UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from
____________ to ____________
Commission File Number 0-14412
Farmers Capital Bank Corporation
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(Exact name of registrant as specified in its charter)
Kentucky 61-1017851
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
P.O. Box 309, 202 West Main Street
Frankfort, Kentucky 40602
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 227-1600
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 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
7,558,137 shares outstanding at November 11, 1998
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TABLE OF CONTENTS
Part I - Financial Information Page No.
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Item 1 - Financial Statements
Unaudited Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 3
Unaudited Consolidated Statements of Income -
For the Three and Nine Months Ended
September 30, 1998 and September 30, 1997 4
Unaudited Consolidated Statements of Comprehensive Income -
For the Three and Nine Months Ended
September 30, 1998 and September 30, 1997 5
Unaudited Consolidated Statements of Cash Flows -
For the Nine Months Ended
September 30, 1998 and September 30, 1997 6
Unaudited Consolidated Statements of Changes in Shareholders' Equity -
For the Nine Months Ended
September 30, 1998 and September 30, 1997 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 17
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K 17
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
UNAUDITED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(In thousands, except share data) 1998 1997
- --------------------------------- ----------- -----------
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 80,266 $ 75,830
Interest bearing deposits in other banks 2,733 1,300
Federal funds sold and securities purchased
under agreements to resell 24,968 109,610
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Total cash and cash equivalents 107,967 186,740
Investment securities:
Available for sale 175,704 119,076
Held to maturity 75,740 95,686
------- -------
Total investment securities 251,444 214,762
Loans, net of unearned income 594,147 585,940
Allowance for loan losses (8,914) (9,114)
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Loans, net 585,233 576,826
Premises and equipment 24,481 21,214
Accrued interest receivable 8,442 7,805
Other assets 8,208 6,836
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Total assets $ 985,775 $ 1,014,183
======= =========
LIABILITIES
Deposits:
Noninterest bearing $ 145,535 $ 151,600
Interest bearing 656,111 683,376
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Total deposits 801,646 834,976
Other borrowed funds 51,090 53,655
Dividends payable 1,813 1,815
Accrued interest payable 2,161 1,956
Other liabilities 5,626 4,737
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Total liabilities 862,336 897,139
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock, par value $0.125 per share;
9,608,000 shares authorized; 7,563,437
and 7,562,440 shares issued and
outstanding at September 30, 1998 and
December 31, 1997, respectively 945 945
Capital surplus 9,120 8,894
Retained earnings 112,480 107,105
Accumulated other comprehensive income 894 100
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Total shareholders' equity 123,439 117,044
Total liabilities and shareholders' equity $ 985,775 $ 1,014,183
======= =========
See accompanying notes to consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30 September 30
(In thousands, except per share data) 1998 1997 1998 1997
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INTEREST INCOME
Interest and fees on loans $13,689 $ 13,369 $ 40,610 $ 39,341
Interest on investment securities:
Taxable 2,180 2,216 6,330 6,553
Nontaxable 916 783 2,600 2,327
Interest on deposits in other banks 50 30 136 79
Interest on federal funds sold and securities
purchased under agreements to resell 717 554 2,198 1,928
------ ------ ------ ------
Total interest income 17,552 16,952 51,874 50,228
INTEREST EXPENSE
Interest on deposits 6,961 6,410 20,396 19,392
Interest on other borrowed funds 495 465 1,497 1,070
----- ----- ------ ------
Total interest expense 7,456 6,875 21,893 20,462
------ ------ ------ ------
Net interest income 10,096 10,077 29,981 29,766
Provision for loan losses 216 407 650 1,493
------ ------ ------ ------
Net interest income after provision for loan losses 9,880 9,670 29,331 28,273
NONINTEREST INCOME
Service charges and fees on deposits 1,292 1,397 3,871 3,972
Other service charges, commissions, and fees 1,057 970 3,112 2,913
Data processing income 384 360 1,174 1,118
Trust income 255 240 860 779
Investment securities gains (losses) (40) 60
Gain on sale of loans 7 5 13 13
Other 152 114 440 548
------ ------ ------ ------
Total noninterest income 3,107 3,086 9,530 9,343
