class B
common stock that are convertible into Class A shares. The Class B shares owned
include significant ownership and transfer restrictions, including a provision
whereby conversion or redemption of the shares may be prohibited until up to
three years or longer after the IPO. As of June 30, 2008 if the Company’s Class
B shares could be converted into Class A shares, they would have a market value
of $446 thousand. The Company will not recognize a gain, if any, on the Visa
Class B stock it currently holds until the shares are redeemed at a time in the
future that is currently not known.
Allotment
processing fees were up $206 thousand or 9.7% due mainly to the timing of the
acquisition of the Military Allotment operations of PNC Bank during the first
quarter a year ago. The $206 thousand increase in other service charges,
commissions, and fees was due to higher volume related interchange fees of $147
thousand and safekeeping fees of $64 thousand. Trust income increased $77
thousand or 7.9% and is also due primarily to increased volume. Lower service
charges and fees on deposits of $253 thousand were driven by a decrease in
dormant account fees of $642 thousand, which offset higher overdraft charges of
$436 thousand. The decrease in dormant account fees is related to a change in
the dormant account policy of one of the Company’s subsidiary banks during 2007.
The change in policy lengthened the period of transaction inactivity of some
deposit accounts required to consider them dormant. The policy changed the
dormant period of certain deposit accounts to 12 months from six months. This
resulted in a decrease in the number of dormant accounts and the related fee
income. The $66 thousand decrease in gains on sale of loans is attributed to
lower loan sales volume in the current six-month period compared to the same
period a year ago.
Noninterest
Expense
Total
noninterest expenses were nearly unchanged at $28.8 million for the six months
ended June 30, 2008 compared to the same six months of 2007. Salaries and
employee benefits, the largest component of noninterest expenses, was unchanged
at $15.1 million as the average number of full time equivalent employees dipped
to 575 from 584. Salary and related payroll taxes grew $83 thousand, but was
offset by lower benefit costs of $100 thousand.
Intangible
amortization and bank franchise tax expense decreased $365 thousand or 21.9% and
$143 thousand or 13.8%, respectively, in the comparison which nearly offset
increases in other expense line items. Amortization of intangible assets, which
relate to customer lists and core deposits from prior acquisitions, is
decreasing as a result of actuarially determined schedules that allocate a
higher amount of amortization in the earlier periods following an acquisition.
The decrease in bank franchise taxes is the result of lower accruals and the
filing of amended tax returns related to prior years.
Data
processing and communications expense was up $237 thousand or 10.2% in the
current period primarily due to higher transaction volumes. Correspondent bank
fees increased $163 thousand or 47.2% due mainly to a change in billing method
of an upstream correspondent bank in the current period. The billing method
included switching from the requirement to maintain a certain minimum balance
with the correspondent to a set fee-based structured arrangement. The $218
thousand or 4.8% increase in other expenses was driven mainly by higher expenses
associated with other real estate owned.
Income
Taxes
Income
tax expense for the first six months of 2008 was $3.1 million, an increase of
$334 thousand or 12.3% compared to $2.7 million for the same period a year
earlier. The effective federal income tax rate increased 255 basis points to
24.8% from 22.2% in the comparison. The Company’s effective tax rate increased
mainly due to an increase in taxable sources of income and, to a lesser extent,
lower tax credits.
FINANCIAL
CONDITION
Total
assets were $2.1 billion at June 30, 2008, an increase of $54.1 million or 2.6%
from the prior year-end. The most significant changes in the
Company’s assets from year-end were a $32.6 million or 41.2% increase in cash
and cash equivalents and an increase in net loans of $12.3 million or
1.0%.
Total
liabilities increased $52.4 million or 2.8% at June 30, 2008 compared to
December 31, 2007. Higher deposit balances account for $39.5 million of the
increase in liabilities; borrowed funds, primarily long-term, increased $14.8
million. Shareholders’ equity was up $1.7 million or 1.0% to $170 million at the
end of the period.
