form10-q093008.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 September 30, 2008
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|
Farmers
Capital Bank Corporation
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|
(Exact
name of registrant as specified in its charter)
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|
Kentucky
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0-14412
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|
61-1017851
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(State
or other jurisdiction
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(Commission
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(IRS
Employer
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|
of
incorporation)
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File
Number)
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Identification
No.)
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P.O.
Box 309 Frankfort, KY
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40602
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code – (502)-227-1668
|
Not
Applicable
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|
(Former
name or former address, if changed since last report.)
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|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
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” 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
7,354,223
shares outstanding at November 5, 2008
TABLE OF
CONTENTS
PART
I – FINANCIAL INFORMATION
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Item
1. Financial Statements
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3
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4
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5
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6
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7
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8
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13
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27
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28
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PART
II - OTHER INFORMATION
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28
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28
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28
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30
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
|
|
September
30,
|
|
|
December
31,
|
|
(In thousands, except share data)
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
106,177 |
|
|
$ |
44,896 |
|
Interest
bearing deposits in other banks
|
|
|
7,025 |
|
|
|
2,290 |
|
Federal
funds sold and securities purchased under agreements to
resell
|
|
|
52,141 |
|
|
|
31,954 |
|
Total
cash and cash equivalents
|
|
|
165,343 |
|
|
|
79,140 |
|
Investment
securities:
|
|
|
|
|
|
|
|
|
Available
for sale, amortized cost of $519,491 (2008) and $542,259
(2007)
|
|
|
516,114 |
|
|
|
542,633 |
|
Held
to maturity, fair value of $2,306 (2008) and $3,863 (2007)
|
|
|
2,539 |
|
|
|
3,844 |
|
Total
investment securities
|
|
|
518,653 |
|
|
|
546,477 |
|
Loans,
net of unearned income
|
|
|
1,303,419 |
|
|
|
1,291,985 |
|
Allowance
for loan losses
|
|
|
(15,602 |
) |
|
|
(14,216 |
) |
Loans,
net
|
|
|
1,287,817 |
|
|
|
1,277,769 |
|
Premises
and equipment, net
|
|
|
41,108 |
|
|
|
38,663 |
|
Company-owned
life insurance
|
|
|
35,084 |
|
|
|
34,171 |
|
Goodwill
|
|
|
52,405 |
|
|
|
52,408 |
|
Other
intangibles, net
|
|
|
7,591 |
|
|
|
9,543 |
|
Other
assets
|
|
|
46,456 |
|
|
|
30,076 |
|
Total
assets
|
|
$ |
2,154,457 |
|
|
$ |
2,068,247 |
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest
bearing
|
|
$ |
244,316 |
|
|
$ |
192,432 |
|
Interest
bearing
|
|
|
1,303,160 |
|
|
|
1,281,665 |
|
Total
deposits
|
|
|
1,547,476 |
|
|
|
1,474,097 |
|
Federal
funds purchased and other short-term borrowings
|
|
|
83,247 |
|
|
|
80,755 |
|
Securities
sold under agreements to repurchase and other long-term
borrowings
|
|
|
286,821 |
|
|
|
267,339 |
|
Subordinated
notes payable to unconsolidated trusts
|
|
|
48,970 |
|
|
|
48,970 |
|
Dividends
payable
|
|
|
2,425 |
|
|
|
2,436 |
|
Other
liabilities
|
|
|
24,900 |
|
|
|
26,159 |
|
Total
liabilities
|
|
|
1,993,839 |
|
|
|
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; 7,354,223 and 7,384,865 shares issued and
outstanding at September 30, 2008 and December 31, 2007,
respectively
|
|
|
919 |
|
|
|
923 |
|
Capital
surplus
|
|
|
48,156 |
|
|
|
48,176 |
|
Retained
earnings
|
|
|
116,843 |
|
|
|
122,498 |
|
Accumulated
other comprehensive loss
|
|
|
(5,300 |
) |
|
|
(3,106 |
) |
Total
shareholders’ equity
|
|
|
160,618 |
|
|
|
168,491 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
2,154,457 |
|
|
$ |
2,068,247 |
|
See
accompanying notes to unaudited consolidated financial
statements.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(In
thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
21,458 |
|
|
$ |
24,402 |
|
|
$ |
66,194 |
|
|
$ |
71,154 |
|
Interest
on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
5,411 |
|
|
|
2,721 |
|
|
|
17,242 |
|
|
|
8,242 |
|
Nontaxable
|
|
|
795 |
|
|
|
826 |
|
|
|
2,446 |
|
|
|
2,527 |
|
Interest
on deposits in other banks
|
|
|
20 |
|
|
|
18 |
|
|
|
44 |
|
|
|
47 |
|
Interest
of federal funds sold and securities purchased under agreements to
resell
|
|
|
175 |
|
|
|
527 |
|
|
|
1,005 |
|
|
|
2,437 |
|
Total
interest income
|
|
|
27,859 |
|
|
|
28,494 |
|
|
|
86,931 |
|
|
|
84,407 |
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
9,082 |
|
|
|
11,478 |
|
|
|
29,791 |
|
|
|
33,683 |
|
Interest
on federal funds purchased and other short-term borrowings
|
|
|
453 |
|
|
|
995 |
|
|
|
1,606 |
|
|
|
3,494 |
|
Interest
on securities sold under agreements to repurchase and other long-term
borrowings
|
|
|
2,879 |
|
|
|
737 |
|
|
|
8,523 |
|
|
|
2,099 |
|
Interest
on subordinated notes payable to unconsolidated trusts
|
|
|
671 |
|
|
|
662 |
|
|
|
2,131 |
|
|
|
1,564 |
|
Total
interest expense
|
|
|
13,085 |
|
|
|
13,872 |
|
|
|
42,051 |
|
|
|
40,840 |
|
Net
interest income
|
|
|
14,774 |
|
|
|
14,622 |
|
|
|
44,880 |
|
|
|
43,567 |
|
Provision
for loan losses
|
|
|
1,780 |
|
|
|
595 |
|
|
|
3,365 |
|
|
|
429 |
|
Net
interest income after provision for loan losses
|
|
|
12,994 |
|
|
|
14,027 |
|
|
|
41,515 |
|
|
|
43,138 |
|
Noninterest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges and fees on deposits
|
|
|
2,539 |
|
|
|
2,627 |
|
|
|
7,403 |
|
|
|
7,744 |
|
Allotment
processing fees
|
|
|
1,199 |
|
|
|
1,114 |
|
|
|
3,530 |
|
|
|
3,239 |
|
Other
service charges, commissions, and fees
|
|
|
1,098 |
|
|
|
1,067 |
|
|
|
3,324 |
|
|
|
3,087 |
|
Data
processing income
|
|
|
258 |
|
|
|
283 |
|
|
|
843 |
|
|
|
867 |
|
Trust
income
|
|
|
535 |
|
|
|
516 |
|
|
|
1,585 |
|
|
|
1,489 |
|
Investment
securities gains, net
|
|
|
5 |
|
|
|
|
|
|
|
585 |
|
|
|
|
|
Other-than-temporary
impairment of investment securities
|
|
|
(13,962 |
) |
|
|
|
|
|
|
(13,962 |
) |
|
|
|
|
Gains
on sale of mortgage loans, net
|
|
|
128 |
|
|
|
141 |
|
|
|
354 |
|
|
|
433 |
|
Income
from company-owned life insurance
|
|
|
310 |
|
|
|
304 |
|
|
|
923 |
|
|
|
972 |
|
Other
|
|
|
25 |
|
|
|
67 |
|
|
|
128 |
|
|
|
63 |
|
Total
noninterest income
|
|
|
(7,865 |
) |
|
|
6,119 |
|
|
|
4,713 |
|
|
|
17,894 |
|
Noninterest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
7,411 |
|
|
|
7,536 |
|
|
|
22,519 |
|
|
|
22,665 |
|
Occupancy
expenses, net
|
|
|
1,140 |
|
|
|
1,055 |
|
|
|
3,340 |
|
|
|
3,144 |
|
Equipment
expenses
|
|
|
824 |
|
|
|
851 |
|
|
|
2,291 |
|
|
|
2,393 |
|
Data
processing and communication expenses
|
|
|
1,417 |
|
|
|
1,251 |
|
|
|
3,980 |
|
|
|
3,577 |
|
Bank
franchise tax
|
|
|
574 |
|
|
|
528 |
|
|
|
1,470 |
|
|
|
1,567 |
|
Correspondent
bank fees
|
|
|
259 |
|
|
|
194 |
|
|
|
767 |
|
|
|
539 |
|
Amortization
of intangibles
|
|
|
651 |
|
|
|
848 |
|
|
|
1,952 |
|
|
|
2,514 |
|
Other
|
|
|
2,603 |
|
|
|
2,093 |
|
|
|
7,332 |
|
|
|
6,604 |
|
Total
noninterest expense
|
|
|
14,879 |
|
|
|
14,356 |
|
|
|
43,651 |
|
|
|
43,003 |
|
(Loss)
income before income taxes
|
|
|
(9,750 |
) |
|
|
5,790 |
|
|
|
2,577 |
|
|
|
18,029 |
|
Income
tax (benefit) expense
|
|
|
(2,865 |
) |
|
|
1,633 |
|
|
|
186 |
|
|
|
4,350 |
|
Net
(loss) income
|
|
$ |
(6,885 |
) |
|
$ |
4,157 |
|
|
$ |
2,391 |
|
|
$ |
13,679 |
|
Per
Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income, basic and diluted
|
|
$ |
(.94 |
) |
|
$ |
.54 |
|
|
$ |
.32 |
|
|
$ |
1.75 |
|
Cash
dividends declared
|
|
|
.33 |
|
|
|
.33 |
|
|
|
.99 |
|
|
|
.99 |
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
7,349 |
|
|
|
7,672 |
|
|
|
7,358 |
|
|
|
7,816 |
|
See
accompanying notes to unaudited consolidated financial
statements.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
(Loss) Income
|
|
$ |
(6,885 |
) |
|
$ |
4,157 |
|
|
$ |
2,391 |
|
|
$ |
13,679 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized holding (loss) gain on available for sale securities arising
during the period, net of tax of $267, $1,340, $1,228 and $456,
respectively
|
|
|
(496 |
) |
|
|
2,488 |
|
|
|
(2,280 |
) |
|
|
846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for prior period unrealized (gain) loss recognized during
current period, net of tax of $47, $85, and $5,
respectively
|
|
|
88 |
|
|
|
|
|
|
|
(158 |
) |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in unfunded portion of postretirement benefit obligation, net of tax of
$43, $35 $131, and $104, respectively
|
|
|
81 |
|
|
|
64 |
|
|
|
244 |
|
|
|
192 |
|
Other
comprehensive (loss) income
|
|
|
(327 |
) |
|
|
2,552 |
|
|
|
(2,194 |
) |
|
|
1,048 |
|
Comprehensive
(Loss) Income
|
|
$ |
(7,212 |
) |
|
$ |
6,709 |
|
|
$ |
197 |
|
|
$ |
14,727 |
|
See
accompanying notes to unaudited consolidated financial statements.
