Kentucky Banking Centers, Inc.
(A wholly-owned subsidiary of Farmers Capital Bank Corporation)
Unaudited Balance Sheets
| | September 30, | December 31, |
(In thousands, except share data) | 2006 | 2005 |
Assets | | |
Cash and cash equivalents: | | |
Cash and due from banks | $ 2,639 | $ 3,140 |
Interest bearing deposits in other banks | 135 | 208 |
Federal funds sold and securities purchased under agreements to resell | 9,738 | - |
Total cash and cash equivalents | 12,512 | 3,348 |
Investment securities: | | |
Available for sale, amortized cost of $23,039 (2006) and $34,755 (2005) | 22,939 | 34,498 |
Held to maturity, fair value of $1,124 (2006) and $1,558 (2005) | 1,105 | 1,529 |
Total investment securities | 24,044 | 36,027 |
| Loans, net of unearned income | 81,416 | 81,845 |
Allowance for loan losses | (1,115) | (1,199) |
Loans, net | 80,301 | 80,646 |
Premises and equipment, net | 4,158 | 4,186 |
Company-owned life insurance | 1,569 | 1,525 |
Other assets | 1,799 | 1,507 |
Total assets | $ 124,383 | $ 127,239 |
Liabilities | | |
Deposits: | | |
Noninterest bearing | $ 10,796 | $ 9,834 |
Interest bearing | 101,595 | 105,443 |
Total deposits | 112,391 | 115,277 |
Federal funds purchased and securities sold under agreements to repurchase | 200 | 777 |
Federal Home Loan Bank advances | 1,347 | 1,591 |
Other liabilities | 782 | 451 |
Total liabilities | 114,720 | 118,096 |
Shareholders’ Equity | | |
Common stock, par value $20,000 per share; 15 shares authorized; | | |
15 shares issued and outstanding at September 30, 2006 | | |
and December 31, 2005 | 300 | 300 |
Capital surplus | 5,975 | 5,945 |
Retained earnings | 3,453 | 3,065 |
Accumulated other comprehensive loss | (65) | (167) |
Total shareholders’ equity | 9,663 | 9,143 |
Total liabilities and shareholders’ equity | $ 124,383 | $ 127,239 |
See accompanying notes to unaudited financial statements. |
Kentucky Banking Centers, Inc.
(A wholly-owned subsidiary of Farmers Capital Bank Corporation)
Unaudited Statements of Income
| | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, |
(In thousands, except weighted average shares) | 2006 | 2005 | 2006 | 2005 |
Interest Income | | | | |
| Interest and fees on loans | $ 1,715 | $ 1,553 | $ 4,981 | $ 4,421 |
| Interest on investment securities: | | | | |
| Taxable | 202 | 199 | 618 | 643 |
| Nontaxable | 41 | 48 | 128 | 144 |
| Interest on deposits in other banks | 1 | 1 | 3 | 7 |
| Interest of federal funds sold and securities purchased | | | | |
under agreements to resell | 162 | 40 | 362 | 112 |
Total interest income | 2,121 | 1,841 | 6,092 | 5,324 |
Interest Expense | | | | |
| Interest on deposits | 850 | 680 | 2,418 | 2,008 |
| Interest on federal funds purchased and securities sold | | | | |
under agreements to repurchase | 2 | 2 | 8 | 5 |
Interest on Federal Home Loan Bank advances | 10 | 13 | 37 | 44 |
Total interest expense | 862 | 695 | 2,463 | 2,057 |
Net interest income | 1,259 | 1,146 | 3,629 | 3,267 |
Provision for loan losses | 45 | (11) | (39) | 65 |
Net interest income after provision for loan losses | 1,214 | 1,157 | 3,668 | 3,202 |
Noninterest Income | | | | |
| Service charges and fees on deposits | 194 | 195 | 561 | 552 |
| Other service charges, commissions, and fees | 52 | 64 | 192 | 195 |
Income from company-owned life insurance | 14 | 15 | 43 | 39 |
Other | 13 | (5) | 36 | 33 |
Total noninterest income | 273 | 269 | 832 | 819 |
Noninterest Expense | | | | |
| Salaries and employee benefits | 477 | 434 | 1,472 | 1,329 |
| Occupancy expenses | 68 | 102 | 278 | 249 |
| Equipment expenses | 19 | 47 | 115 | 123 |
| Data processing and communications expense | 144 | 123 | 409 | 385 |
| Holding Company management fee | 61 | 56 | 181 | 166 |
Liability insurance | 28 | 6 | 85 | 19 |
Bank Franchise tax | 27 | 24 | 81 | 72 |
Other | 129 | 141 | 419 | 415 |
Total noninterest expense | 953 | 933 | 3,040 | 2,758 |
Income before income tax expense | 534 | 493 | 1,460 | 1,263 |
Income tax expense | 189 | 159 | 443 | 344 |
Net Income | $ 345 | $ 334 | $ 1,017 | $ 919 |
Net Income Per Common Share (in thousands) | | | | |
Basic and diluted | $ 23.00 | $ 22.27 | $ 67.80 | $ 61.27 |
Weighted Average Shares Outstanding | | | | |
| Basic and diluted | 15 | 15 | 15 | 15 |
See accompanying notes to unaudited financial statements. |
Kentucky Banking Centers, Inc.