The
increase in current end of period cash and cash equivalents compared to year-end
2007 was driven by an additional $34.4 million in deposits from the Commonwealth
of Kentucky (“Commonwealth”). The Company has used the growth from other sources
of funds primarily to invest in loans and investment securities. The modest
increase in the loan portfolio from year-end 2007 is representative of a more
cautious and measured lending strategy. This is a result of continuing signs of
general economic weaknesses and tighter loan underwriting
standards.
Management
of the Company considers it noteworthy to understand the relationship between
the Company’s principal subsidiary, Farmers Bank & Capital Trust Co.
(“Farmers Bank”), and the Commonwealth. 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 provides services
to the Teacher’s Retirement systems. As the depository for the Commonwealth,
significant fluctuations in deposits are likely to occur on a daily
basis. Therefore, reviewing average balances is important to
understanding the financial condition of the Company.
On an
average basis, total assets were $2.1 billion for the first six months of 2008,
an increase of $250 million or 13.3% from year-end 2007. The increase in average
assets is attributed mainly to higher earning asset balances. Average investment
securities were up $176 million, boosted by the $200 million balance sheet
leverage transaction that occurred during the fourth quarter of 2007. Average
loans were up $46.4 million or 3.7% compared to their average year-end balance.
Deposits averaged $1.5 billion for the six months ended June 30, 2008, an
increase of $59.4 million or 4.1% from year-end. Average deposits from the
Commonwealth were up $2.5 million or 6.8% in the comparison. Average earning
assets were 88.0% of total average assets at June 30, 2008 compared to 88.1% at
year-end 2007.
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
June 30, 2008, temporary investments were $31.9 million, a decrease of $2.3
million compared to $34.2 million at year-end 2007. Temporary investments
averaged $64.8 million during the first six months of 2008, a decrease of $5.3
million or 7.6% from year-end 2007. The decrease is a result of the Company’s
overall net funding position. Temporary investments are reallocated as loan
demand and other investment alternatives present the opportunity.
Investment Securities
The
investment securities portfolio is comprised primarily of U.S.
government-sponsored agency securities, mortgage-backed securities, and
tax-exempt securities of states and political subdivisions. During the first
half of 2008, the Company purchased $15.5 million principal amount of fixed rate
preferred stocks of U.S. government-
sponsored
agencies. These investments, which make up approximately 2.8% of the total
investment portfolio, had an unrealized loss of $706 thousand at June 30, 2008.
Subsequent to June 30, the market value of these investments declined sharply
before trending back in a higher direction. No impairment charge has been taken
on these investments. Due to the U.S. government recently announcing plans to
support government-sponsored agencies, the Company does not believe it is
necessary to take an impairment charge at this time. The Company continues to
monitor these investments with a high degree of scrutiny and will take
appropriate actions, including impairment write-downs, in future quarters as
necessary.
The
Company also holds $16.0 million principal amount of trust preferred capital
securities of global and national financial services firms, including $6 million
of fixed rate coupon, $6.5 million of floating rate coupon, and $3.5 million
currently fixed that converts to floating in 2013. In addition, the Company
holds $1.5 million and $1.0 million of fixed and floating rate, respectively, of
debentures issued by global and national financial services firms. The Company
does not have direct exposure to the subprime mortgage market. The Company does
not originate subprime mortgages nor has it invested in bonds that are secured
by such mortgages.
Total
investment securities were $548 million on June 30, 2008, up $1.1 million
compared to year-end 2007. Net amortized cost amounts increased $4.2 million or
..7%, partially offset by a decrease in market values of $3.1 million related to
investments carried in the available for sale portfolio. Compared to the end of
the first quarter of 2008, total investment securities declined $12.1 million
due mainly to a $10.1 million drop in market values related to the available for
sale investment portfolio. Market values of the Company’s fixed rate investments
spiked significantly higher in the first quarter mainly as a result of a lower
overall interest rate environment. The lower market values in the current
quarter were influenced heavily by an increase in overall rates along the yield
curve, with nearly half of the decline related to the GNMA bonds purchased in
the Company’s $200 million balance sheet leverage transaction in late 2007. The
$5.0 million unrealized gain related to these bonds that occurred during the
first quarter of 2008 declined back near to their amortized cost amounts in the
current quarter. Unrealized losses in the available for sale portfolio occurring
in the current quarter relate to a wide range of holdings and the amount related
to the GNMA bonds in the leverage transaction is noteworthy mainly because of
the large amount of bonds purchased in the transaction.