Nine
months ended September 30, (In thousands)
|
|
2008
|
|
|
2007
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,391 |
|
|
$ |
13,679 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,853 |
|
|
|
5,532 |
|
Net
amortization of investment security premiums and
(discounts):
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
(94 |
) |
|
|
(799 |
) |
Held
to maturity
|
|
|
|
|
|
|
1 |
|
Provision
for loan losses
|
|
|
3,365 |
|
|
|
429 |
|
Noncash
compensation expense
|
|
|
41 |
|
|
|
42 |
|
Mortgage
loans originated for sale
|
|
|
(13,525 |
) |
|
|
(16,960 |
) |
Proceeds
from sale of mortgage loans
|
|
|
12,812 |
|
|
|
16,359 |
|
Deferred
income tax (benefit) expense
|
|
|
(3,249 |
) |
|
|
3,096 |
|
Gain
on sale of mortgage loans, net
|
|
|
(354 |
) |
|
|
(433 |
) |
Loss
on disposal of premises and equipment, net
|
|
|
12 |
|
|
|
104 |
|
Loss
(gain) on sale of repossessed assets
|
|
|
87 |
|
|
|
(352 |
) |
Gain
on sale of available for sale investment securities, net
|
|
|
(585 |
) |
|
|
|
|
Other-than-temporary
impairment of investment securities
|
|
|
13,962 |
|
|
|
|
|
Increase
(decrease) in accrued interest receivable
|
|
|
340 |
|
|
|
(1,613 |
) |
Income
from company-owned life insurance
|
|
|
(913 |
) |
|
|
(935 |
) |
Decrease
in other assets
|
|
|
(3,364 |
) |
|
|
(1,050 |
) |
(Decrease)
increase in accrued interest payable
|
|
|
(955 |
) |
|
|
1,074 |
|
Increase
(decrease) in other liabilities
|
|
|
71 |
|
|
|
(5,218 |
) |
Net
cash provided by operating activities
|
|
|
14,895 |
|
|
|
12,956 |
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Proceeds
from maturities and calls of investment securities:
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
185,925 |
|
|
|
246,282 |
|
Held
to maturity
|
|
|
1,305 |
|
|
|
2,318 |
|
Proceeds
from sale of available for sale investment securities
|
|
|
30,672 |
|
|
|
21,007 |
|
Purchase
of available for sale investment securities
|
|
|
(207,112 |
) |
|
|
(246,149 |
) |
Loans
originated for investment, net of principal collected
|
|
|
(25,448 |
) |
|
|
(69,049 |
) |
Purchase
of PNC Military Allotment operations, net of cash acquired
|
|
|
|
|
|
|
(1,916 |
) |
Purchase
price refinements of previous acquisitions
|
|
|
|
|
|
|
51 |
|
Investment
in unconsolidated trust
|
|
|
|
|
|
|
(696 |
) |
Additions
to mortgage servicing rights, net
|
|
|
(65 |
) |
|
|
(62 |
) |
Purchase
of premises and equipment
|
|
|
(7,596 |
) |
|
|
(4,241 |
) |
Proceeds
from sale of repossessed assets
|
|
|
4,040 |
|
|
|
3,377 |
|
Proceeds
from sale of equipment
|
|
|
2,356 |
|
|
|
315 |
|
Net
cash used in investing activities
|
|
|
(15,923 |
) |
|
|
(48,763 |
) |
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
73,379 |
|
|
|
20,810 |
|
Net
increase (decrease) in federal funds purchased and other short-term
borrowings
|
|
|
2,492 |
|
|
|
(1,514 |
) |
Proceeds
from long-term debt issued to unconsolidated trusts
|
|
|
|
|
|
|
23,196 |
|
Proceeds
from other long-term debt
|
|
|
27,000 |
|
|
|
26,000 |
|
Repayments
of long-term debt
|
|
|
(7,518 |
) |
|
|
(9,703 |
) |
Dividends
paid
|
|
|
(7,295 |
) |
|
|
(8,685 |
) |
Purchase
of common stock
|
|
|
(1,048 |
) |
|
|
(18,649 |
) |
Shares
issued under Employee Stock Purchase Plan
|
|
|
191 |
|
|
|
195 |
|
Stock
options exercised
|
|
|
30 |
|
|
|
1,546 |
|
Net
cash provided by financing activities
|
|
|
87,231 |
|
|
|
33,196 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
86,203 |
|
|
|
(2,611 |
) |
Cash
and cash equivalents at beginning of year
|
|
|
79,140 |
|
|
|
156,828 |
|
Cash
and cash equivalents at end of period
|
|
$ |
165,343 |
|
|
$ |
154,217 |
|
Supplemental
Disclosures
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
43,006 |
|
|
$ |
39,766 |
|
Income
taxes
|
|
|
5,600 |
|
|
|
8,800 |
|
Transfers
from loans to repossessed assets
|
|
|
13,105 |
|
|
|
1,263 |
|
Cash
dividend declared and unpaid
|
|
|
2,425 |
|
|
|
2,433 |
|
See
accompanying notes to unaudited consolidated financial
statements.
Unaudited Consolidated Statements of Changes in Shareholders'
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
Nine
months ended
|
|
Common
Stock
|
|
|
Capital
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders’
|
|
September
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,391 |
|
|
|
|
|
|
|
2,391 |
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,194 |
) |
|
|
(2,194 |
) |
Cash
dividends declared, $.99 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,284 |
) |
|
|
|
|
|
|
(7,284 |
) |
Purchase
of common stock
|
|
|
(43 |
) |
|
|
(5 |
) |
|
|
(281 |
) |
|
|
(762 |
) |
|
|
|
|
|
|
(1,048 |
) |
Stock
options exercised, including related tax benefits
|
|
|
1 |
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
30 |
|
Shares
issued pursuant to Employee Stock Purchase Plan
|
|
|
11 |
|
|
|
1 |
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
191 |
|
Noncash
compensation expense attributed to Employee Stock Purchase
Plan
|
|
|
|
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
41 |
|
Balance
at September 30, 2008
|
|
|
7,354 |
|
|
$ |
919 |
|
|
$ |
48,156 |
|
|
$ |
116,843 |
|
|
$ |
(5,300 |
) |
|
$ |
160,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2007
|
|
|
7,895 |
|
|
$ |
988 |
|
|
$ |
53,201 |
|
|
$ |
128,652 |
|
|
$ |
(5,778 |
) |
|
$ |
177,063 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,679 |
|
|
|
|
|
|
|
13,679 |
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,048 |
|
|
|
1,048 |
|
Cash
dividends declared, $.99 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,646 |
) |
|
|
|
|
|
|
(7,646 |
) |
Purchase
of common stock
|
|
|
(584 |
) |
|
|
(73 |
) |
|
|
(6,877 |
) |
|
|
(11,699 |
) |
|
|
|
|
|
|
(18,649 |
) |
Stock
options exercised, including related tax benefits
|
|
|
63 |
|
|
|
7 |
|
|
|
1,540 |
|
|
|
|
|
|
|
|
|
|
|
1,547 |
|
Shares
issued pursuant to Employee Stock Purchase Plan
|
|
|
8 |
|
|
|
1 |
|
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
195 |
|
Noncash
compensation expense attributed to stock option and Employee Stock
Purchase Plan grants
|
|
|
|
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
42 |
|
Balance
at September 30, 2007
|
|
|
7,382 |
|
|
$ |
923 |
|
|
$ |
48,100 |
|
|
$ |
122,986 |
|
|
$ |
(4,730 |
) |
|
$ |
167,279 |
|
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 four active nonbank
subsidiaries, FCB Services, Inc. (“FCB Services”), Kentucky General Holdings,
LLC (“Kentucky General”), FFKT Insurance Services, Inc. (“FFKT Insurance”), and
EKT Properties, Inc. (“EKT”). 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. EKT is involved in real estate management and
liquidation for certain properties repossessed by subsidiary banks of the
Company. All significant intercompany transactions and balances are eliminated
in consolidation.
