Farmers Capital Bank Corporation
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(Exact name of registrant as specified in its charter) |
Kentucky
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0-14412
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61-1017851
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(State or other jurisdiction of incorporation)
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(Commission File Number)
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(IRS Employer 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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Not Applicable
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(Former name or former address, if changed since last report.)
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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Farmers Capital Bank Corporation
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7-20-11
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/s/ Doug Carpenter
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Date
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C. Douglas Carpenter
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Senior Vice President, Secretary, and Chief Financial Officer
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(In thousands)
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June 30,
2011
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March 31,
2011
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December 31,
2010
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September 30,
2010
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June 30,
2010
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Nonaccrual loans
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$ | 63,737 | $ | 57,473 | $ | 53,971 | $ | 53,866 | $ | 59,370 | ||||||||||
Loans 90 days or more past due and still accruing
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3 | 45 | 42 | 472 | 1,279 | |||||||||||||||
Restructured loans
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32,241 | 36,746 | 36,978 | 37,395 | 38,220 | |||||||||||||||
Total nonperforming loans
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95,981 | 94,264 | 90,991 | 91,733 | 98,869 | |||||||||||||||
Other real estate owned
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34,710 | 34,371 | 30,545 | 29,022 | 27,562 | |||||||||||||||
Other foreclosed assets
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17 | 20 | 34 | 59 | 39 | |||||||||||||||
Total nonperforming assets
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$ | 130,708 | $ | 128,655 | $ | 121,570 | $ | 120,814 | $ | 126,470 | ||||||||||
Ratio of total nonperforming loans to total loans (net of unearned income)
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8.5 | % | 8.2 | % | 7.6 | % | 7.5 | % | 8.0 | % |
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§
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The $876 thousand or $.12 per common share decrease in net income for the second quarter of 2011 compared to the first quarter of 2011 is attributed mainly to a $2.1 million or 85.5% increase in the provision for loan losses and overall higher noninterest expenses of $225 thousand or 1.5%. Partially offsetting these expense increases was a $447 thousand or 7.6% increase in noninterest income, a $166 thousand or 1.2% increase in net interest income, and $823 thousand decrease attributed to income taxes.
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The increase in provision for loan losses of $2.1 million in the linked quarter comparison was $478 thousand or 29.7% higher than the corresponding $1.6 million increase in net loan charge offs. The increase in the provision for loan losses was driven mainly by rising historical loss rates and was also impacted by higher levels of nonaccrual loans, each of which are factored into the Company’s allowance for loan losses computation.
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The $225 thousand or 1.5% increase in noninterest expenses was driven mainly by higher net expenses associated with repossessed real estate of $1.3 million or 185%. The increase in expenses attributed to repossessed real estate was made up primarily of impairment charges, which increased $1.1 million in the comparison.
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All other noninterest expenses decreased a net of $1.0 million or 7.1%. This decrease is mainly the result of two non-routine losses in the aggregate of $1.0 million recorded in the first quarter with no corresponding amount recorded in the current quarter. These losses, which were discussed in the previous quarter, relate to a fraudulent transaction on a deposit account involving one of the Company’s customers and a write-down attributed to uncollectible amounts of property tax receivables at the Company’s leasing subsidiary.
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The $477 thousand or 7.6% increase in noninterest income is spread across numerous income statement line items. The overall increase was led by higher trust fee income of $232 thousand or 54.3%. The increase in trust income is due to both an increase related to higher managed asset values along with accrual refinements resulting in a one-time increase in the amount of $165 thousand. Service charges and fees on deposits were up $124 thousand or 6.0% due to higher overdraft/insufficient funds of $108 thousand or 8.3% which is related to an uptick in transaction volume.
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The $166 thousand or 1.2% increase in net interest income is due mainly to a decrease in interest expense on deposits of $175 thousand or 4.4% in the comparison. Net interest margin was 3.18% in the current quarter, unchanged compared to the linked quarter. Net interest spread was 2.93%, a slight decrease compared to 2.94% in the linked quarter. The Company has been able to strategically reduce many of its higher-rate deposit balances as part of its effort to improve net interest margin, overall profitability, and its capital position.