Unrealized
losses within the Company’s investment securities portfolio have not been
included in income since they are identified as temporary. The securities’ fair
values are expected to recover as they approach their maturity dates and the
Company has the intent and ability to hold to recovery. All investments in the
Company’s portfolio are currently performing.
Total
investment securities averaged $518 million for the first six months of 2008, an
increase of $176 million or 51.6% from year-end 2007. The increase in average
investment securities is mainly due to the GNMA mortgage-backed bonds that were
purchased in the balance sheet leverage transaction during the fourth quarter of
2007.
Loans
Loans,
net of unearned income, totaled $1.3 billion at June 30, 2008, relatively
unchanged from year-end 2007. The Company is taking a more measured and cautious
approach to loan growth in the near term as a result of continued weaknesses in
the general economy, including a softer housing market and significant credit
tightening throughout the financial services industry.
The
composition of the loan portfolio is summarized in the table below.
|
|
June
30, 2008
|
|
|
December
31, 2007
|
|
(Dollars
in thousands)
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial, and agriculture
|
|
$ |
148,390 |
|
|
|
11.4 |
% |
|
$ |
154,015 |
|
|
|
11.9 |
% |
Real
estate - construction
|
|
|
246,021 |
|
|
|
18.9 |
|
|
|
254,788 |
|
|
|
19.7 |
|
Real
estate mortgage - residential
|
|
|
428,564 |
|
|
|
32.8 |
|
|
|
405,992 |
|
|
|
31.5 |
|
Real
estate mortgage - farmland and other commercial
enterprises
|
|
|
406,891 |
|
|
|
31.2 |
|
|
|
394,900 |
|
|
|
30.6 |
|
Installment
|
|
|
48,517 |
|
|
|
3.7 |
|
|
|
52,028 |
|
|
|
4.0 |
|
Lease
financing
|
|
|
26,696 |
|
|
|
2.0 |
|
|
|
30,262 |
|
|
|
2.3 |
|
Total
|
|
$ |
1,305,079 |
|
|
|
100.0 |
% |
|
$ |
1,291,985 |
|
|
|
100.0 |
% |
On
average, loans represented 69.0% of earning assets during the current six-month
period, a decrease of 624 basis points compared to 75.2% for year-end 2007.
Average loans represent a lower percentage of earning assets mainly as a result
of the $200 million balance sheet leverage transaction late in 2007, which was
the primary driver of increased investment securities and earning assets. As
loan demand fluctuates, the available funds are reallocated between loans and
temporary investments or investment securities, which typically involve a
decrease in credit risk and lower yields.
The
Company does not have direct exposure to the subprime mortgage market. The
Company does not originate subprime mortgages nor has it invested in bonds that
are secured by such mortgages.
Nonperforming Loans
Nonperforming
loans consist of nonaccrual loans and loans past due ninety days or more on
which interest is still accruing. Nonperforming loans dipped in the
current quarter compared to the linked-quarter, but are still higher than at
year-end 2007. Overall economic conditions continue to stress certain portions
of the Company’s lending portfolio, particularly real estate development.
Nonperforming loans were as follows at June 30, 2008, March 31, 2008, and
December 31, 2007.