The
Company provides financial services at its 37 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-dollar 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 September 30, 2008 and 2007.
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
(In
thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income, basic and diluted
|
|
$ |
(6,885 |
) |
|
$ |
4,157 |
|
|
$ |
2,391 |
|
|
$ |
13,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding, basic and diluted
|
|
|
7,349 |
|
|
|
7,672 |
|
|
|
7,358 |
|
|
|
7,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per share, basic and diluted
|
|
$ |
(.94 |
) |
|
$ |
.54 |
|
|
$ |
.32 |
|
|
$ |
1.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $9.9 million at September 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 September 30, 2008 Using
|
|
(In
thousands)
Description
|
|
Fair
Value
September
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
|
|
$ |
507,016 |
|
|
$ |
1,344 |
|
|
$ |
505,672 |
|
|
$ |
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 $39.7 million have been written down to their estimated
fair value of $37.0 million at September 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 nine months ended September 30, 2008 includes
$911 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.
7. Other-Than-Temporary
Impairment of Securities
The
Company regularly evaluates its investment securities with significant declines
in fair value to determine whether losses are other-than-temporary under the
principles of SFAS No. 115, FSP No. 115, and Staff Accounting Bulletin (“SAB”)
No. 59. A decline in the market value of any available for sale or held to
maturity security below cost that is deemed other-than-temporary results in a
charge to earnings and the establishment of a new cost basis for the security.
In estimating other-than-temporary losses, management considers each of the
following: the length of time and extent that fair value has been less than
cost, the financial condition and near term prospects of the issuer, and the
Company’s ability and intent to hold the security for a period sufficient to
allow for any anticipated recovery in fair value.
During
the third quarter of 2008 the Company determined that its collective investments
in Federal National Mortgage Association (“Fannie”) and Federal Home Loan
Mortgage Corporation (“Freddie”) preferred stock exceeded its fair value. The
value of the Fannie and Freddie preferred stocks decreased significantly
following the announcement on September 7 that Fannie and Freddie were
suspending dividend payments and being placed into conservatorship by the
Federal Housing Finance Agency. These preferred stocks were also downgraded by
the rating agencies to below investment grade. As a result, the Company recorded
a $14.0 million pre-tax non-cash other-than-temporary impairment (“OTTI”) charge
during the current quarter. The Company had $1.1 million combined market value
of Fannie and Freddie preferred stock following the impairment charge at
September 30, 2008.
The
Company recorded a tax benefit from the non-cash OTTI charge in the third
quarter of 2008 as a result of identifying sufficient capital gains from the
previous sale of a subsidiary and from other tax planning
strategies.
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
Third Quarter 2008 Compared
to Third Quarter 2007
The
Company reported a net loss of $6.9 million or $.94 per share for the quarter
ended September 30, 2008 compared to net income of $4.2 million or $.54 per
share for the same three-month period a year ago. Results of the current quarter
were driven mainly by a non-cash other-than-temporary impairment (“OTTI”) charge
of $14.0 million ($1.33 per share, net of tax) related to the Company’s
investments in preferred stock of Federal National Mortgage Association and
Federal Home Loan Mortgage Corporation (collectively, the “GSE’s”). The value of
these investments decreased sharply in September soon after the announcement
that the GSE’s were suspending dividend payments and being placed into
conservatorship by the Federal Housing Finance Agency. The rating agencies also
downgraded the preferred stocks of the GSE’s to below investment grade. A
summary of the quarterly comparison follows.
|
§
|
The
$1.48 decrease in per share earnings for the third quarter of 2008
compared to the same period a year ago is attributed to the $14.0 million
or $1.33 per share OTTI charge related to the GSE’s and a higher provision
for loan losses of $1.2 million.
|
|
§
|
Excluding
the non-cash OTTI charge, net income for the current quarter was $2.9
million or $.39 per share. This represents a $1.3 million or $.15 per
share decrease compared to the same period a year earlier driven in large
part to a $1.2 million higher provision for loan
losses.
|
|
§
|
Net
interest income increased $152 thousand or 1.0%, helped by the Company’s
leverage transaction that occurred during the fourth quarter of
2007.
|
|
§
|
Noninterest
expenses increased $523 thousand or 3.6% driven by higher net expenses
related to properties acquired through
foreclosure.
|
|
§
|
Income
tax expense decreased $4.5 million due mainly to the OTTI
charge.
|
|
§
|
Return
on average assets (“ROA”) and equity (“ROE”) was -1.30% and -16.45%,
respectively compared to .90% and 9.43% for the previous-year third
quarter.
|
|
§
|
Net
interest spread and margin for the current quarter was 3.03% and 3.27%,
respectively compared to 3.31% and 3.73% a year earlier. The 2007 balance
sheet leverage transaction negatively impacted net interest margin by 27
basis points in the current three
months.
|
Net Interest Income
Net
interest income was $14.8 million for the third quarter of 2008, an increase of
$152 thousand or 1.0% from $14.6 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 $825 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 $27.9 million in the third quarter of 2008, a decrease of
$635 thousand or 2.2%. Interest on taxable investment securities nearly doubled
to $5.4 million primarily from the leverage transaction, but was outpaced by
lower interest income of $3.3 million from other sources, mainly loans. Interest
and fees on loans was $21.5 million, a decrease of $2.9 million or 12.1% from a
year ago as the impact of lower rates earned offset a $43.7 million or 3.5%
increase in volume. Interest on short-term investments declined $350 thousand or
64.2% due mainly to a lower average rate earned and a modest $1.0 million or
2.4% lower average outstanding balances.
Total
interest expense was $13.1 million in the current quarter, a decrease of $787
thousand or 5.7% from the same quarter year ago. Interest expense on securities
sold under agreements to repurchase and other long-term borrowings increased
$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 $2.4 million or 20.9% and $542 thousand or 54.5%,
respectively. The decline of interest expense on deposit accounts is attributed
to lower average rates paid, which offset a $41.5 million or 3.3% increase in
average balances outstanding. For short-term borrowings, the lower interest
expense is attributed mainly to a decline in the average rate paid of 250 basis
points and, to a lesser extent, a $925 thousand or 1.1% lower average
outstanding balances.
The net
interest margin on a taxable equivalent basis decreased 46 basis points to 3.27%
during the third quarter of 2008 compared to 3.73% in the same quarter of
2007. The lower net interest margin is attributed in part to a 28
basis point decrease in the spread between rates earned on earning assets and
the rates paid on interest bearing liabilities to 3.03% in the current quarter
from 3.31% in the third quarter of 2007. In addition, the impact of noninterest
bearing sources of funds reduced net interest margin by an additional 18 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 September 30.
Distribution
of Assets, Liabilities and Shareholders’ Equity: Interest Rates and
Interest Differential
Quarter
Ended September 30,
|
|
2008
|
|
|
2007
|
|
(In
thousands)
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
Earning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$ |
418,043 |
|
|
$ |
5,411 |
|
|
|
5.15 |
% |
|
$ |
220,135 |
|
|
$ |
2,721 |
|
|
|
4.90 |
% |
Nontaxable1
|
|
|
85,489 |
|
|
|
1,148 |
|
|
|
5.34 |
|
|
|
87,746 |
|
|
|
1,179 |
|
|
|
5.33 |
|
Time
deposits with banks, federal funds sold and securities purchased under
agreements to resell
|
|
|
41,782 |
|
|
|
195 |
|
|
|
1.86 |
|
|
|
42,788 |
|
|
|
545 |
|
|
|
5.05 |
|
Loans1,2,3
|
|
|
1,308,192 |
|
|
|
21,583 |
|
|
|
6.56 |
|
|
|
1,264,490 |
|
|
|
24,622 |
|
|
|
7.73 |
|
Total
earning assets
|
|
|
1,853,506 |
|
|
$ |
28,337 |
|
|
|
6.08 |
% |
|
|
1,615,159 |
|
|
$ |
29,067 |
|
|
|
7.14 |
% |
Allowance
for loan losses
|
|
|
(14,911 |
) |
|
|
|
|
|
|
|
|
|
|
(11,239 |
) |
|
|
|
|
|
|
|
|
Total
earning assets, net of allowance for loan losses
|
|
|
1,838,595 |
|
|
|
|
|
|
|
|
|
|
|
1,603,920 |
|
|
|
|
|
|
|
|
|
Nonearning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
66,765 |
|
|
|
|
|
|
|
|
|
|
|
75,762 |
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
41,221 |
|
|
|
|
|
|
|
|
|
|
|
39,041 |
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
165,172 |
|
|
|
|
|
|
|
|
|
|
|
123,845 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,111,753 |
|
|
|
|
|
|
|
|
|
|
$ |
1,842,568 |
|
|
|
|
|
|
|
|
|
Interest
Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand
|
|
$ |
246,453 |
|
|
$ |
346 |
|
|
|
.56 |
% |
|
$ |
249,231 |
|
|
$ |
881 |
|
|
|
1.40 |
% |
Savings
|
|
|
267,191 |
|
|
|
895 |
|
|
|
1.33 |
|
|
|
239,744 |
|
|
|
1,329 |
|
|
|
2.20 |
|
Time
|
|
|
774,127 |
|
|
|
7,841 |
|
|
|
4.03 |
|
|
|
757,294 |
|
|
|
9,268 |
|
|
|
4.86 |
|
Federal
funds purchased and other short-term borrowings
|
|
|
83,929 |
|
|
|
453 |
|
|
|
2.15 |
|
|
|
84,854 |
|
|
|
995 |
|
|
|
4.65 |
|
Securities
sold under agreements to
repurchase
and other long-term
borrowings
|
|
|
333,796 |
|
|
|
3,550 |
|
|
|
4.23 |
|
|
|
105,086 |
|
|
|
1,399 |
|
|
|
5.28 |
|
Total
interest bearing liabilities
|
|
|
1,705,496 |
|
|
$ |
13,085 |
|
|
|
3.05 |
% |
|
|
1,436,209 |
|
|
$ |
13,872 |
|
|
|
3.83 |
% |
Noninterest
Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth
of Kentucky deposits
|
|
|
34,144 |
|
|
|
|
|
|
|
|
|
|
|
32,324 |
|
|
|
|
|
|
|
|
|
Other
demand deposits
|
|
|
176,388 |
|
|
|
|
|
|
|
|
|
|
|
175,827 |
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
29,186 |
|
|
|
|
|
|
|
|
|
|
|
23,240 |
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,945,214 |
|
|
|
|
|
|
|
|
|
|
|
1,667,600 |
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
166,539 |
|
|
|
|
|
|
|
|
|
|
|
174,968 |
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
2,111,753 |
|
|
|
|
|
|
|
|
|
|
$ |
1,842,568 |
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
|
15,252 |
|
|
|
|
|
|
|
|
|
|
|
15,195 |
|
|
|
|
|
TE
basis adjustment
|
|
|
|
|
|
|
(478 |
) |
|
|
|
|
|
|
|
|
|
|
(573 |
) |
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
14,774 |
|
|
|
|
|
|
|
|
|
|
$ |
14,622 |
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
|
|
3.03 |
% |
|
|
|
|
|
|
|
|
|
|
3.31 |
% |
Impact
of noninterest bearing sources of funds
|
|
|
|
|
|
|
|
|
|
|
.24 |
|
|
|
|
|
|
|
|
|
|
|
.42 |
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
3.27 |
% |
|
|
|
|
|
|
|
|
|
|
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 $567 thousand and $737 thousand in 2008
and 2007, respectively.
