Farmers Capital Bank Corporation (FFKT) - Description of business

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Company Description
The disclosures set forth in this item are qualified by Item 1A (“ Risk Factors ”) and the section captioned “ Forward-Looking Statements ” in Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) of this report and other cautionary statements contain elsewhere in this report. Organization Farmers Capital Bank Corporation (the “Registrant” or the “Company”) is a financial holding company. The Registrant was originally formed as a bank holding company under the Bank Holding Company Act of 1956, as amended, on October 28, 1982 under the laws of the Commonwealth of Kentucky. During 2000, the Company elected to change from a bank holding company to a financial holding company (see discussion in Supervision and Regulation section of this report). The Company’s subsidiaries provide a wide range of banking and bank-related services to customers throughout Central and Northern Kentucky. The bank subsidiaries owned by the Company include Farmers Bank & Capital Trust Co. ("Farmers Bank"), Frankfort, Kentucky; United Bank & Trust Co. ("United Bank"), Versailles, Kentucky; Lawrenceburg National Bank ("Lawrenceburg Bank"), Harrodsburg, Kentucky; First Citizens Bank, Elizabethtown, Kentucky; Farmers Bank and Trust Company ("Farmers Georgetown”), Georgetown, Kentucky; Citizens Bank of Northern Kentucky, Inc. (“Citizens Northern”), Newport, Kentucky; and Citizens National Bank of Jessamine County (“Citizens Jessamine”), Nicholasville, Kentucky. The Company also owns FCB Services, Inc., ("FCB Services"), a nonbank data processing subsidiary located in Frankfort, Kentucky; Kentucky General Life Insurance Company, Inc., (“Kentucky General Life”), an inactive nonbank insurance agency subsidiary located in Frankfort, Kentucky; Kentucky General Holdings, LLC, (“Kentucky General”), in Frankfort, Kentucky, which holds a 50% voting interest in KHL Holdings, LLC. KHL Holdings acquired a 100% interest in Kentucky Home Life Insurance Company effective January 1, 2005; Citizens Acquisition Subsidiary Corporation (“Citizens Acquisition”), the one-bank holding Company of Citizens Northern; FFKT Insurance Services, Inc., (“FFKT Insurance”), a captive property and casualty insurance company in Frankfort, Kentucky; and Farmers Capital Bank Trust I and Farmers Capital Bank Trust II, which are unconsolidated trusts established during 2005 to complete the private offering of trust preferred securities. The Company provides a broad range of financial services to individuals, corporations, and others through its 35 banking locations in 22 communities throughout Central and Northern Kentucky. These services primarily include the activities of lending and leasing, receiving deposits, providing cash management services, safe deposit box rental, and trust activities. Operations are managed and financial performance is evaluated at the subsidiary level. The Company’s chief decision makers monitor the results of the various banking products and services of its subsidiaries. Accordingly, all of the Company’s operations are considered by management to be aggregated in one reportable operating segment: commercial and retail banking. As of December 31, 2006, the Company had $1.8 billion in consolidated assets. Organization Chart Subsidiaries of Farmers Capital Bank Corporation are indicated in the table that follows. Percentages reflect the ownership interest held by the parent company of each of the subsidiaries. Tier 2 subsidiaries are direct subsidiaries of Farmers Capital Bank Corporation. Tier 3 subsidiaries are direct subsidiaries of the Tier 2 subsidiary listed immediately above them. Tier 4 subsidiaries are direct subsidiaries of the Tier 3 subsidiary listed immediately above them. Tier Entity 1 Farmers Capital Bank Corporation, Frankfort KY       2   United Bank & Trust Co., Versailles KY 100% 3     EV Properties, Inc., Versailles KY 100%         2   Lawrenceburg National Bank, Harrodsburg KY 100%       2   Farmers Bank & Capital Trust Co., Frankfort KY 100% 3     Farmers Bank Realty Co., Frankfort KY 100% 3     Leasing One Corporation, Frankfort KY 100% 3     EG Properties, Inc., Frankfort KY 100% 3     Austin Park Apartments, LTD, Frankfort KY 99% 3     Frankfort Apartments II, LTD, Frankfort KY 99.9% 3     Farmers Capital Insurance Corp., Frankfort KY 100% 4       Farmers Fidelity Insurance Agency, LLP, Lexington KY 50%           2   Citizens National Bank of Jessamine County, Nicholasville KY 100%       2   First Citizens Bank, Elizabethtown KY 100% 3     EH Properties, Inc., Elizabethtown KY 100% (Dissolved in January, 2007)         2   Farmers Bank and Trust Company, Georgetown KY 100% 3     Pro Mortgage Partners, LLC, Georgetown KY 100%         2   FCB Services, Inc., Frankfort KY 100%       2   Kentucky General Holdings, LLC, Frankfort, KY 100% 3     KHL Holdings, LLC, Frankfort KY 45% (equity), 50% (voting) 4       Kentucky Home Life Insurance Company, Frankfort KY 100%           2   Kentucky General Life Insurance Company, Frankfort KY (Inactive)           2   FFKT