NONINTEREST EXPENSE
Salaries and employee benefits 4,159 4,104 12,459 11,862
Occupancy expense, net 536 515 1,569 1,504
Equipment expense 726 676 2,071 2,063
Data processing expense 188 282 736 770
Bank franchise tax 290 287 836 779
Other 1,965 1,931 5,973 5,615
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Total noninterest expense 7,864 7,795 23,644 22,593
------ ------ ------ ------
Income before income taxes 5,123 4,961 15,217 15,023
Income tax expense 1,417 1,499 4,195 4,385
------ ------ ------ ------
Net income $ 3,706 $ 3,462 $ 11,022 $ 10,638
===== ===== ====== ======
NET INCOME PER COMMON SHARE
Basic $ 0.49 $ 0.46 $ 1.46 $ 1.40
Diluted 0.48 0.46 1.44 1.40
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 7,556 7,562 7,557 7,575
Diluted 7,662 7,562 7,657 7,575
See accompanying notes to consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended Nine Months Ended
September 30 September 30
(In thousands) 1998 1997 1998 1997
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NET INCOME $ 3,706 $ 3,462 $ 11,022 $ 10,638
Other comprehensive income:
Unrealized holding gain on available for sale
securities arising during the period, net of tax
of $442, $212, $443, and $226, respectively 858 412 859 438
Reclassification adjustment for prior period
unrealized gain recognized during current period,
net of tax of $33 in 1998 (65)
----- ----- ------ ------
Net gain (loss) recognized in other
comprehensive income 858 412 794 438
----- ----- ------ ------
Comprehensive income $ 4,564 $ 3,874 $ 11,816 $ 11,076
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See accompanying notes to consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, (In thousands) 1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,022 $ 10,638
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,006 1,951
Net amortization of securities
premiums and discounts:
Available for sale 1
Held to maturity 125 53
Provision for loan losses 650 1,493
Mortgage loans originated for sale (12,332) (7,614)
Proceeds from sale of mortgage loans 11,957 7,704
Deferred income tax benefit (1)
Gain on sale of mortgage loans (13) (13)
Gain on sale of available for sale investment securities (60)
(Gain) loss on sale of fixed assets (1) 6
(Increase) decrease in accrued interest receivable (637) 136
Increase in other assets (2,143) (1,686)
Increase (decrease) in accrued interest payable 205 (187)
Increase (decrease) in other liabilities 889 (935)
------ ------
Net cash provided by operating activities 11,668 11,546
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity or call of investment securities:
Available for sale 95,313 91,923
Held to maturity 26,471 25,101
Proceeds from sale of available for sale investment securities 25,673 8,066
Purchase of investment securities:
Available for sale (176,351) (92,288)
Held to maturity (6,650) (14,731)
Loans originated for investment, net of principal collected (8,669) (18,552)
Purchase of premises and equipment (4,887) (3,302)
Proceeds from sale of equipment 11 5
------ ------
Net cash used in investing activities (49,089) (3,778)
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (33,330) (13,944)
Dividends paid (5,442) (4,666)
Purchase of common stock (215) (644)
Stock options exercised 200
Net (decrease) increase in other borrowed funds (2,565) 17,074
------ ------
Net cash used in by financing activities (41,352) (2,180)
------ ------
Net change in cash and cash equivalents (78,773) 5,588
Cash and cash equivalents at beginning of year 186,740 122,746
------- -------
Cash and cash equivalents at end of period 107,967 128,334
======= =======
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest 20,257 20,649
Income taxes 3,755 4,249
Cash dividend declared and unpaid 1,813 1,550
See accompanying notes to consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Total
(In thousands, except per share data) Common Stock Capital Retained Accumulated Other Shareholders'
Nine months ended September 30, 1998 and 1997 Shares Amount Surplus Earnings Comprehensive Income Equity
- --------------------------------------------- ------ ------ ------- -------- -------------------- ------
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Balance at December 31, 1996 7,594 $ 949 $8,931 $100,078 $(362) $109,596
Cash dividends declared, $.615 per share (4,658) (4,658)
Purchase of common stock (32) (4) (37) (603) (644)
Comprehensive income:
Net income 10,638 10,638
Other comprehensive income, net of tax:
Unrealized gain on available for sale securities,
net of reclassification adjustment 438 438
------
Comprehensive income 11,076
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Balance at September 30, 1997 7,562 $ 945 $8,894 $105,455 $ 76 $115,370
===== === ===== ======= === =======
Balance at December 31, 1997 7,562 $ 945 $8,894 $107,105 $ 100 $117,044
Cash dividends declared, $.72 per share (5,441) (5,441)
Purchase of common stock (7) (1) (8) (206) (215)