Analysis
of Changes in Net Interest Income (tax equivalent basis)
(In
thousands)
|
|
Variance
|
|
|
Variance
Attributed to
|
|
Quarter
Ended September 30,
|
|
|
2008/2007 |
1 |
|
Volume
|
|
|
Rate
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
Taxable
investment securities
|
|
$ |
2,690 |
|
|
$ |
2,546 |
|
|
$ |
144 |
|
Nontaxable
investment securities2
|
|
|
(31 |
) |
|
|
(46 |
) |
|
|
15 |
|
Time
deposits with banks, federal funds sold and securities purchased under
agreements to resell
|
|
|
(350 |
) |
|
|
(13 |
) |
|
|
(337 |
) |
Loans2
|
|
|
(3,039 |
) |
|
|
4,935 |
|
|
|
(7,974 |
) |
Total
interest income
|
|
|
(730 |
) |
|
|
7,422 |
|
|
|
(8,152 |
) |
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand deposits
|
|
|
(535 |
) |
|
|
(10 |
) |
|
|
(525 |
) |
Savings
deposits
|
|
|
(434 |
) |
|
|
839 |
|
|
|
(1,273 |
) |
Time
deposits
|
|
|
(1,427 |
) |
|
|
1,283 |
|
|
|
(2,710 |
) |
Federal
funds purchased and other short-term borrowings
|
|
|
(542 |
) |
|
|
(11 |
) |
|
|
(531 |
) |
Securities
sold under agreements to repurchase and
other
long-term borrowings
|
|
|
2,151 |
|
|
|
3,992 |
|
|
|
(1,841 |
) |
Total
interest expense
|
|
|
(787 |
) |
|
|
6,093 |
|
|
|
(6,880 |
) |
Net
interest income
|
|
$ |
57 |
|
|
$ |
1,329 |
|
|
$ |
(1,272 |
) |
Percentage
change
|
|
|
100.0 |
% |
|
|
2,331.6 |
% |
|
|
(2,231.6 |
)% |
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 September 30, 2008 was $1.8
million, an increase of $1.2 million compared to $595 thousand for the same
quarter of 2007. Net charge-offs were $1.1 million in the current quarter
compared to $386 thousand a year earlier. Higher net charge-offs in the current
quarter were boosted mainly by $651 thousand in charge-offs relating to three
larger-balance credits. Of these credits one is secured by commercial real
estate property, one by inventory and other assets, and other is related to a
commercial lease customer. On an annualized basis, quarterly net charge-offs
were .35% of average loans outstanding at September 30, 2008. This compares to
..20%, .11% and .12% at June 30, 2008, year-end 2007, and September 30,
2007.
In
general, the provision for loan losses and related allowance increases as the
level of nonperforming and impaired loans, as a percentage of loans outstanding,
increases. Nonperforming loans were $24.0 million at September 30, 2008, an
increase of $2.9 million compared to year-end 2007 and unchanged compared to
June 30, 2008. At September 30 a year ago, nonperforming loans were $12.4
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 nonperforming loan levels at September 30, 2008 were flat compared to
June 30, 2008 as a result of a $3.7 million increase in loans past due 90 days
or more and still accruing interest was offset by lower nonaccrual loans of the
same amount. The decrease in nonaccrual loans in the linked quarters is due
mainly to acquiring through foreclosure a residential real estate development
securing a small group of related credits.
The
allowance for loan losses was $15.6 million or 1.20% of net loans at September
30, 2008. This compares to $15.0 million or 1.15% of net loans and $14.2 million
or 1.10% of net loans outstanding at June 30, 2008 and year-end 2007,
respectively. A year earlier, the allowance was $11.5 million or .91% of net
loans outstanding. As a
percentage
of nonperforming loans, the allowance for loan losses was 65.1%, 62.5%, 67.5%,
and 92.4% at September 30, 2008, June 30, 2008, December 31, 2007, and September
30, 2007, respectively.
Noninterest Income
Noninterest
income was a negative $7.9 million for the third quarter of 2008 compared to
$6.1 million for the same period a year ago. The $14.0 million decrease in
noninterest income was driven by the non-cash OTTI charge of the same amount
attributed to the Company’s GSE investments. Excluding the non-cash OTTI charge,
noninterest income was unchanged at $6.1 million.
Increases
from allotment processing fees of $85 thousand or 7.6%, non-deposit service
charges of $31 thousand or 2.9% and trust income of $19 thousand or 3.7% were
mostly offset by lower service charges and fees on deposits of $88 thousand or
3.3%, data processing fees of $25 thousand or 8.8%, and gains on sale of loans
of $13 thousand or 9.2%
Noninterest Expense
Total
noninterest expenses were $14.9 million for the third quarter of 2008, up $523
thousand or 3.6% compared to the third quarter a year earlier. Salaries and
employee benefits, the largest component of noninterest expenses, was $7.4
million, a decrease of $125 thousand or 1.7% as the average number of full time
equivalent employees declined to 580 from 587. Employee benefits expense
declined $92 thousand and was the primary driver of the lower expense amount in
the current period.
Intangible
amortization expense decreased $197 thousand or 23.2% in the quarterly
comparison which helped to 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.
Correspondent
bank fees increased $65 thousand or 33.5% due mainly to a change in billing
method of an upstream correspondent bank in the current year. 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 $166
thousand or 13.3% increase in data processing and communication expenses is
attributed primarily to higher transaction volumes. The $510 thousand or 24.4%
net increase in other expenses was driven mainly by higher expenses associated
with other real estate owned.
Income Taxes
The
Company recorded an income tax benefit for the third quarter of 2008 of $2.9
million. This compares to income tax expense of $1.6 million for the same
quarter a year earlier. The $4.5 million change in income tax expense is due
mainly to the non-cash OTTI charge in the current quarter. The effective federal
income tax rate increased 118 basis points to 29.4% from 28.2% in the
comparison.
The
Company recorded a tax benefit from the OTTI charge in the current period as a
result of identifying sufficient capital gains from the previous sale of a
subsidiary and from other tax planning strategies.
First Nine Months of 2008
Compared to First Nine Months of 2007
Net
income for the first nine months of 2008 was $2.4 million or $.32 per share
compared to $13.7 million or $1.75 per share for the same nine-month period of
2007. Results for the current nine-month period were driven mainly by the
non-cash OTTI charge of $14.0 million ($1.33 per share, net of tax) during
September of the current year related to the Company’s investments in preferred
stock of the GSE’s. A summary of the quarterly comparison follows.
|
§
|
The
$1.43 decrease in per share earnings for the nine-month period ended
September 30, 2008 compared to the same period for 2007 is due mainly to
the impact of the $14.0 million or $1.33 per share OTTI charge related to
the GSE’s and a higher provision for loan losses of $2.9
million.
|
|
§
|
Net
income for the current nine months was $12.2 million or $1.65 per share
excluding the OTTI charge, a decline of $1.5 million or $.10 per share
compared to the same period a year earlier impacted primarily by the $2.9
million increase in the provision for loan
losses.
|
|
§
|
Net
interest income increased $1.3 million or 3.0%, driven by the Company’s
leverage transaction that occurred during the fourth quarter of
2007.
|
|
§
|
Excluding
investment securities related transactions, noninterest income increased
$196 thousand or 1.1%.
|
|
§
|
Noninterest
expenses increased $648 thousand or 1.5% driven by higher net expenses
related to properties acquired through
foreclosure.
|
|
§
|
Income
tax expense decreased $4.2 million due mainly to the OTTI charge. The
effective income tax rate declined to 7.2% compared to 24.1% a year
earlier.
|
|
§
|
ROA
and ROE was .15% and 1.87%, respectively compared to .99% and 10.26% for
the previous-year third quarter.
|
|
§
|
Net
interest spread and margin for the current quarter was 3.06% and 3.33%,
respectively compared to 3.29% and 3.73% a year earlier. The 2007 balance
sheet leverage transaction negatively impacted net interest margin by 25
basis points in the current nine
months.
|
Net Interest
Income
Net
interest income was $44.9 million for the first nine months of 2008, an increase
of $1.3 million or 3.0% from $43.6 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 $2.6 million to net interest income in the current nine months
compared to zero in the same nine-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 $86.9 million for the current nine months, an increase of
$2.5 million or 3.0%. Interest on taxable investment securities increased $9.0
million or 109%, boosted primarily from the leverage transaction that offset
lower interest income of $6.5 million from other sources, mainly loans and
short-term investments. Interest and fees on loans was $66.2 million, a decrease
of $5.0 million or 7.0% from a year ago as the impact of an 87 basis point
decline in the average rate earned offset a $60.6 million or 4.9% increase in
average outstanding balances. Interest on short-term investments decreased $1.4
million or 58% due to a 241 basis point lower average rate earned combined with
$11.3 million or 16.5% lower average outstanding balances.