(In
thousands)
|
|
June
30, 2008
|
|
|
March
31,
2008
|
|
|
Change
|
|
|
%
|
|
|
|
June
30, 2008
|
|
|
December
31,
2007
|
|
|
Change
|
|
|
%
|
|
Nonaccrual
|
|
$ |
19,479 |
|
|
$ |
24,041 |
|
|
$ |
(4,562 |
) |
|
|
(19.0 |
)% |
|
|
$ |
19,479 |
|
|
$ |
18,073 |
|
|
$ |
1,406 |
|
|
|
7.8 |
% |
Past
due 90 days or more and still accruing
|
|
|
4,482 |
|
|
|
5,851 |
|
|
|
(1,369 |
) |
|
|
(23.4 |
)% |
|
|
|
4,482 |
|
|
|
2,977 |
|
|
|
1,505 |
|
|
|
50.6 |
|
Total
nonperforming loans
|
|
$ |
23,961 |
|
|
$ |
29,892 |
|
|
$ |
(5,931 |
) |
|
|
(19.8 |
)% |
|
|
$ |
23,961 |
|
|
$ |
21,050 |
|
|
$ |
2,911 |
|
|
|
13.8 |
% |
The $19.5
million balance of nonaccrual loans outstanding at June 30, 2008 is comprised
mainly of 7 credits totaling $15.2 million, substantially all of which is
secured by real estate.
The
decrease in linked-quarter nonaccrual loans of $4.6 million or 19.0% is
attributed mainly to two credits of $6.3 million at March 31, 2008 that were
removed from nonaccrual status. One credit totaling $4.1 million was transferred
to the Company through foreclosure during the second quarter simultaneous with a
$250 thousand charge-off. The other credit of $2.0 million was paid off during
the current quarter. The $1.4 million decrease in loans past due 90 days or more
and still accruing interest is primarily attributed to a single credit of $1.8
million that is now current.
The $1.4
million increase in nonaccrual loans at June 30, 2008 compared to the prior
year-end is primarily limited to two credits totaling $1.2 million that were
classified as past due 90 days and still accruing at year-end. Loans past due 90
days or more increased $1.5 million since year-end 2007 and scattered across
multiple lower-balance credits. The Company continues to work diligently to
reduce and minimize the impact of holding nonperforming loans.
Other Real
Estate
Other
real estate owned (“OREO”) includes real estate properties acquired by the
Company through foreclosure. At June 30, 2008 OREO was $11.2 million, up $3.8
million or 51.1% and $5.2 million or 85.5% from the first quarter of 2008 and
year-end 2007, respectively. The increase in linked-quarter and year-to-date
OREO is mainly driven by a $4.1 million real estate development property
acquired that previously secured outstanding loans to one individual credit.
This property, which was included in nonaccrual loans at March 31, 2008 and
December 31, 2007, was acquired by the Company during the second quarter of
2008.
Deposits
A summary
of the Company’s deposits are as follows for the periods indicated.
|
|
End
of Period
|
|
|
Average
|
|
(In
thousands)
|
|
June
30,
2008
|
|
|
December
31,
2007
|
|
|
Difference
|
|
|
June
30,
2008
|
|
|
December
31,
2007
|
|
|
Difference
|
|
Noninterest
Bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth
|
|
$ |
49,804 |
|
|
$ |
15,367 |
|
|
$ |
34,437 |
|
|
$ |
39,645 |
|
|
$ |
37,119 |
|
|
$ |
2,526 |
|
Other
|
|
|
173,596 |
|
|
|
177,065 |
|
|
|
(3,469 |
) |
|
|
175,463 |
|
|
|
177,304 |
|
|
|
(1,841 |
) |
Total
|
|
$ |
223,400 |
|
|
$ |
192,432 |
|
|
$ |
30,968 |
|
|
$ |
215,108 |
|
|
$ |
214,423 |
|
|
$ |
685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
$ |
250,887 |
|
|
$ |
261,642 |
|
|
$ |
(10,755 |
) |
|
$ |
267,364 |
|
|
$ |
258,992 |
|
|
$ |
8,372 |
|
Savings
|
|
|
268,252 |
|
|
|
250,002 |
|
|
|
18,250 |
|
|
|
263,340 |
|
|
|
244,299 |
|
|
|
19,041 |
|
Time
|
|
|
771,075 |
|
|
|
770,021 |
|
|
|
1,054 |
|
|
|
780,273 |
|
|
|
748,939 |
|
|
|
31,334 |
|
Total
|
|
$ |
1,290,214 |
|
|
$ |
1,281,665 |
|
|
$ |
8,549 |
|
|
$ |
1,310,977 |
|
|
$ |
1,252,230 |
|
|
$ |
58,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Deposits
|
|
$ |
1,513,614 |
|
|
$ |
1,474,097 |
|
|
$ |
39,517 |
|
|
$ |
1,526,085 |
|
|
$ |
1,466,653 |
|
|
$ |
59,432 |
|
Deposit
balances of the Commonwealth can fluctuate significantly from day to day. The
Company believes average balances are important when analyzing its deposit
balances. Both end of period and average savings account deposit balances were
fueled by promotional efforts beginning in the fourth quarter of 2007. Average
time deposits increased mainly as a result of higher shorter-term certificates
of deposit balances and increased individual retirement account
balances.