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§
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The Company recorded an income tax benefit of $42 thousand in the current quarter compared to income tax expense in the amount of $781 thousand in the linked quarter. The change in income taxes is primarily due to the tax expense recorded in the first quarter related to an unfavorable tax situation concerning a tax-exempt customer of the Company. As a result, the Company recorded $449 thousand in income tax expense during the first quarter upon learning that one of its tax-exempt customers had received notification that the Internal Revenue Service intends to issue an adverse ruling to the customer regarding the qualified status of their debt arrangement with the Company. The loan contract contains provisions that the customer will indemnify the Company for any penalties, taxes, or interest thereon for which the Company becomes liable as a result of a determination of taxability. The Company intends to exercise its rights under the contract; however, due to the contingent nature of the indemnification provisions, the Company will not record the effects of the indemnification until it is realized. Additional information related to this matter is set forth in footnote 24 of the Company’s 2010 audited consolidated financial statements. Furthermore, a lower effective income tax rate resulted in a tax benefit for the current quarter.
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The $2.7 million or $.36 per common share decrease in net income for the second quarter of 2011 compared to the same quarter a year ago is mainly the result of lower net interest income of $455 thousand or 3.2%, a $3.5 million or 35.8% decrease in noninterest income, and an increase in noninterest expense of $302 thousand or 2.0%. A decrease in the provision for loan losses of $962 thousand or 17.5% and lower income taxes of $652 thousand positively impacted net income in the quarterly comparison.
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Total interest income decreased $3.3 million or 14.2% as interest income on loans was $2.3 million or 12.7% lower in the quarterly comparison. Interest income on loans decreased as outstanding loan balances have declined, nonperforming loans remain elevated, and the overall interest rate environment continues near historic lows.
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Total interest expense decreased $2.9 million or 31.4% in the comparison, led by a $2.2 million or 37.1% decrease in interest expense on deposits. Interest expense on deposits and other borrowers have trended downward primarily as a result of the overall low interest rate environment and a strategic decision to reduce certain higher-rate time deposits.
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Net interest margin was 3.18% in the current quarter, an increase of 6 basis points from 3.12% in the second quarter a year ago. Net interest spread was 2.93%, up 2 basis points compared to 2.91%.
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The $3.5 million decrease in noninterest income occurred over a broad range of line items, but was mainly due to lower securities gains of $3.0 million or 87.7%. The Company periodically sells investment securities in response to its overall asset/liability management strategy to lock in gains, increase yield, and/or enhance its capital position as opportunities occur.
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The $302 thousand increase in noninterest expense was driven by $943 thousand or 95.1% higher expenses related to repossessed real estate properties. Impairment charges on repossessed real estate were $1.3 million in the current quarter, an increase of $780 thousand compared to the second quarter a year ago.
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Improvements in noninterest expense in the comparison primarily include lower deposit insurance expense of $373 thousand or 34.1% and a decrease in data processing and communications expense of $226 thousand or 15.9%. Deposit insurance expense decreased mainly due to the change in the FDIC’s assessment base and rate structure that went into effect in the current quarter. The decrease in data processing and communication expense is mainly due to additional costs related to the merger of two of the Company’s bank subsidiaries during the second quarter of 2010 combined with expenses associated with a now defunct rewards program processed through an unrelated third party.
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The $962 thousand decrease in the provision for loan losses is attributed mainly to the overall decrease in net loans outstanding of $105 million or 8.5% at June 30, 2011 compared to a year earlier. Nonperforming loans, while up in the linked quarter comparison, improved $2.9 million or 2.9% at June 30, 2011 compared to a year earlier.
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The Company recorded an income tax benefit of $42 thousand in the current quarter compared to income tax expense in the amount of $610 thousand in the same quarter of 2010. The effective income tax rate for the second quarter of 2010 was 17.7%. The effective income tax rate in the current quarter is not meaningful.
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The $3.6 million or $.48 per common share decrease in net income for the six months ending June 30, 2011 compared to the first six months of 2010 is primarily the result of lower net gains on the sale of investment securities of $4.2 million or 83.5%.
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Net interest income decreased $249 thousand or .9% as a $6.6 million decrease in interest income was nearly offset by lower interest expense of $6.3 million. Net interest margin was 3.18% for the first six months of 2011, an increase of 15 basis points from 3.03% in the same period a year ago. Net interest spread was 2.94%, up 10 basis points compared to 2.84%. The increase in net interest margin and spread while net interest income declined is reflective of the Company’s overall balance sheet realignment strategy and focused effort to reduce its cost of funds.