Stock options exercised, including related
tax benefits 8 1 234 235
Comprehensive income:
Net income 11,022 11,022
Other comprehensive income, net of tax:
Unrealized loss on available for sale securities,
net of reclassification adjustment 794 794
------
Comprehensive income 11,816
----- --- ----- ------- --- -------
Balance at September 30, 1998 7,563 $ 945 $9,120 $112,480 $ 894 $123,439
===== === ===== ======= === =======
See accompanying notes to consolidated financial statements.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Farmers Capital
Bank Corporation (the "Company"), a bank holding company, and its subsidiaries,
including its principal subsidiary, Farmers Bank & Capital Trust Company. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles 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
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 generally accepted
accounting principles 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, 1997.
2. RECLASSIFICATIONS
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 shareholders' equity as previously
reported.
3. ADOPTION OF NEW ACCOUNTING PRINCIPLES
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income and SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components. Comprehensive income is defined as the change in
equity (net assets) of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources. For the Company, this
includes net income and unrealized gains and losses on available for sale
investment securities. This Statement requires comprehensive income to be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The implementation of SFAS No. 130 did not have a
material impact on the Company's consolidated financial statements.
SFAS No. 131 changes the way public companies report information about segments
of their business in their annual financial statements and requires them to
report selected segment information in their quarterly report to shareholders.
This Statement requires that companies disclose segment data based on how
management makes decisions about allocating resources to segments and measuring
their performance. This Statement is effective in 1998. In the initial year of
application, this Statement is not required to be applied to interim periods.
The Company does not expect the implementation of this Statement to have a
material effect on the consolidated financial statements.
4. STOCK SPLIT
On January 26, 1998, the Company's Board of Directors approved a two-for-one
stock split of its common stock. The stock split was effective July 1, 1998 for
holders of record on June 1, 1998. The stock split increased the Company's
outstanding common shares from 3,777,620 to 7,555,240 shares on July 1, 1998.
Additionally, all references in the Consolidated Financial Statements,
Footnotes, and Supplementary data to the number of shares, per-share amounts,
and market prices of the Company's common stock have been restated to give
retroactive recognition to the stock split.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------- ----------------------------------------------------------
of Operations
-------------
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties. 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);
competition for the Company's customers from other providers of financial
services; government legislation and regulation (which changes from time to time
and over which the Company has no control); changes in interest rates; material
unforeseen changes in the liquidity, results of operations, or financial
condition of the Company's customers; and other risks 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.
RESULTS OF OPERATIONS
Third Quarter 1998 vs. Third Quarter 1997
-----------------------------------------
The Company reported earnings of $3.7 million, or $.48 per diluted share for the
third quarter of 1998 compared to earnings of $3.5 million, or $.46 per diluted
share for the third quarter of 1997.
Return on average assets was 1.54% for the third quarter of 1998, compared to
1.53% reported for the same period of 1997. Return on average equity was 12.10%
for the third quarter of 1998, an increase from 12.06% during the same period of
1997.
Net Interest Income
- -------------------
Net interest income totaled $10.1 million for the third quarter of 1998,
unchanged from the third quarter of 1997. Interest income for the third quarter
of 1998 increased $600 thousand to $17.6 million compared to same quarter of
1997. Interest expense totaled $7.5 million for the current quarter, and
increase of $581 thousand over the same quarter of the prior year. Interest and
fees on loans, the largest component of interest income, increased $320 thousand
or 2.4% to $13.7 million for the current quarter. The increase in interest and
fees on loans in primarily due to a $24.9 million increase in average loans.