Total
interest expense was $42.1 million in the current period, an increase of $1.2
million or 3.0% from a year ago. Interest expense on securities sold under
agreements to repurchase and other long-term borrowings increased $6.4 million
in the current nine 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 $3.9 million or 11.6% and $1.9 million or 54%, respectively.
The lower interest expense on deposit accounts is attributed to a 57 basis point
net decrease in average rates paid for the entire deposit portfolio to 3.1% from
3.6%, which more than offset a volume increase of $58.8 million or 4.9%. The
$1.9 million decrease in interest expense on short-term borrowings is attributed
mainly to a 218 basis point drop in the average rate paid and, to a lesser
extent, a $14.3 million or 14.5% decrease in the average balance outstanding.
Interest expense on the Company’s subordinated notes payable increased $567
thousand or 36.3% due mainly to interest expense related to Farmers Capital Bank
Trust III, which was established during the third quarter of the prior year to
facilitate the Company’s purchase of a portion of its outstanding shares through
a modified Dutch Auction.
The net
interest margin on a taxable equivalent basis decreased 40 basis points to 3.33%
during the first nine months of 2008 compared to 3.73% in the same period of
2007. The lower net interest margin is attributed in part to a 23
basis point decrease in the spread between rates earned on earning assets and
the rates paid on interest bearing liabilities to 3.06% in the current period
from 3.29% in the comparable nine months of 2007. In addition, the impact of
noninterest bearing sources of funds reduced net interest margin by an
additional 17 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
continue to reprice downward to reflect the overall lower market interest rate
environment.
The
following tables present an analysis of net interest income for the nine months
ended September 30.
Distribution
of Assets, Liabilities and Shareholders’ Equity: Interest Rates and
Interest Differential
Nine
Months Ended September 30,
|
|
2008
|
|
|
2007
|
|
(In
thousands)
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
Earning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$ |
425,650 |
|
|
$ |
17,242 |
|
|
|
5.41 |
% |
|
$ |
226,292 |
|
|
$ |
8,242 |
|
|
|
4.87 |
% |
Nontaxable1
|
|
|
87,747 |
|
|
|
3,520 |
|
|
|
5.36 |
|
|
|
88,838 |
|
|
|
3,611 |
|
|
|
5.43 |
|
Time
deposits with banks, federal funds sold and securities purchased under
agreements to resell
|
|
|
57,102 |
|
|
|
1,049 |
|
|
|
2.45 |
|
|
|
68,388 |
|
|
|
2,484 |
|
|
|
4.86 |
|
Loans1,2,3
|
|
|
1,300,659 |
|
|
|
66,904 |
|
|
|
6.87 |
|
|
|
1,240,029 |
|
|
|
71,810 |
|
|
|
7.74 |
|
Total
earning assets
|
|
|
1,871,158 |
|
|
$ |
88,715 |
|
|
|
6.33 |
% |
|
|
1,623,547 |
|
|
$ |
86,147 |
|
|
|
7.09 |
% |
Allowance
for loan losses
|
|
|
(14,518 |
) |
|
|
|
|
|
|
|
|
|
|
(11,511 |
) |
|
|
|
|
|
|
|
|
Total
earning assets, net of allowance for loan losses
|
|
|
1,856,640 |
|
|
|
|
|
|
|
|
|
|
|
1,612,036 |
|
|
|
|
|
|
|
|
|
Nonearning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
76,856 |
|
|
|
|
|
|
|
|
|
|
|
80,020 |
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
40,327 |
|
|
|
|
|
|
|
|
|
|
|
38,939 |
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
154,134 |
|
|
|
|
|
|
|
|
|
|
|
113,833 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,127,957 |
|
|
|
|
|
|
|
|
|
|
$ |
1,844,828 |
|
|
|
|
|
|
|
|
|
Interest
Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand
|
|
$ |
260,393 |
|
|
$ |
1,520 |
|
|
|
.78 |
% |
|
$ |
258,164 |
|
|
$ |
2,832 |
|
|
|
1.47 |
% |
Savings
|
|
|
264,622 |
|
|
|
2,803 |
|
|
|
1.41 |
|
|
|
243,572 |
|
|
|
4,117 |
|
|
|
2.26 |
|
Time
|
|
|
778,160 |
|
|
|
25,468 |
|
|
|
4.37 |
|
|
|
742,674 |
|
|
|
26,734 |
|
|
|
4.81 |
|
Federal
funds purchased and other short-term borrowings
|
|
|
84,791 |
|
|
|
1,606 |
|
|
|
2.53 |
|
|
|
99,115 |
|
|
|
3,494 |
|
|
|
4.71 |
|
Securities
sold under agreements to
repurchase
and other long-term
borrowings
|
|
|
328,716 |
|
|
|
10,654 |
|
|
|
4.33 |
|
|
|
93,673 |
|
|
|
3,663 |
|
|
|
5.23 |
|
Total
interest bearing liabilities
|
|
|
1,716,682 |
|
|
$ |
42,051 |
|
|
|
3.27 |
% |
|
|
1,437,198 |
|
|
$ |
40,840 |
|
|
|
3.80 |
% |
Noninterest
Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth
of Kentucky deposits
|
|
|
37,811 |
|
|
|
|
|
|
|
|
|
|
|
37,889 |
|
|
|
|
|
|
|
|
|
Other
demand deposits
|
|
|
175,771 |
|
|
|
|
|
|
|
|
|
|
|
175,562 |
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
27,255 |
|
|
|
|
|
|
|
|
|
|
|
15,859 |
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,957,519 |
|
|
|
|
|
|
|
|
|
|
|
1,666,508 |
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
170,438 |
|
|
|
|
|
|
|
|
|
|
|
178,320 |
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
2,127,957 |
|
|
|
|
|
|
|
|
|
|
$ |
1,844,828 |
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
|
46,664 |
|
|
|
|
|
|
|
|
|
|
|
45,307 |
|
|
|
|
|
TE
basis adjustment
|
|
|
|
|
|
|
(1,784 |
) |
|
|
|
|
|
|
|
|
|
|
(1,740 |
) |
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
44,880 |
|
|
|
|
|
|
|
|
|
|
$ |
43,567 |
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
|
|
3.06 |
% |
|
|
|
|
|
|
|
|
|
|
3.29 |
% |
Impact
of noninterest bearing sources of funds
|
|
|
|
|
|
|
|
|
|
|
.27 |
|
|
|
|
|
|
|
|
|
|
|
.44 |
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
3.33 |
% |
|
|
|
|
|
|
|
|
|
|
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 $1.9 million and $2.1 million in 2008
and 2007, respectively.
Analysis
of Changes in Net Interest Income (tax equivalent basis)
(In
thousands)
|
|
Variance
|
|
|
Variance
Attributed to
|
|
Nine
Months Ended September 30,
|
|
|
2008/2007 |
1 |
|
Volume
|
|
|
Rate
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
Taxable
investment securities
|
|
$ |
9,001 |
|
|
$ |
7,995 |
|
|
$ |
1,006 |
|
Nontaxable
investment securities2
|
|
|
(91 |
) |
|
|
(44 |
) |
|
|
(47 |
) |
Time
deposits with banks, federal funds sold and securities purchased under
agreements to resell
|
|
|
(1,435 |
) |
|
|
(358 |
) |
|
|
(1,077 |
) |
Loans2
|
|
|
(4,906 |
) |
|
|
5,053 |
|
|
|
(9,959 |
) |
Total
interest income
|
|
|
2,569 |
|
|
|
12,646 |
|
|
|
(10,077 |
) |
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand deposits
|
|
|
(1,312 |
) |
|
|
41 |
|
|
|
(1,353 |
) |
Savings
deposits
|
|
|
(1,314 |
) |
|
|
528 |
|
|
|
(1,842 |
) |
Time
deposits
|
|
|
(1,266 |
) |
|
|
1,808 |
|
|
|
(3,074 |
) |
Federal
funds purchased and other short-term borrowings
|
|
|
(1,888 |
) |
|
|
(449 |
) |
|
|
(1,439 |
) |
Securities
sold under agreements to repurchase and
other
long-term borrowings
|
|
|
6,991 |
|
|
|
8,120 |
|
|
|
(1,129 |
) |
Total
interest expense
|
|
|
1,211 |
|
|
|
10,048 |
|
|
|
(8,837 |
) |
Net
interest income
|
|
$ |
1,358 |
|
|
$ |
2,598 |
|
|
$ |
(1,240 |
) |
Percentage
change
|
|
|
100.0 |
% |
|
|
191.3 |
% |
|
|
(91.3 |
)% |
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 nine months ended September 30, 2008 was $3.4
million, an increase of $2.9 million compared to $429 thousand for the same
period of 2007. Net charge-offs were $2.0 million in the current nine-month
period compared to $967 thousand a year earlier. This represents an increase of
$1.0 million in the comparison. Higher net charge-offs in the current year were
driven by $1.1 million of charge-offs relating to a small number of
larger-balance credits. Net charge-offs in the current year were helped by an
$828 thousand recovery in the second quarter of a previously charged-off credit
initiated during 2001. On an annualized basis, year-to-date net charge-offs were
..20% of average loans outstanding at September 30, 2008. Excluding the unusually
large recovery in the current year, the annualized amount was .29%. This
compares to .26%, .11% and .11% at June 30, 2008, year-end 2007, and September
30, 2007.