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The provision for loan losses decreased $447 thousand or 6.0% in the current six months compared to a year earlier. The decrease is attributed mainly to the overall decrease in net loans outstanding of $105 million or 8.5% at June 30, 2011 compared to a year earlier.
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The $4.2 million decrease in gains on the sale of investment securities was part of an overall decrease in noninterest income of $5.1 million in the six month comparison. Decreases in other noninterest income occurred across a wide range of line items led by lower service charges and fees on deposits of $306 thousand or 6.7%, nondeposit service charges, commissions, and fees of $249 thousand or 10.6%, and data processing fees of $192 thousand. Trust fee income was up $257 thousand mainly due to both an increase related to higher managed asset values along with the one-time increase in the amount of $165 thousand discussed in the linked quarter comparison.
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Total noninterest expenses decreased $913 thousand or 2.9% and were represented by decreases over a wide range of line items. Deposit insurance expense decreased $590 thousand or 26.8% mainly due to the change in the FDIC’s assessment base and rate structure that went into effect in the second quarter of 2011. Data processing and communication expenses decreased $441 thousand or 15.4% mainly due to additional costs related to the merger of two of the Company’s bank subsidiaries during the second quarter of 2010 combined with expenses associated with a now defunct rewards program processed through an unrelated third party. Salaries and employee benefits decreased $223 thousand or 1.6% due primarily to a smaller workforce.
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Included in noninterest expenses in the first six months of 2011 are two non-routine losses in the aggregate of $1.0 million recorded in the first quarter in which no corresponding amount was recorded in the comparable period of a year ago. These losses, which were discussed in the previous quarter, relate to a fraudulent transaction on a deposit account involving one of the Company’s customers and a write-down attributed to uncollectible amounts of property tax receivables at the Company’s leasing subsidiary.
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Income tax expense decreased $443 thousand or 37.5% in the comparison and is mainly attributed to a decrease in the effective tax rate. The effective tax rate, after adjusting for the $449 thousand tax expense in the first quarter of 2011 described previously, was 14.8% compared to 19.8% for the same period a year ago.
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Total assets were $1.9 billion at June 30, 2011, a decrease of $36.0 million or 1.8% from March 31, 2011. The net decrease in total assets is attributed mainly to decreases in cash and cash equivalents of $85.7 million or 46.5% and net loans of $19.6 million or 1.8% partially offset by an increase in investment securities of $68.4 million or 13.2%.
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The decrease in cash and cash equivalents reflects an overall lower net funding position of the Company combined with the opportunity to redeploy cash equivalents into higher yielding investments in the absence of high quality loan demand.
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Deposits decreased $26.4 million or 1.8% in the linked quarter comparison. Interest bearing deposit balances made up $25.0 million of the decrease.
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Short-term borrowings decreased $8.1 million or 11.2% due mainly to activity related to the Commonwealth of Kentucky. Such activity can fluctuate significantly from day to day.
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The allowance for loan losses was 2.63% of loans outstanding (net of unearned income) at June 30, 2011, an increase of 11 basis points compared to 2.52% at March 31, 2011. Net charge-offs were $3.8 million and $2.2 million for the current and linked quarters, respectively.
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While the allowance for loan losses and the level of nonperforming loans have both edged upward since the previous quarter, the ratio of each of these totals to net loans have been boosted by a decrease in net loans outstanding.
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On a consolidated basis, the Company’s regulatory capital levels remain in excess of “well-capitalized” as defined by bank regulators. Likewise, the regulatory capital for the Company’s subsidiary banks exceeds the targets established in the agreements with the regulatory agencies.
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As has been previously disclosed, the Company learned in the first quarter of 2011 that the Commonwealth of Kentucky awarded its general depository services contract to a large multi-national bank. The Company held the previous contract which had an original termination date of June 30, 2011. This contract was extended through December 2011 whereby the Company will continue to provide services and assistance during the transition process. The Company is committed to facilitating a smooth transition with the Commonwealth and its employees. The impact of not retaining the general depository services contract of the Commonwealth is not expected to have a material impact on the Company’s results of operations.