Interest on taxable securities decreased $36 thousand for the current quarter
due primarily to a slight decrease in rate. Interest on nontaxable securities
increased $133 thousand or 17.0% due to a $12.8 million or 19.4% increase in
volume. Interest on short term investments, including time deposits with banks,
federal funds sold, and securities purchased under agreements to resell,
increased $183 thousand in the current quarter due to an increase in both volume
and rate.
Interest expense on deposits increased $551 thousand or 8.6%. Interest expense
on savings and time deposits account for $460 of the increase, which is
primarily attributed to a $26.2 million or 5.8% increase in these deposits.
Interest expense on interest bearing checking accounts increased $91 thousand or
8.6% due to slight increases to both volume and rate. Interest expense on other
borrowed funds increased $30 thousand or 6.5% due primarily to increased volume.
The net interest margin (net interest income as a percentage of average earning
assets), on a tax equivalent basis, decreased to 4.85% during the third quarter
of 1998 compared to 5.09% in the third quarter of 1997. The spread between rates
earned and paid decreased to 4.03% compared to 4.30% in the third quarter of
1997. The decrease in both net interest margin and the spread between rates
earned and rates paid are attributed to a general decrease of rates on earning
assets and slight increases in rates paid to fund earning assets.
Noninterest Income
- ------------------
Noninterest income of $3.1 million remained unchanged from the third quarter of
1997. Service charges and fees on deposits of $1.3 million decreased $105
thousand, or 7.5% from the third quarter of 1997. Other service charges,
commissions, and fees increased $87 thousand, or 9.0% to $1.1 million from the
third quarter of 1997. Data processing income increased 6.7% to $384 thousand
for the third quarter of 1998. Trust fees increased $15 thousand, or 6.3% to
$255 thousand. Other noninterest income remained unchanged at $119 thousand.
Noninterest Expense
- -------------------
Total noninterest expenses increased $69 thousand or less than 1% from the third
quarter of 1997 to $7.9 million. Salaries and employee benefits, the largest
component of noninterest expense, increased $55 thousand, or 1.3%. Occupancy
expense, net of rental income, increased $21 thousand to $536 thousand.
Equipment expense increased $50 thousand, or 7.4%. Data processing expense
decreased 33% from $282 thousand to $188 thousand for the third quarter of 1998.
This decrease is primarily attributed to a reduction in credit card interchange
expense. Bank franchise tax was relatively unchanged at $290 thousand. Other
noninterest expense increased from $34 thousand to $2.0 million.
Income Taxes
- ------------
Income tax expense for the third quarter of 1998 was $1.4 million, a decrease of
$82 thousand from the third quarter of 1997. The third quarter 1998 effective
tax rate was 27.7%, a decrease from 30.2% in the third quarter of 1997. The
decrease in the effective tax rate is primarily due to increases in tax free
interest income and tax credits.
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First nine months of 1998
-------------------------
Net income for the nine months ended September 30, 1998 was $11.0 million, or
$1.44 per diluted share compared to earnings of $10.6 million, or $1.40 per
diluted share for the same period in 1997. Net interest income increased
approximately 1.0% to $30.0 million. Noninterest income increased 2.0% to $9.5
million and the provision for loan losses decreased $843 thousand, or 56.5%.
These increases have been offset by an increase in noninterest expense of $1.1
million, of which $597 thousand relates to salaries and employee benefits.
Return on average assets was 1.56% for the nine months ended September 30, 1998,
a decrease of 1 basis point from the same period in 1997. Return on average
equity was 12.37%, a decrease from 12.72% in the first nine months of 1997.
Net Interest Income
- -------------------
Net interest income totaled $30.0 million for the first nine months of 1998, an
increase of $215 thousand or approximately 1% from the first nine months of
1997. Interest income for the period increased $1.6 million to $51.9 million
compared to same period of 1997. Interest expense totaled $21.9 million for the
current nine month period, and increase of $1.4 million over the same period of
the prior year. Interest and fees on loans, the largest component of interest
income, increased $1.3 million or 3.2% to $40.6 million for the current period.