Borrowed Funds
Total
borrowed funds were $412 million at June 30, 2008, an increase of $14.8 million
or 3.7% from $397 million at year-end 2007. Long-term borrowings increased $11.6
million resulting from additional FHLB borrowings of $19.0 million during the
current period partially offset by repayments of $7.4 million. Short-term
borrowings increased $3.2 million or 3.9% due mainly to higher federal funds
purchases and securities sold under agreements to repurchase balances. These
sources of short-term funding fluctuate as the overall net funding position of
the Company changes.
LIQUIDITY
The
Parent Company’s primary use of cash consists of dividend payments to its common
shareholders, purchases of its common stock, corporate acquisitions, interest
expense on borrowings, and other general operating purposes. Liquidity of the
Parent Company depends primarily on the receipt of dividends from its subsidiary
banks, cash balances maintained, and borrowings from nonaffiliated
sources. As of June 30, 2008 combined retained earnings of the
subsidiary banks was $50.1 million, of which $7.9 million was available for the
payment of dividends to the Parent Company without obtaining prior approval from
bank regulatory agencies. As a practical matter, payment of future
dividends is also subject to the maintenance of other capital ratio
requirements.
Management
expects that in the aggregate, its subsidiary banks will continue to have the
ability to pay dividends in order to provide funds to the Parent Company to meet
its near-term liquidity needs. In addition, the Parent Company has a $15.0
million unsecured line of credit with an unrelated financial institution
available for general corporate purposes. This line of credit matures in June
2009 and bears interest at the three-month LIBOR rate plus 140 basis
points.
The
Parent Company had cash balances of $12.6 million at June 30, 2008, a decrease
of $2.4 million or 15.9% from $15.0 million at year-end
2007. Significant cash flows during the current six-month period for
the Parent Company include the following: management fees received from
subsidiaries of $1.4 million; dividends received from subsidiaries of $6.3
million; payment of dividends to shareholders of $4.9 million; the purchase of
$1.0 million of common shares in two unaffiliated banks; interest payment on
borrowed funds of $1.5 million; and the repurchase of the Company’s stock in the
amount of $1.0 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 business and nonbusiness deposits, cash flow generated
by repayment of principal and interest on loans and investment securities, FHLB
and other borrowings, and federal funds purchased and securities sold under
agreements to repurchase. While maturities and scheduled amortization
of loans and investment securities are generally a predictable source of funds,
deposit outflows and mortgage prepayments are influenced significantly by
general interest rates, economic conditions, and competition in the Company’s
local markets. As of June 30, 2008 the Company had approximately $195
million in additional borrowing capacity under various FHLB, federal funds, and
other borrowing agreements. However, there is no guarantee that these
sources of funds will continue to be available to the Company, or that current
borrowings can be refinanced upon maturity, although the Company is not aware of
any events or uncertainties that are likely to cause a decrease in the Company’s
liquidity from these sources.
For the
longer term, the liquidity position is managed by balancing the maturity
structure of the balance sheet. This process allows for an orderly
flow of funds over an extended period of time. The Company’s Asset
and Liability Management Committee, both at the bank subsidiary level and on a
consolidated basis, meets regularly and monitors the composition of the balance
sheet to ensure comprehensive management of interest rate risk and
liquidity.