Insurance Services, Inc., Frankfort, KY 100%       2   Citizens Acquisition Subsidiary Corporation, Frankfort, KY 100% (Dissolved in January, 2007) 3     Citizens Bank of Northern Kentucky, Inc., Newport, KY 100% (Became a Tier 2 subsidiary in January, 2007)         2   Farmers Capital Bank Trust I, Frankfort, KY 100%       2   Farmers Capital Bank Trust II, Frankfort, KY 100% Farmers Bank, originally organized in 1850, is a state chartered bank engaged in a wide range of commercial and personal banking activities, which include accepting savings, time and demand deposits; making secured and unsecured loans to corporations, individuals and others; providing cash management services to corporate and individual customers; issuing letters of credit; renting safe deposit boxes; and providing funds transfer services. The bank's lending activities include making commercial, construction, mortgage, and personal loans and lines of credit. The bank serves as an agent in providing credit card loans. It acts as trustee of personal trusts, as executor of estates, as trustee for employee benefit trusts and as registrar, transfer agent and paying agent for bond issues. Farmers Bank is the general depository for the Commonwealth of Kentucky and has been for more than 70 years. Farmers Bank is the largest bank chartered in Franklin County. It conducts business in its principal office and four branches within Frankfort, the capital of Kentucky. Franklin County is a diverse community, including government, commerce, finance, industry, medicine, education and agriculture. The bank also serves many individuals and corporations throughout Central Kentucky. On December 31, 2006, it had total consolidated assets of $598 million, including loans net of unearned income of $327 million. On the same date, total deposits were $433 million and shareholders' equity totaled $37.0 million. Farmers Bank had six active subsidiaries during 2006: Farmers Bank Realty Co. ("Farmers Realty"), Leasing One Corporation ("Leasing One"), Farmers Capital Insurance Corporation (“Farmers Insurance”), EG Properties, Inc. (“EG Properties”), Austin Park Apartments, LTD (“Austin Park”), and Frankfort Apartments II, LTD (“Frankfort Apartments”). Farmers Realty was incorporated in 1978 for the purpose of owning certain real estate used by the Company and Farmers Bank in the ordinary course of business. Farmers Realty had total assets of $3.3 million on December 31, 2006. Leasing One was incorporated in August 1993 to operate as a commercial equipment leasing company. It is located in Frankfort and is currently licensed to conduct business in fourteen states. At year-end 2006, it had total assets of $17.5 million, including leases net of unearned income of $19.1 million. Farmers Insurance was organized in 1988 to engage in insurance activities permitted to the Company under federal and state law. Farmers Bank capitalized this corporation in December 1998. Farmers Insurance acts as an agent for Commonwealth Land Title Co. At year-end 2006 it had total assets of $949 thousand. Farmers Insurance holds a 50% interest in Farmers Fidelity Insurance Company, LLP (“Farmers Fidelity”). The Creech & Stafford Insurance Agency, Inc., an otherwise unrelated party to the Company, also holds a 50% interest in Farmers Fidelity. Farmers Fidelity is a direct writer of property and casualty coverage, both individual and commercial. In November 2002 Farmers Bank incorporated EG Properties. EG Properties is involved in real estate management and liquidation for properties repossessed by Farmers Bank. It had total assets of $4.5 million at December 31, 2006. Farmers Bank is a limited partner in Austin Park and Frankfort Apartments, two low income housing tax credit partnerships located in Frankfort, Kentucky. These investments provide for federal income tax credits to the Company. Farmers Bank’s aggregate investment in these partnerships was $1.4 million at year-end 2006. On February 15, 1985, the Company acquired United Bank, a state chartered bank originally organized in 1880. It is engaged in a general banking business providing full service banking to individuals, businesses and governmental customers. It conducts business in its principal office and two branches in Woodford County, Kentucky. During 2003 United Bank incorporated EV Properties, Inc. EV Properties is involved in real estate management and liquidation for properties repossessed by United Bank. EV Properties had total assets of $408 thousand at year-end 2006. Based on deposits, United Bank is the second largest bank chartered in Woodford County with total assets of $177 million and total deposits of $153 million at December 31, 2006. On June 28, 1985, the Company acquired Lawrenceburg Bank, a national chartered bank originally organized in 1885. It is engaged in a general banking business providing full service banking to individuals, businesses and governmental customers. During 1998, it moved its charter and main office to Harrodsburg, Kentucky in Mercer County. Lawrenceburg Bank conducts business at its Harrodsburg site, two branches in Anderson County, Kentucky, and one branch in Mercer County, Kentucky. Based on deposits, the Anderson County branches rank number one in size compared to all banks chartered in Anderson County. Total assets were $179 million and total deposits were $165 million at December 31, 2006.  