The increase in interest and fees on loans in primarily due to a $23.3 million
increase in average loans. Interest on taxable securities decreased $223
thousand for the current period due primarily to a 3.9% decrease in volume.
Interest on nontaxable securities increased $273 thousand or 11.7% due primarily
to a $10.8 million or 16.4% increase in volume. Interest on short term
investments, including time deposits with banks, federal funds sold, and
securities purchased under agreements to resell, increased $327 thousand in the
current period due primarily to a 12.3% increase in volume.
Interest expense on deposits increased $1.0 million or 5.2%. Interest expense on
savings accounts increased $376 thousand or 11.3%. This increase is attributable
to a combination of a $5.8 million increase in volume and approximately a 3
basis point increase in rates. Interest expense on time deposits increased $465
thousand or 3.6%. This increase is due primarily to an 11 basis point increase
in rates and a slight increase in volume. Interest expense on interest bearing
checking accounts increased $163 thousand or 5.2% due to slight increases to
both volume and rate. Interest expense on other borrowed funds increased $427
thousand or 39.9% due primarily to a $6.2 million or 23.1% increase in
securities sold under agreement to repurchase. Slight increases in rates paid
also contributed to the increase.
Net interest margin on a tax equivalent basis decreased to 4.90% during the
first nine months of 1998 compared to 5.05% for the same period of 1997. The
spread between rates earned and paid decreased from 4.29% in 1997 to 4.08% in
the current period. The decrease in both net interest margin and the spread
between rates earned and rates paid are attributed to a general decrease of
rates on earning assets and slight increases in rates paid to fund earning
assets.
Noninterest Income
- ------------------
Total noninterest income increased $187 thousand, or 2.0% for the first nine
months of 1998 compared to the same period in 1997. Service charges and fees on
deposits decreased $101 thousand to $3.9 million. Other service charges,
commissions, and fees increased 6.8% to $3.1 million. Data processing fees
increased 5.0% to $1.2 million. Trust fees increased 10.4% to $860 thousand. The
Company recorded gains on the sale of available for sale investment securities
of $60 thousand. Other noninterest income decreased by $108 thousand in 1998
compared to 1997. This is primarily attributed to a recovery of prior year legal
expenses of $189 thousand recorded in 1997. The recovery was a result of an
insurance claim filed by the Company's Farmers Bank & Trust Company, Georgetown
subsidiary and relates to that case as described in the Company's 1997 Form
10-K.
Noninterest Expense
- -------------------
Total noninterest expense increased $1.1 million, or 4.7% from the first nine
months of 1997 to $23.6 million. Salaries and employee benefits, the largest
component of noninterest expense, increased $597 thousand, or 5.0%. Occupancy
expense, net of rental income, increased 4.3% to $1.6 million. These increases
are partially attributed to the Company's ongoing efforts to expand into new
markets. Equipment expense increased $8 thousand, or less than 1%. Data
processing expense decreased 4.4% to $736 thousand. This decrease is primarily
attributable to a decrease in credit card interchange and processing during the
third quarter of 1998. Bank franchise tax expense increased $57 thousand, or
7.3%. Other noninterest expense increased $358 thousand or 6.4%. The largest
increase in other noninterest expense was in correspondent bank fees, which rose
$165 thousand, or 27.3%. This increase is attributable to increased activity in
the Company's role as custodian for various accounts of the Commonwealth of
Kentucky in Frankfort. Net Other Real Estate Owned expense also contributed to
the increase in other noninterest expense by increasing $52 thousand.
Income Taxes
- ------------
Income tax expense for the first nine months of 1998 was $4.2 million compared
to $4.4 million for the same period in 1997. The effective tax rate was 27.6%
for the first nine months of 1998, down from 29.2% in the prior year. The
decrease in the effective tax rate is primarily due to increases in tax free
interest income and tax credits.