In
general, the provision for loan losses and related allowance increases as the
level of nonperforming and impaired loans, as a percentage of loans outstanding,
increases. Nonperforming loans were $24.0 million at September 30, 2008, an
increase of $2.9 million compared to year-end 2007. At September 30, 2007
nonperforming loans were $12.4 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 $11.6 million increase in nonperforming
loan levels at September 30, 2008 compared to the same time a year ago is
attributed to the factors identified above.
The
allowance for loan losses was $15.6 million or 1.20% of net loans at September
30, 2008. This compares to $14.2 million or 1.10% of net loans outstanding at
year-end 2007. At September 30, 2007, the allowance was $11.5 million or .91% of
net loans outstanding. As a percentage of nonperforming loans, the allowance for
loan losses was 65.1%, 67.5%, and 92.4% at September 30, 2008, December 31,
2007, and September 30, 2007, respectively.
Noninterest
Income
Noninterest
income for the nine months ended September 30, 2008 was $4.7 million, a decrease
of $13.2 million or 74% compared to a year ago. The decrease in noninterest
income in the comparison was primarily the result of the $14.0 million non-cash
OTTI charge on the Company’s GSE investments in the third quarter of 2008.
Excluding the non-cash OTTI charge, noninterest income grew $781 thousand or
4.4%. Significant line item increases include net gains on the sale of
investment securities of $585 thousand; allotment processing fees of $291
thousand or 9.0%; and non-deposit service charges of $237 thousand or 7.7%.
Significant line items that partially offset these increases were lower service
charges and fees on deposits of $341 thousand or 4.4%; lower net gains on sale
of loans of $79 thousand or 18.2%; and lower income from company owned life
insurance of $49 thousand or 5.0%
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 $293
thousand are attributed to normal asset and liability management.
Allotment
processing fees were up $291 thousand or 9.0% due partially to the timing of the
acquisition of the Military Allotment operations of PNC Bank during the first
quarter a year ago and increased volumes. The $237 thousand increase in
non-deposit service charges, commissions, and fees was due to higher volume
related interchange and ATM fees of $207 thousand and $72 thousand,
respectively. Lower service charges and fees on deposits of $341 thousand were
driven by a decrease in dormant account fees of $884 thousand, which offset
higher overdraft charges of $644 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 $79 thousand decrease in gains on sale
of loans is attributed to lower loan sales volume in the current nine-month
period compared to the same period a year ago. The decrease in company-owned
life insurance is due to the expiration of certain trailing commissions earned.
The Company earned $73 thousand in commissions during the nine-month period of
the prior year and only nine thousand during 2008.
Noninterest
Expense
Total
noninterest expenses were $43.7 million for the nine months ended September 30,
2008, up $648 thousand or 1.5% from $43.0 million for the same period in 2007.
Salaries and employee benefits, the largest component of noninterest expenses,
decreased $146 thousand as the average number of full time equivalent employees
decreased to 577 from 585. Salary and related payroll taxes inched up $48
thousand, but was offset by lower benefit costs of $192 thousand.
Intangible
amortization and equipment expense decreased $562 thousand or 22.4% and $102
thousand or 4.3%, 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
equipment expense is mainly attributed to lower depreciation in the comparable
periods.
Data
processing and communications expense increased $403 thousand or 11.3% in the
current period primarily due to higher transaction volumes. Correspondent bank
fees increased $228 thousand or 42.3% due mainly to a change in billing method
of an upstream correspondent bank in the current year. The billing method
included switching from the requirement to maintain a certain minimum balance
with the correspondent to a set fee-based structured arrangement. Net occupancy
expense increased $196 thousand or 6.2% due mainly to higher depreciation and
utilities. The $728 thousand or 11.0% increase in other expenses was driven
mainly by higher net expenses associated with other real estate owned of $672
thousand. The increase in expenses of other real estate owned was magnified as a
result of overall net gains from other real estate in the prior year of $193
thousand.
Income
Taxes
Income
tax expense for the first nine months of 2008 was $186 thousand, a decrease of
$4.2 million or 96% compared to $4.4 million for the same period a year earlier.
The decrease in income tax expense is due mainly to the non-cash OTTI charge
that occurred in the current year. The effective federal income tax rate was
7.2% in the current period compared to 24.1% a year earlier. The lower effective
federal income tax rate was driven by the OTTI charge, which significantly
reduced taxable income. A substantial amount of the remaining pre-tax revenues
after the OTTI charge were nontaxable and, therefore, resulted in the lower
effective federal income tax rate in the current period.
The
Company recorded a tax benefit from the OTTI charge in the current period as a
result of identifying sufficient capital gains from the previous sale of a
subsidiary and from other tax planning strategies.
FINANCIAL
CONDITION
Total
assets were $2.2 billion at September 30, 2008, an increase of $86.2 million or
4.2% from the prior year-end. The most significant changes in the Company’s
assets from year-end were an $86.2 million or 109% increase in cash and cash
equivalents, an increase in net loans of $10.0 million or .8%, higher real
estate acquired through foreclosure of $10.2 million, partially offset by lower
investment securities of $27.8 million or 5.1%.
Total
liabilities increased $94.1 million or 5.0% at September 30, 2008 compared to
December 31, 2007. Higher deposit balances account for $73.4 million of the
increase in liabilities; borrowed funds, primarily long-term, increased $22.0
million. Shareholders’ equity decreased $7.9 million or 4.7% to $161 million at
the end of the period due mainly to the after-tax impact of the $14.0 million
OTTI charge.
The
increase in current end of period cash and cash equivalents compared to year-end
2007 was driven by an additional $50.5 million in deposits from the Commonwealth
of Kentucky (“Commonwealth”). Increases from other sources of funds, such as
interest bearing deposits and net proceeds from matured, called, or sold
investment securities, have generally been reinvested in loans and temporary
investments. The modest increase in net loans 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 nine months of 2008,
an increase of $242 million or 12.8% from year-end 2007. The increase in average
assets is attributed mainly to higher earning asset balances. Average investment
securities were up $171 million, boosted by the $200 million balance sheet
leverage transaction that occurred during the fourth quarter of 2007. Average
loans were up $50.2 million or 4.0% compared to the average year-end balance.
Deposits averaged $1.5 billion for the nine months ended September 30, 2008, an
increase of $50.1 million or 3.4% from year-end. Average deposits from the
Commonwealth were up $692 thousand or 1.9% in the comparison. Average earning
assets were 87.9% of total average assets at September 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
September 30, 2008, temporary investments were $59.2 million, an increase of
$24.9 million or
73%
compared to $34.2 million at year-end 2007. Temporary investments averaged $57.1
million during the first nine months of 2008, a decrease of $13.0 million or
18.5% from year-end 2007. The decrease is a result of the Company’s overall net
funding position. Temporary investments are reallocated to loans or other
investments as market conditions and Company resources warrant.
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. During the third quarter
of 2008, the Company recorded a non-cash OTTI charge of $14.0 million related to
its investments in these GSE’s. The value of these investments decreased sharply
in September soon after the announcement that the GSE’s were suspending dividend
payments and being placed into conservatorship by the Federal Housing Finance
Agency. The rating agencies also downgraded the preferred stocks of the GSE’s to
below investment grade. The Company had $1.1 million market value in GSE
preferred stock following the impairment charge at September 30,
2008.
The
Company also holds $16.4 million amortized cost amounts of single-issuer trust
preferred capital securities of global and national financial services firms
with an estimated fair value of $12.8 million. In addition, the Company holds
$2.4 million amortized cost amounts of debentures issued by global and national
financial services firms with an estimated fair value of $1.9 million. The
Company evaluated these securities under the applicable accounting guidance,
SFAS No. 115, FSP No. 115, and SAB No. 59. Each of these securities are
currently performing and are rated as investment grade by the major rating
agencies. The Company has the intent and ability to hold these securities for
the foreseeable future and believes these securities are not impaired due to
reasons of credit quality, but rather the unrealized losses are primarily
attributed to general uncertainties in the financial markets and extraordinary
market volatility. The Company currently believes that it will be able to
collect all amounts due according to the contractual terms of these securities
and that the fair values of these securities will recover as they approach their
maturity dates.
Total
investment securities were $519 million on September 30, 2008, a decrease of
$27.8 million or 5.1% compared to year-end 2007. Net amortized cost amounts
declined $24.1 million or 4.4% coupled with a net decrease in market values of
$3.8 million related to investments carried in the available for sale portfolio.