(A wholly-owned subsidiary of Farmers Capital Bank Corporation)
Unaudited Statements of Comprehensive Income
| | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, |
(In thousands) | 2006 | 2005 | 2006 | 2005 |
Net Income | $ 345 | $ 334 | $ 1,017 | $ 919 |
| Other comprehensive (loss) income: | | | | |
| Unrealized holding (loss) gain on available for sale | | | | |
| securities arising during the period, net of tax | | | | |
| of $73, $(37), $55, and $(33), respectively | 135 | (68) | 102 | (62) |
Comprehensive Income | $ 480 | $ 266 | $ 1,119 | $ 857 |
See accompanying notes to unaudited financial statements. |
Kentucky Banking Centers, Inc.
(A wholly-owned subsidiary of Farmers Capital Bank Corporation)
Unaudited Statements of Cash Flows
Nine months ended September 30, (In thousands) | 2006 | 2005 |
Cash Flows from Operating Activities | | |
| Net income | $ 1,017 | $ 919 |
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Depreciation and amortization | 141 | 189 |
| Net amortization of investment security premiums and (discounts): | | |
| Available for sale | (25) | 12 |
| Held to maturity | - | (1) |
| Provision for loan losses | (39) | 195 |
| Noncash compensation expense | 30 | - |
| Deferred income tax expense (benefit) | 98 | 2 |
| Losses on sale of premises and equipment, net | - | 27 |
| Increase in accrued interest receivable | (291) | (79) |
| Income from company-owned life insurance | (44) | (40) |
| (Increase) decrease in other assets | (1) | 65 |
| Increase in accrued interest payable | 46 | 19 |
Increase in other liabilities | 131 | 104 |
Net cash provided by operating activities | 1,063 | 1,412 |
Cash Flows from Investing Activities | | |
| Proceeds from maturities and calls of investment securities: | | |
| Available for sale | 20,390 | 28,359 |
| Held to maturity | 425 | 150 |
| Purchase of available for sale investment securities | (8,649) | (10,518) |
| Loans originated for investment, net of principal collected | 384 | (240) |
| Purchase of premises and equipment | (113) | (313) |
Proceeds from sale of equipment | - | 2 |
Net cash provided by investing activities | 12,437 | 17,440 |
Cash Flows from Financing Activities | | |
| Net decrease in deposits | (2,886) | (14,851) |
| Net decrease in federal funds sold and repurchase agreements | (577) | (2,114) |
| Repayments of Federal Home Loan Bank advances | (244) | (259) |
| Dividends paid | (629) | (325) |
Net cash used in financing activities | (4,336) | (17,549) |
Net increase (decrease) in cash and cash equivalents | 9,164 | 1,303 |
Cash and cash equivalents at beginning of year | 3,348 | 3,822 |
Cash and cash equivalents at end of period | $ 12,512 | $ 5,125 |
| | | |
Supplemental Disclosures | | |
| Cash paid during the period for: | | |
| Interest | $ 2,417 | $ 2,038 |
| Income taxes | 360 | 195 |
| See accompanying notes to unaudited financial statements. | | |
Kentucky Banking Centers, Inc.
(A wholly-owned subsidiary of Farmers Capital Bank Corporation)
Unaudited Statements of Changes in Shareholders’ Equity
| (In thousands) | Accumulated | |
| | Other | Total |
| Nine months ended | Common Stock | Capital | Retained | Comprehensive | Shareholders’ |
September 30, 2006 and 2005 | Shares | Amount | Surplus | Earnings | Income (Loss) | Equity |
Balance at January 1, 2006 | 15 | $ 300 | $ 5,945 | $ 3,065 | $ (167) | $ 9,143 |
Net income | | | | 1,017 | | 1,017 |
| Other comprehensive loss | | | | | 102 | 102 |
Cash dividends declared, $41.93 per share (in thousands) | | | | (629) | | (629) |
| Noncash compensation expense attributed to stock option & Employee Stock Purchase Plan grants | | | 30 | | | 30 |
Balance at September 30, 2006 | 15 | $ 300 | $ 5,975 | $ 3,453 | $ (65) | $ 9,663 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Balance at January 1, 2005 | 15 | $ 300 | $ 5,945 | $ 3,358 | $ (80) | $ 9,523 |
Net income | | | | 919 | | 919 |
| Other comprehensive income | | | | | (62) | (62) |
Cash dividends declared, $21.67 per share (in thousands) | | | | (325) | | (325) |
Balance at September 30, 2005 | 15 | $ 300 | $ 5,945 | $ 3,952 | $ (142) | $10,055 |
See accompanying notes to unaudited financial statements. |
Notes to Unaudited Financial Statements
1. Basis of Presentation and Nature of Operations
The accounting and reporting policies of Kentucky Banking Centers, Inc. (the “Bank”) conform to accounting principles generally accepted in the United States of America and general practices applicable to the banking industry.