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(In thousands except per share data)
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Three Months Ended
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Six Months Ended
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June 30,
2011
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March 31,
2011
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June 30,
2010
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June 30,
2011
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June 30,
2010
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Interest income
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$ | 20,133 | $ | 20,168 | $ | 23,475 | $ | 40,301 | $ | 46,857 | ||||||||||
Interest expense
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6,311 | 6,512 | 9,198 | 12,823 | 19,130 | |||||||||||||||
Net interest income
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13,822 | 13,656 | 14,277 | 27,478 | 27,727 | |||||||||||||||
Provision for loan losses
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4,528 | 2,441 | 5,490 | 6,969 | 7,416 | |||||||||||||||
Net interest income after provision for loan losses
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9,294 | 11,215 | 8,787 | 20,509 | 20,311 | |||||||||||||||
Noninterest income
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6,340 | 5,893 | 9,869 | 12,233 | 17,359 | |||||||||||||||
Noninterest expenses
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15,507 | 15,282 | 15,205 | 30,789 | 31,702 | |||||||||||||||
Income before income tax expense
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127 | 1,826 | 3,451 | 1,953 | 5,968 | |||||||||||||||
Income tax (benefit) expense
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(42 | ) | 781 | 610 | 739 | 1,182 | ||||||||||||||
Net income
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$ | 169 | $ | 1,045 | $ | 2,841 | $ | 1,214 | $ | 4,786 | ||||||||||
Net income
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$ | 169 | $ | 1,045 | $ | 2,841 | $ | 1,214 | $ | 4,786 | ||||||||||
Preferred stock dividends and discount accretion
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(473 | ) | (472 | ) | (466 | ) | (945 | ) | (932 | ) | ||||||||||
Net (loss) income available to common shareholders
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$ | (304 | ) | $ | 573 | $ | 2,375 | $ | 269 | $ | 3,854 | |||||||||
Basic and diluted net (loss) income per common share
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$ | (.04 | ) | $ | .08 | $ | .32 | $ | .04 | $ | .52 | |||||||||
Averages
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Loans, net of unearned interest
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$ | 1,144,035 | $ | 1,173,677 | $ | 1,250,667 | $ | 1,158,774 | $ | 1,257,453 | ||||||||||
Total assets
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1,956,654 | 1,958,088 | 2,149,940 | 1,957,367 | 2,168,814 | |||||||||||||||
Deposits
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1,466,759 | 1,464,858 | 1,584,156 | 1,465,814 | 1,611,706 | |||||||||||||||
Shareholders’ equity
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154,090 | 151,325 | 151,808 | 152,715 | 150,982 | |||||||||||||||
Weighted average common shares outstanding – basic and diluted
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7,420 | 7,412 | 7,384 | 7,416 | 7,382 | |||||||||||||||
Return on average assets
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.03 | % | .22 | % | .53 | % | .13 | % | .45 | % | ||||||||||
Return on average equity
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.44 | % | 2.80 | % | 7.51 | % | 1.60 | % | 6.39 | % | ||||||||||
June 30,
2011
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March 31,
2011
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December 31,
2010
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Cash and cash equivalents
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$ | 98,506 | $ | 184,187 | $ | 182,056 | ||||||
Investment securities
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584,815 | 516,453 | 445,112 | |||||||||
Loans, net of allowance of $29,738, $29,022, and $28,784
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1,102,796 | 1,122,445 | 1,164,056 | |||||||||
Other assets
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145,567 | 144,603 | 144,469 | |||||||||
Total assets
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$ | 1,931,684 | $ | 1,967,688 | $ | 1,935,693 | ||||||
Deposits
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$ | 1,446,902 | $ | 1,473,257 | $ | 1,463,572 | ||||||
Federal funds purchased and other short-term borrowings
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64,666 | 72,810 | 47,409 | |||||||||
Other borrowings
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244,874 | 250,038 | 252,209 | |||||||||
Other liabilities
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22,129 | 21,509 | 22,607 | |||||||||
Total liabilities
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1,778,571 | 1,817,614 | 1,785,797 | |||||||||
Shareholders’ equity
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153,113 | 150,074 | 149,896 | |||||||||
Total liabilities and shareholders’ equity
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$ | 1,931,684 | $ | 1,967,688 | $ | 1,935,693 |
End of period tangible book value per common share1
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16.39 | 15.90 | 15.87 | |||||||||
End of period common share value
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5.25 | 7.51 | 4.88 |