The decrease in the amortized cost amounts was led by the $14.0 million OTTI
charge related to the GSE investments in the current quarter followed by
matured, sold, or called investments that exceeded new purchased amounts. The
$3.8 million lower market values of the available for sale investment securities
is mainly attributed to the $4.2 million unrealized loss related to the trust
preferred and corporate debentures identified above. Market values of fixed rate
investments in much of the remaining portfolio edged higher compared to the
prior year-end mainly as a result of a lower overall interest rate environment
as reflected in the yield curves of the comparable periods.
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. With the exception of
its GSE’s, all investment securities in the Company’s portfolio are currently
performing.
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 averaged $513 million for the first nine months of 2008,
an increase of $171 million or 50.1% 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 September 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.
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
(Dollars
in thousands)
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Commercial,
financial, and agriculture
|
|
$ |
147,632 |
|
|
|
11.3 |
% |
|
$ |
154,015 |
|
|
|
11.9 |
% |
Real
estate - construction
|
|
|
247,005 |
|
|
|
19.0 |
|
|
|
254,788 |
|
|
|
19.7 |
|
Real
estate mortgage - residential
|
|
|
439,571 |
|
|
|
33.7 |
|
|
|
405,992 |
|
|
|
31.5 |
|
Real
estate mortgage - farmland and other commercial
enterprises
|
|
|
394,355 |
|
|
|
30.3 |
|
|
|
394,900 |
|
|
|
30.6 |
|
Installment
|
|
|
46,914 |
|
|
|
3.6 |
|
|
|
52,028 |
|
|
|
4.0 |
|
Lease
financing
|
|
|
27,942 |
|
|
|
2.1 |
|
|
|
30,262 |
|
|
|
2.3 |
|
Total
|
|
$ |
1,303,419 |
|
|
|
100.0 |
% |
|
$ |
1,291,985 |
|
|
|
100.0 |
% |
On
average, loans represented 69.5% of earning assets during the current nine-month
period, a decrease of 571 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 were unchanged
at the end of the current quarter compared to the linked-quarter, but have
increased since 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 September 30, 2008, June 30,
2008, and December 31, 2007.
(In
thousands)
|
|
September
30,
2008
|
|
|
June
30,
2008
|
|
|
Change
|
|
|
%
|
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
Change
|
|
|
%
|
|
Nonaccrual
|
|
$ |
15,780 |
|
|
$ |
19,479 |
|
|
$ |
(3,699 |
) |
|
|
(19.0 |
)% |
|
$ |
15,780 |
|
|
$ |
18,073 |
|
|
$ |
(2,293 |
) |
|
|
(12.7 |
)% |
Past
due 90 days or more and still accruing
|
|
|
8,204 |
|
|
|
4,482 |
|
|
|
3,722 |
|
|
|
83.1 |
% |
|
|
8,204 |
|
|
|
2,977 |
|
|
|
5,227 |
|
|
|
175.6 |
% |
Total
nonperforming loans
|
|
$ |
23,984 |
|
|
$ |
23,961 |
|
|
$ |
23 |
|
|
|
0.1 |
% |
|
$ |
23,984 |
|
|
$ |
21,050 |
|
|
$ |
2,934 |
|
|
|
13.9 |
% |
The $15.8
million balance of nonaccrual loans outstanding at September 30, 2008 is
comprised mainly of 9 credits totaling $11.6 million, substantially all of which
is secured by real estate.
The
decrease in linked-quarter nonaccrual loans of $3.7 million or 19.0% is
attributed mainly as a result of acquiring through foreclosure a residential
real estate development securing a small group of related credits previously
classified as nonaccrual loans in the amount of $6.2 million. Partially
offsetting this decrease was the addition of $2.5 million of nonaccrual loans,
of which $1.5 million was previously classified as past due 90 days or more and
still accruing interest. The increase in loans past due 90 days or more of $3.7
million is due mainly to a $4.6 million commercial real estate development
credit that was added during the current quarter. The Company believes it is
probable that it will collect all amounts of principal and interest on loans
past due 90 days or more and still accruing interest based on information
available at the reporting date.
The $2.3
million decrease in nonaccrual loans since year-end 2007 is attributed mainly to
two larger balance residential real estate nonaccrual credits totaling $8.7
million at year-end that were transferred to the Company through foreclosure.
This was partially offset by a relatively small number of larger balance real
estate loans placed in nonaccrual status during 2008. The $5.2 million increase
in loans past due 90 days or more since year-end 2007 is due mainly to the $4.6
million commercial real estate development credit that was added during the
third quarter of 2008.
Other Real
Estate
Other
real estate owned (“OREO”) includes real estate properties acquired by the
Company through foreclosure. At September 30, 2008 OREO was $16.3 million, up
$5.1 million or 45.2% and $10.2 million or 169% from the second quarter of 2008
and year-end 2007, respectively. The increase in linked-quarter OREO is
attributed to the Company taking possession of the $6.2 million residential real
estate development securing a small group of related credits previously
classified as nonaccrual loans. The increase in OREO in the year-to-date period
is also attributed to this event along with the foreclosure of a $4.1 million
real estate development property that previously secured outstanding loans to
one individual credit during the second quarter.
Deposits
A summary
of the Company’s deposits are as follows for the periods indicated.
|
|
End
of Period
|
|
|
Average
|
|
(In
thousands)
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
Difference
|
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
Difference
|
|
Noninterest
Bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth
|
|
$ |
65,862 |
|
|
$ |
15,367 |
|
|
$ |
50,495 |
|
|
$ |
37,811 |
|
|
$ |
37,119 |
|
|
$ |
692 |
|
Other
|
|
|
178,454 |
|
|
|
177,065 |
|
|
|
1,389 |
|
|
|
175,771 |
|
|
|
177,304 |
|
|
|
(1,533 |
) |
Total
|
|
$ |
244,316 |
|
|
$ |
192,432 |
|
|
$ |
51,884 |
|
|
$ |
213,582 |
|
|
$ |
214,423 |
|
|
$ |
(841 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
$ |
233,552 |
|
|
$ |
261,642 |
|
|
$ |
(28,090 |
) |
|
$ |
260,393 |
|
|
$ |
258,992 |
|
|
$ |
1,401 |
|
Savings
|
|
|
261,342 |
|
|
|
250,002 |
|
|
|
11,340 |
|
|
|
264,622 |
|
|
|
244,299 |
|
|
|
20,323 |
|
Time
|
|
|
808,266 |
|
|
|
770,021 |
|
|
|
38,245 |
|
|
|
778,160 |
|
|
|
748,939 |
|
|
|
29,221 |
|
Total
|
|
$ |
1,303,160 |
|
|
$ |
1,281,665 |
|
|
$ |
21,495 |
|
|
$ |
1,303,175 |
|
|
$ |
1,252,230 |
|
|
$ |
50,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Deposits
|
|
$ |
1,547,476 |
|
|
$ |
1,474,097 |
|
|
$ |
73,379 |
|
|
$ |
1,516,757 |
|
|
$ |
1,466,653 |
|
|
$ |
50,104 |
|
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. Lower
end of period interest bearing demand deposit balances at quarter-end in
relation to the prior year end were impacted mainly by a net decrease in
larger-balance public funds and certain other deposits that can have large
fluctuations on any particular day.
Borrowed Funds
Total
borrowed funds were $419 million at September 30, 2008, an increase of $22.0
million or 5.5% from $397 million at year-end 2007. Long-term borrowings
increased $19.5 million resulting from additional FHLB borrowings of $27.0
million during the current period partially offset by repayments of $7.5
million. Short-term borrowings increased $2.5 million or 3.1% due 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 September 30, 2008 combined retained earnings of the
subsidiary banks was $43.4 million, of which $4.6 million was available for the
payment of dividends to the Parent Company without obtaining prior approval from
bank regulatory agencies. As a practical matter, payment of future
dividends is also subject to the maintenance of other capital ratio
requirements.
Management
expects that in the aggregate, its subsidiary banks will continue to have the
ability to 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 $8.0 million at September 30, 2008, a
decrease of $6.9 million or 46.3% from $15.0 million at year-end
2007. Significant cash flows during the current nine-month period for
the Parent Company include the following: management fees received from
subsidiaries of $2.1 million; dividends received from subsidiaries of $7.7
million; payment of dividends to shareholders of $7.3 million; the purchase and
subsequent sale of $1.0 million of common shares in two unaffiliated banks;
interest payments on borrowed funds of $2.1 million; a $4.0 million capital
injection into EKT; and the repurchase of the Company’s common 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 September 30, 2008 the Company had approximately
$182 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 available for sale investment
securities. At September 30, 2008, consolidated liquid assets were
$681 million, an increase of $59.7 million or 9.6% from year-end
2007. The increase in liquid assets is mainly attributed to $86.2
million higher cash and equivalents, partially offset by lower available for
sale investment securities of $26.5 million. 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. The decrease in available
for sale investments securities was led by the $14.0 million OTTI charge related
to the GSE investments in the current quarter coupled with matured, sold, or
called investments that exceeded new purchased amounts.
Net cash
provided by operating activities was $14.9 million in the first nine months of
2008, an increase of $1.9 million or 15.0% compared to the same period a year
earlier. Net cash used in investing activities was $15.9 million in the current
nine months of 2008 compared to $48.8 million a year ago. The $32.8 million
improvement in cash flows is mainly due to lower net outflows related to loan
activity in the current nine months of $43.6 million compared to a year ago,
partially offset by lower net inflows related to investment securities
transactions of $12.7 million. Net cash provided by financing activities was
$87.2 million in the current nine months, up $54.0 million. The higher cash
provided by financing activities in the current period is due mainly to a $52.6
million increase in net deposit activity.