The Bank, formerly named Horse Cave State Bank, was originally organized in 1926 and operates as a State of Kentucky chartered bank. In 1987 the Bank was acquired by Farmers Capital Bank Corporation (“Farmers Capital”), a publicly held financial holding company located in Frankfort, Kentucky, and has operated as a wholly-owned subsidiary of Farmers Capital since that time. The Bank operates three locations; one each in Glasgow, Horse Cave, and Munfordville. It is engaged in a general banking business providing full service banking to individuals, businesses, and government customers. The Bank’s operations include one reportable segment: commercial and retail banking.
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 Bank’s net interest income and the value of its recorded assets and liabilities. Actual results could differ from those estimates used in the preparation of the financial statements.
The financial information presented as of any date other than December 31 has been prepared from the books and records without audit. The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2005.
2. Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment”, that requires the cost resulting from stock options be measured at fair value and recognized in earnings. This Statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” which permitted the recognition of compensation expense using the intrinsic value method. The adoption of SFAS No. 123(R) did not have a material impact on the Bank’s results of operations or financial condition.
In November 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 123(R)-3, “Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards”. This FSP provides a simplified method to calculate the Bank’s hypothetical additional paid-in capital (“APIC”) pool for the beginning balance of excess tax benefits and the method of determining the subsequent impact on the pool of option awards that are outstanding and fully or partially vested upon adoption of SFAS 123(R). This FSP allows companies up to one year from the later of the adoption date of SFAS 123(R) or November 10, 2005 to evaluate the available transition alternatives and make a one-time election. The Bank is currently evaluating the impact of the new method provided by this guidance.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments”, an amendment of SFAS No. 133 and SFAS No. 140. This statement permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. It establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. In addition, SFAS 155 clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133. It also clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. SFAS 155 amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Bank is evaluating the impact, if any, of the adoption of this Statement on its financial results.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets”. This Statement amends SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", and requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable and permits the entities to elect either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of SFAS No. 140 for subsequent measurement. The subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value eliminates the necessity for entities that manage the risks inherent in servicing assets and servicing liabilities with derivatives to qualify for hedge accounting treatment and eliminates the characterization of declines in fair value as impairments or direct write-downs. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Bank is evaluating the impact, if any, of the adoption of this Statement on its financial results.
In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48 “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”, to clarify certain aspects of accounting for uncertain tax positions, including issues related to the recognition and measurement of those tax positions taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation is effective for fiscal years beginning after December 15, 2006. The Bank is in the process of evaluating the impact of the adoption of this interpretation on the Bank’s results of operations and financial condition.
3. Stock-Based Compensation
In 1997, Farmers Capital’s Board of Directors approved a nonqualified stock option plan (the “Plan”) that provides for granting of options to acquire Farmers Capital stock to key employees and officers of the Bank. All stock options are awarded at a price equal to the fair market value of Farmers Capital’s common stock at the date the options are granted and expire ten years from the date of the grant.
Prior to January 1, 2006, the Bank and Farmers Capital accounted for its Plan under the recognition and measurement provisions of APB Opinion No. 25 and related interpretations as allowed by SFAS No. 123. Effective January 1, 2006, the Bank and Farmers Capital adopted the fair value recognition provisions of SFAS No. 123(R) applying the modified-prospective application. Under the modified-prospective application, prior year amounts are not restated. The following table presents the effect on net income and earnings per share prior to adoption as if expense was measured using the fair value recognition provisions of SFAS No. 123(R).
| (In thousands) | Three Months Ended September 30, 2005 | Nine Months Ended September 30, 2005 |
Net Income | | |
| As reported | $334 | $919 |
Less: Stock-based compensation expense determined under fair value based method for all awards, net of related tax effects | (3) | (11) |
| Proforma | $331 | $908 |
Net Income Per Common Share | | |
| Basic and diluted, as reported | $22.27 | $61.27 |
| Basic and diluted, proforma | 22.07 | 60.53 |
| | | |
The amount of stock-based compensation attributed to Farmers Capital’s stock option grants included in net income was $5,000 and $14,000 for the three and nine-month periods ended September 30, 2006. In addition, there was $10,000 in compensation cost related to unvested options not recognized at September 30, 2006, with a weighted-average period of 4 months over which the cost is expected to be recognized. There were no modifications or cash paid to settle stock option awards during the nine months ended September 30, 2006.
Certain eligible employees of the Bank also participate in Farmers Capital’s Employee Stock Purchase Plan (“ESPP”). During 2005 there was no stock-based compensation expense recorded related to the ESPP. The amount of stock-based compensation attributed to Farmers Capital’s ESPP included in net income was zero and $1,000 for the three and nine-month periods ended September 30, 2006.
4. Sale of the Bank
On June 1, 2006 the Bank, Farmers Capital, and Citizens First Corporation (“Citizens First”) jointly announced the signing of a definitive agreement for the purchase of the Bank by Citizens First in a $20 million cash transaction. The sale of the Bank was consummated effective December 1, 2006.