Liquid
assets consist of cash, cash equivalents, and securities available for
sale. At June 30, 2008, consolidated liquid assets were $656 million,
an increase of $34.2 million or 5.5% from year-end 2007. The increase
in liquid assets is mainly attributed to $32.6 million higher cash and
equivalents. The increase in cash and equivalents is due mainly to higher
deposit activity of the Commonwealth and the overall funding position of the
Company, which changes as loan demand, deposit levels, and other sources and
uses of funds fluctuate.
Net cash
provided by operating activities was $6.1 million in the first six months of
2008, unchanged compared to the same period a year earlier. Net cash used in
investing activities was $22.1 million in the current six months of 2008
compared to $54.8 million a year earlier. The change in cash flows is mainly due
to lower net outflows related to loan activity in the current six months of
$61.0 million compared to a year ago, partially offset by lower net inflows
related to investment securities transactions of $24.7 million. Net cash
provided by financing activities was $48.5 million in the current six months, up
$42.1 million. The higher cash provided by financing activities in the current
period is due mainly to a $54.0 million increase in net deposit activity
partially offset by $12.5 million lower net borrowings.
Commitments
to extend credit are considered in addressing the Company’s liquidity
management. The Company does not expect these commitments to
significantly effect the liquidity position in future periods. 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 $170 million on June 30, 2008, an increase of $1.7 million or 1.0%
from $168 million at December 31, 2007. The increase in shareholders’ equity is
due mainly to an increase in retained earnings of $3.7 million or 3.0%,
partially offset by $1.9 million lower accumulated other comprehensive
income.
The
increase in retained earnings is due to net income of $9.3 million, partially
offset by $4.9 million or $.66 per share cash dividends declared and the
purchase of 43 thousand shares of the Company’s outstanding shares.
Compared
to year-end 2007, accumulated other comprehensive income decreased mainly due to
lower market values of available for sale investment securities of $2.0 million,
net of tax. Market value declines related equity investments and trust preferred
capital securities purchased during the first half of 2008 is the primary driver
of the decrease in accumulated other comprehensive income.
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 June 30, 2008 and
the regulatory minimums are as follows.
|
|
Farmers
Capital
|
|
|
Regulatory
|
|
|
|
Bank
Corporation
|
|
|
Minimum
|
|
Tier
1 risk based
|
|
|
11.58 |
% |
|
|
4.00 |
% |
Total
risk based
|
|
|
12.66 |
% |
|
|
8.00 |
% |
Leverage
|
|
|
7.78 |
% |
|
|
4.00 |
% |
As of
June 30, 2008, all of the Company’s subsidiary banks were in excess of the
well-capitalized regulatory ratio requirements as calculated under guidelines
established by federal banking agencies. The Company is not aware of any
recommendations by its regulatory authorities which, if implemented, would have
a material effect on its capital resources, liquidity, or
operations.
The
Company uses a simulation model as a tool to monitor and evaluate interest rate
risk exposure. The model is designed to measure the sensitivity of
net interest income and net income to changing interest rates over future time
periods. Forecasting net interest income and its sensitivity to
changes in interest rates requires the Company to make assumptions about the
volume and characteristics of many attributes, including assumptions relating to
the replacement of maturing earning assets and liabilities. Other
assumptions include, but are not limited to, projected prepayments, projected
new volume, and the predicted relationship between changes in market interest
rates and changes in customer account balances. These effects are
combined with the Company’s estimate of the most likely rate environment to
produce a forecast of net interest income and net income. The
forecasted results are then adjusted for the effect of a gradual increase and
decrease in market interest rates on the Company’s net interest income and net
income. Because assumptions are inherently uncertain, the model
cannot precisely estimate net interest income or net income or the effect of
interest rate changes on net interest income and net income. Actual
results could differ significantly from simulated results.
At June
30, 2008, the model indicated that if rates were to gradually increase by 150
basis points during the remainder of the calendar year, then net interest income
and net income would increase .82% and 2.1%, respectively for the year ending
December 31, 2008 when compared to the forecasted results for the most likely
rate environment. The model indicated that if rates were to gradually
decrease by 150 basis points over the same period, then net interest income and
net income would decrease 1.0% and 2.5%, respectively.