Commitments
to extend credit are considered in addressing the Company’s liquidity
management. The Company does not expect these commitments to
significantly effect the liquidity position in future periods. The Company has
not entered into any contracts for financial derivative instruments such as
futures, swaps, options, or similar instruments.
Subsequent
to September 30, 2008, the U.S. Treasury announced a voluntary Capital Purchase
Program (“Program”) designed to inject $250 billion directly into U.S. financial
institutions to build additional capital and
encourage
the flow of financing to U.S. businesses and consumers in response to a
weakening economy. The Company is carefully considering the details of the
Program and its decision on whether to participate. Under the Program the
Treasury will purchase, within a pre-established minimum and maximum limit of 1%
and 3% of regulatory defined risk-weighted assets, senior non-voting preferred
shares that will qualify as Tier 1 capital. The Program calls for a 5%
cumulative dividend during the first five years the shares are outstanding,
resetting to 9% thereafter and includes certain restrictions on dividend
payments of lower ranking equity.
The
Program includes other rights and restrictions including the Treasury’s right to
receive warrants to purchase Company common stock, restrictions on redeeming the
preferred shares, and executive compensation limits, among others. The Treasury
will receive warrants to purchase Company common stock having an aggregate
market price equal to 15% of the preferred shares issued on the date of the
investment, subject to certain other adjustments. If the Company elects to
participate and is granted funds under the Program, it estimates the dollar
amount of additional capital raised to range between $14 million and $42 million
and issue warrants to purchase between 93 thousand and 279 thousand shares of
Company common stock.
CAPITAL
RESOURCES
Shareholders’
equity was $161 million on September 30, 2008, a decrease of $7.9 million or
4.7% from $168 million at December 31, 2007. The decrease in shareholders’
equity is due mainly to lower retained earnings of $5.7 million or 4.6% that was
driven by the non-cash OTTI charge of $14.0 million related to the Company’s GSE
investments in the current quarter. Other comprehensive income declined by $2.2
million since year-end 2007 due mainly to a $2.4 million (after tax) lower
market value of certain investments in trust preferred capital securities of
global and national financial services firms. Excluding the impact from the
trust preferred capital securities, the net fair value of the available for sale
investment securities portfolio generally increased as a result of an overall
decline in market interest rates.
Consistent
with the objective of operating a sound financial organization, the Company’s
goal is to maintain capital ratios well above the regulatory minimum
requirements. The Company's capital ratios as of September 30, 2008
and the regulatory minimums are as follows.
|
|
Farmers
Capital
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Regulatory
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Bank
Corporation
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|
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Minimum
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Tier
1 risk based
|
|
|
11.11 |
% |
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4.00 |
% |
Total
risk based
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|
|
12.24 |
% |
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|
8.00 |
% |
Leverage
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|
|
7.48 |
% |
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4.00 |
% |
As of
September 30, 2008, each of the Company’s subsidiary banks exceeded the
regulatory minimum ratio requirements as calculated under guidelines established
by federal banking agencies. Five of the Company’s seven subsidiary banks
exceeded the well-capitalized regulatory ratio requirements.
Two of
the Company’s subsidiary banks fell below the well-capitalized status during the
current quarter, but remain in excess of the regulatory minimum. The lower
capital ratio of the two subsidiary banks are attributed to the non-cash OTTI
charge related to the GSE investments. The Company expects these two subsidiary
banks to meet or exceed well-capitalized status by year-end 2008. This is
expected to be accomplished through earnings growth at the impacted banks or,
alternatively, with a capital injection from the Parent Company.
The
Company is considering its option of participating in the recently announced
$250 billion Capital Purchase Program by the U.S. Treasury. Please see
additional information under the preceding heading of “Liquidity”.
The
Company uses a simulation model as a tool to monitor and evaluate interest rate
risk exposure. The model is designed to measure the sensitivity of
net interest income and net income to changing interest rates over future time
periods. Forecasting net interest income and its sensitivity to
changes in interest rates requires the Company to make assumptions about the
volume and characteristics of many attributes, including assumptions relating to
the replacement of maturing earning assets and liabilities. Other
assumptions include, but are not limited to, projected prepayments, projected
new volume, and the predicted relationship between changes in market interest
rates and changes in customer account balances. These effects are
combined with the Company’s estimate of the most likely rate environment to
produce a forecast of net interest income and net income. The
forecasted results are then
adjusted
for the effect of a gradual increase and decrease in market interest rates on
the Company’s net interest income and net income. Because assumptions
are inherently uncertain, the model cannot precisely estimate net interest
income or net income or the effect of interest rate changes on net interest
income and net income. Actual results could differ significantly from
simulated results.
At
September 30, 2008, the model indicated that if rates were to gradually increase
by 75 basis points during the remainder of the calendar year, then net interest
income and net income would increase .09% and .92%, 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 75 basis points over the same period, then net interest
income and net income would decrease .36% and 3.0%, 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.
The
Company’s Chief Executive Officer and Chief Financial Officer have also
concluded that there were no significant changes during the quarter ended
September 30, 2008 in the Company’s internal control over financial reporting or
in other factors that have materially affected, or are reasonably likely to
materially affect, the registrant’s internal control over financial
reporting.
PART
II - OTHER INFORMATION
As of
September 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.
At
various times, the Company’s Board of Directors has authorized the purchase of
shares of the Company’s outstanding common stock. No stated expiration dates
have been established under any of the previous authorizations. There were no
Company shares purchased during the quarter ended September 30, 2008. There are
84,971 shares that may still be purchased under the various
authorizations.
List of Exhibits
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3i.
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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).
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3ii.
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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).
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3iia
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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).
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4.1
|
Junior
Subordinated Indenture, dated as of July 21, 2005, between Farmers Capital
Bank Corporation and Wilmington Trust Company, as Trustee, relating to
unsecured junior subordinated deferrable interest notes that mature in
2035.*
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|
|
4.2
|
Amended
and Restated Trust Agreement, dated as of July 21, 2005, among Farmers
Capital Bank Corporation, as Depositor, Wilmington Trust Company, as
Property and Delaware Trustee, the Administrative Trustees (as named
therein), and the Holders (as defined therein).*
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|
|
4.3
|
Guarantee
Agreement, dated as of July 21, 2005, between Farmers Capital Bank
Corporation, as Guarantor, and Wilmington Trust Company, as Guarantee
Trustee.*
|
|
|
4.4
|
Junior
Subordinated Indenture, dated as of July 26, 2005, between Farmers Capital
Bank Corporation and Wilmington Trust Company, as Trustee, relating to
unsecured junior subordinated deferrable interest notes that mature in
2035.*
|
|
|
4.5
|
Amended
and Restated Trust Agreement, dated as of July 26, 2005, among Farmers
Capital Bank Corporation, as Depositor, Wilmington Trust Company, as
Property and Delaware Trustee, the Administrative Trustees (as named
therein), and the Holders (as defined therein).*
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|
|
4.6
|
Guarantee
Agreement, dated as of July 26, 2005, between Farmers Capital Bank
Corporation, as Guarantor, and Wilmington Trust Company, as Guarantee
Trustee.*
|
|
|
4.7
|
Indenture,
dated as of August 14, 2007 between Farmers Capital Bank Corporation, as
Issuer, and Wilmington Trust Company, as Trustee, relating to
fixed/floating rate junior subordinated debt due 2037.*
|
|
|
4.8
|
Amended
and Restated Declaration of Trust, dated as of August 14, 2007, by Farmers
Capital Bank Corporation, as Sponsor, Wilmington Trust Company, as
Delaware and Institutional Trustee, the Administrative Trustees (as named
therein), and the Holders (as defined therein).*
|
|
|
4.9
|
Guarantee
Agreement, dated as of August 14, 2007, between Farmers Capital Bank
Corporation, as Guarantor, and Wilmington Trust Company, as Guarantee
Trustee.*
|
|
|
10.1
|
Agreement
and Plan of Merger, Dated July 1, 2005, as Amended, by and among Citizens
Bancorp, Inc., Citizens Acquisition Subsidiary Corp, and Farmers Capital
Bank Corporation incorporated
by reference to Appendix A of Registration Statement filed on Form S-4 on
October 11, 2005).
|
|
|
10.2
|
Amended
and Restated Plan of Merger of Citizens National Bancshares, Inc. with and
into FCBC Acquisition Subsidiary, LLC (incorporated by reference to
Appendix A of Proxy Statement for Special Meeting of Shareholders of
Citizens National Bancshares, Inc. and Prospectus in connection with an
offer of up to 600,000 shares of its common stock of Farmers Capital Bank
Corporation filed on Form 424B3 on August 7, 2006).
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*
Exhibit not included pursuant to Item 601(b)(4)(iii) and (v) of Regulation
S-K. The Company will provide a copy of such exhibit to the Securities and
Exchange Commission upon
request.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date:
|
November
7, 2008 |
|
/s/ G. Anthony
Busseni |
|
|
|
G.
Anthony Busseni,
|
|
|
|
President
and CEO
|
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|
|
(Principal
Executive Officer)
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|
Date:
|
11-7-08
|
|
/s/ Doug Carpenter |
|
|
|
C.
Douglas Carpenter,
|
|
|
|
Senior
Vice President, Secretary, and CFO
|
|
|
|
(Principal
Financial and Accounting Officer)
|