On March 31, 1986, the Company acquired First Citizens Bank, a state chartered bank originally organized in 1964. It is engaged in a general banking business providing full service banking to individuals, businesses and governmental customers. It conducts business at its main office and three branches in Hardin County, Kentucky along with its branch office in Bullitt County, Kentucky. During 2003 First Citizens Bank incorporated EH Properties, Inc. This company, which had total assets of $27 thousand at December 31, 2006, is involved in real estate management and liquidation for properties repossessed by First Citizens Bank. EH Properties was dissolved in January, 2007. On October 8, 2004, First Citizens Bank acquired Financial National Electronic Transfer, Inc. (“FiNET”), a data processing company that specializes in the processing of federal benefit payments and military allotments and is headquartered in Radcliff, Kentucky. Effective January 1, 2005 FiNET was merged into First Citizens Bank. These services are now operated using the name of FirstNet. On November 2, 2006, First Citizens Bank announced the signing of a definitive agreement to acquire the military allotment operation of PNC Bank, National Association based in Elizabethtown, Kentucky. The operation specializes in the processing of data associated with military allotments and federal benefit payments. The transaction was completed on January 12, 2007. Based on deposits, First Citizens Bank ranks third in size compared to all banks chartered in Hardin County. Total assets were $224 million and total deposits were $178 million at December 31, 2006. On June 30, 1986, the Company acquired Farmers Georgetown, a state chartered bank originally organized in 1850. It is engaged in a general banking business providing full service banking to individuals, businesses and governmental customers. During the fourth quarter of 2004 the Company merged its previously acquired Citizens Bank (Kentucky), Inc. (“Citizens Georgetown”) into Farmers Georgetown. During 2006, Farmers Georgetown sold the Bath County branches that it acquired from Citizens Georgetown. Farmers Georgetown conducts business at its principal office and three branches in Scott County, Kentucky and two branches in Fayette County, Kentucky. On July 16, 2002, Farmers Georgetown incorporated Community Development of Kentucky, Inc. (“CDK, Inc.”) in order to apply to be certified as a Community Development Entity for participation in the New Markets Tax Credit Program (“Program”) as provided by the Community Renewal Tax Relief Act of 2000. The Program is designed to promote economic development in qualified low-income communities as defined by the tax regulations. The Company decided not to participate in the Program and CDK, Inc. was dissolved during 2006. In May 2004, Farmers Georgetown incorporated Pro Mortgage Partners, LLC (“Pro Mortgage”), a mortgage brokerage company established to offer a variety of fixed rate loan products. Pro Mortgage has an office in Georgetown, Danville, and Lexington. At December 31, 2006, Pro Mortgage had total assets of $848 thousand. Based on deposits, Farmers Georgetown is the largest bank chartered in Scott County with total assets of $322 million and total deposits of $214 million at December 31, 2006. On June 15, 1987, the Company acquired Horse Cave State Bank, a state chartered bank originally organized in 1926. During 1997, it moved its charter to Glasgow, Kentucky. Subsequent to that approval, Horse Cave State Bank changed its name to Kentucky Banking Centers, Inc. On December 1, 2006, the Company sold Kentucky Banking Centers to Citizens First Corporation, an unrelated company headquartered in Bowling Green, Kentucky. On December 6, 2005, the Company acquired Citizens Bancorp, Inc. (“Citizens Bancorp”) in Newport, Kentucky. Citizens Bancorp was subsequently merged into Citizens Acquisition. Citizens Acquisition is the parent company of Citizens Northern. Citizens Northern is a state chartered bank organized in 1993 and is engaged in a general banking business providing full service banking to individuals, businesses, and governmental customers. It conducts business in its principal office in Newport and four branches in Campbell County, Kentucky, one branch in Boone County, Kentucky and two branches in Kenton County, Kentucky. Based on deposits, Citizens Northern ranks second in size compared to all banks chartered in Campbell County. Total assets were $248 million and total deposits were $195 million at December 31, 2006. Citizens Financial Services, formerly an investment brokerage subsidiary of Citizens Acquisition, was dissolved during 2006. During January, 2007 Citizens Acquisition was merged into the Company, leaving Citizens Northern as a direct subsidiary of the Company. On October 1, 2006, the Company acquired Citizens National Bancshares (“Citizens Bancshares”), the