The
Company’s Chief Executive Officer and Chief Financial Officer have reviewed and
evaluated the effectiveness of the Company’s disclosure controls and procedures
as of the end of the period covered by this report, and have concluded that the
Company’s disclosure controls and procedures were adequate and effective to
ensure that all material information required to be disclosed in this report has
been made known to them in a timely fashion.
There
were no significant changes in the Company’s internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the Chief Executive Officer and Chief Financial Officers evaluation, nor were
there any significant deficiencies or material weaknesses in the controls which
required corrective action.
As of
June 30, 2008, 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.
The
following table provides information with respect to shares of common stock
repurchased by the Company during the quarter ended June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
April
1, 2008 to April 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
89,971 |
|
May
1, 2008 to May 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
89,971 |
|
June
1, 2008 to June 30, 2008
|
|
|
5,000 |
|
|
$ |
19.90 |
|
|
|
5,000 |
|
|
|
84,971 |
|
Total
|
|
|
5,000 |
|
|
$ |
19.90 |
|
|
|
5,000 |
|
|
|
|
|
At
various times, the Company’s Board of Directors has authorized the purchase
shares of the Company’s outstanding common stock. No stated
expiration dates have been established under any of the previous
authorizations.
The
annual meeting of shareholders was held May 13, 2008. The
matters that was voted upon included the election of four directors for
three-year terms ending in 2011 or until their successors have been
elected and
qualified.
|
The
outcome of the voting was as
follows:
|
Election
of Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
For
|
|
|
Against
|
|
|
Withheld
|
|
|
Abstained
|
|
G.
Anthony Busseni
|
|
|
5,391,670 |
|
|
|
0 |
|
|
|
342,122 |
|
|
|
0 |
|
Shelley
S. Sweeney
|
|
|
5,684,012 |
|
|
|
0 |
|
|
|
49,780 |
|
|
|
0 |
|
Ben
F. Brown
|
|
|
5,394,847 |
|
|
|
0 |
|
|
|
338,946 |
|
|
|
0 |
|
Marvin
E. Strong, Jr.
|
|
|
5,546,737 |
|
|
|
0 |
|
|
|
187,055 |
|
|
|
0 |
|
Listed
below are the names of each other director whose term of office continued after
the meeting.
Frank
W. Sower, Jr.
|
Lloyd
C. Hillard, Jr.
|
J.
Barry Banker |
Robert
Roach, Jr. |
Dr.
John D. Sutterlin
|
R.
Terry Bennett
|
Dr.
Donald J. Mullineaux
|
Dr.
Donald A. Saelinger
|
In
addition to the directors above, Dr. John P. Stewart, Chairman Emeritus, E.
Bruce Dungan, and Charles T. Mitchell serve as advisory directors for the
Company.
List of Exhibits
|
|
|
3i.
|
Amended
and Restated Articles of Incorporation of Farmers Capital Bank Corporation
(incorporated by reference to Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2006).
|
|
|
3ii.
|
Amended
and Restated By-Laws of Farmers Capital Bank Corporation (incorporated by
reference to Annual Report of Form 10-K for the fiscal year ended December
31, 1997).
|
|
|
3iia
|
Amendments
to By-Laws of Farmers Capital Bank Corporation (incorporated by reference
to Quarterly Report of Form 10-Q for the quarterly period ended March 31,
2003).
|
|
|
31.1
|
|
|
|
31.2
|
|
|
|
32
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date:
|
August 7, 2008 |
|
/s/ G. Anthony
Busseni |
|
|
|
G.
Anthony Busseni,
|
|
|
|
President
and CEO
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
Date:
|
8-7-08 |
|
/s/ Doug Carpenter |
|
|
|
C.
Douglas Carpenter,
|
|
|
|
Senior
Vice President, Secretary, and CFO
|
|
|
|
(Principal
Financial and Accounting Officer)
|