one-bank holding company of Citizens National Bank of Jessamine County (“Citizens Jessamine”). Citizens Bancshares was subsequently merged into the Company, leaving Citizens Jessamine as a direct subsidiary of the Company. Citizens Jessamine is a national chartered bank organized in 1996 and is engaged in a general banking business providing full service banking to individuals, businesses, and governmental customers. It conducts business in its principal office and three branches in Jessamine County, Kentucky. Based on deposits, Citizens Jessamine ranks first in size compared to all banks chartered in Jessamine County. Total assets were $173 million and total deposits were $136 million at December 31, 2006. FCB Services, organized in 1992, provides data processing services and support for the Company and its subsidiaries. It is located in Frankfort, Kentucky. During 1994, FCB Services began performing data processing services for nonaffiliated banks. FCB Services had total assets of $2.9 million at December 31, 2006. Kentucky General Holdings, LLC (“Kentucky General”) was incorporated in November 2004 and holds a 50% voting interest in KHL Holdings, LLC. Effective January 1, 2005 KHL Holdings, LLC purchased Kentucky Home Life Insurance Company (“KHL”). KHL writes credit life and health insurance in Kentucky. The remaining 50% voting interest in KHL Holdings, LLC is held by Hamburg Insurance, LLC, an otherwise unrelated company. Kentucky General had total assets of $2.0 million at December 31, 2006. Kentucky General Life was incorporated on June 22, 2000 to engage in insurance activities permitted by federal and state law. This corporation was inactive as of December 31, 2006. Farmers Capital Bank Trust I and Farmers Capital Bank Trust II are two separate Delaware statutory business trusts sponsored by the Company during 2005. The Company completed two private offerings of trust preferred securities through the Trusts totaling $25.0 million. The Company owns all of the common securities of each of the Trusts. The Company does not consolidate the Trusts into its financial statements. FFKT Insurance was incorporated during 2005. It is a captive property and casualty insurance company insuring primarily deductible exposures and uncovered liability related to properties of the Company. It had total assets of $2.3 million at December 31, 2006. Lending A significant part of the Company’s operating activities include originating loans, approximately 76% of which are secured by real estate at December 31, 2006. Real estate lending primarily includes loans secured by owner-occupied one-to-four family residential properties as well as commercial real estate mortgage loans to developers and owners of other commercial real estate. Real estate lending primarily includes both variable and adjustable rate products. Loan rates on variable rate loans generally adjust upward or downward immediately based on changes in the loan’s index, normally prime rate as published in the Wall Street Journal. Rates on adjustable rate loans move upward or downward after an initial fixed term of normally one, three, or five years. However, rate adjustments on adjustable rate loans are made annually after the initial fixed term expires and are indexed primarily to shorter-term Treasury indexes. Generally, variable and adjustable rate loans contain provisions that cap annual increases at a maximum of 100 basis points with lifetime caps of up to 600 basis points and lifetime floors of 100 basis points. The Company also makes fixed rate commercial real estate loans to a lesser extent with repayment terms generally not exceeding 12 months. The Company’s subsidiary banks make first and second residential mortgage loans secured by real estate not to exceed 90% loan to value without seeking third party guarantees. Commercial real estate loans are made primarily to small and mid-sized businesses, secured by real estate not exceeding 80% loan to value. Other commercial loans are asset based loans secured by equipment and lines of credit secured by receivables and include lending across a diverse range of business types. Commercial lending and real estate construction lending, including commercial leasing, generally includes a higher degree of credit risk than other loans, such as residential mortgage loans. Commercial loans, like other loans, are evaluated at the time of approval to determine the adequacy of repayment sources and collateral requirements. Collateral requirements vary to some degree among borrowers and depend on the borrower’s financial strength, the terms and amount of the loan, and collateral available to secure the loan. Credit risk results from the decreased ability or willingness to pay by a borrower. Credit risk also results when a liquidation of collateral occurs and there is a shortfall in collateral value as compared to a loans outstanding balance. For construction loans, inaccurate initial estimates of a property’s value could lead to a property having a value that is insufficient to satisfy full payment of the amount of funds advanced for t

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