FINANCIAL CONDITION
Total assets were $986 million on September 30, 1998, a decrease of 2.8% from
December 31, 1997. The fluctuation in total assets is primarily due to the
relationship between the Company's lead bank, Farmers Bank & Capital Trust Co.
and the Commonwealth of Kentucky. Farmers Bank provides various services to
state agencies of the Commonwealth of Kentucky. As the depository for the
Commonwealth, these agencies issue checks drawn on Farmers Bank, including
paychecks and state income tax refunds. Farmers Bank also processes vouchers for
the WIC (Women, Infants and Children) program for the Cabinet for Human
Resources. The Bank's investment department provides services to both the
Kentucky Retirement and Teacher's Retirement systems. As the depository for the
Commonwealth, large fluctuations in deposits in the form of uncollected funds
are likely to occur on a daily basis. On December 31, 1997, Farmers Bank held a
significant amount of deposits for the Commonwealth, which were subsequently
reduced shortly after year end. Assets averaged $945 million for the first nine
months of 1998, an increase of $40 million, or 4.4% from year end 1997.
Loans
- -----
Loans, net of unearned income, increased $8.2 million, or 1.4% from December 31,
1997 to $594 million. On average, loans represented 68.3% of earning assets
compared to 68.7% for year end 1997. As loan demand fluctuates, the available
funds are redirected between either temporary investments or investment
securities.
<PAGE>
Allowance for Loan Losses
- -------------------------
The provision for loan losses decreased $843 thousand or 56.5% compared to the
first nine months 1997. The Company had net charge-offs of $850 thousand in the
first nine months of 1998 compared to net charge-offs of $1.2 million in the
same period of 1997. The allowance for loan losses was 1.50% of net loans at
September 30, 1998, a decrease of 6 basis points from year end 1997. Management
continues to emphasize collection efforts and evaluation of risks within the
portfolio.
Nonperforming Assets
- --------------------
Nonperforming assets, consisting of nonaccrual loans, restructured loans, loans
past due ninety days or more on which interest in still accruing, other real
estate owned, and other foreclosed assets, totaled $7.3 million on September 30,
1998, an increase of $685 thousand or 10.3% from year end 1997. The increase is
primarily attributed to a $902 thousand increase in other real estate owned,
which had a balance of $29 thousand at year end. Nonperforming assets to total
equity increased slightly from 5.7% at year end 1997 to 5.9% at September 30,
1998. Nonperforming loans as a percentage of net loans was 1.1% at September 30,
1998, unchanged from year end 1997.
Temporary Investments
- ---------------------
Time deposits with banks, federal funds sold and securities purchased under
agreements to resell averaged $55.6 million, an increase of $7.9 million, or
16.6% from year end 1997.
Investment Securities
- ---------------------
Investment securities were $251 million on September 30, 1998, an increase of
$36.7 million, or 17.1% from year end 1997. Available for sale and held to
maturity securities were $175 and $76 million, respectively. Investment
securities averaged $216 million for the first nine months of 1998, an increase
of $6.5 million, or 3.1% from year end 1997. The Company had a net unrealized
gain on securities available for sale, net of taxes, of $894 thousand on
September 30, 1998, as compared to a net unrealized gain of $100 thousand on
December 31, 1997.
Deposits
- --------
Total deposits decreased $33 million, or 4.0%, from year end 1997 to $802
million. This fluctuation is primarily due to the relationship between the
Company's lead bank and the Commonwealth of Kentucky, as previously described
under the caption "FINANCIAL CONDITION". Deposits averaged $780 million, an
increase of $26.3 million, or 3.5% from year end 1997.
Borrowed Funds
- --------------
Borrowed funds totaled $51.1 million, a decrease of $2.6 million, or 4.8% from
year end 1997. This decrease is due primarily to repurchase agreements entered
into with the Commonwealth of Kentucky. The fluctuations are due to the
relationship with the Commonwealth of Kentucky as described under the caption
"FINANCIAL CONDITION". Borrowed funds averaged $37 million, an increase of $6.0
million, or 19.1%.
LIQUIDITY
The liquidity of the Parent Company is primarily affected by the receipt of
dividends from its subsidiary banks and cash balances maintained. As of
September 30, 1998, the Company's subsidiary banks could pay up to $5.7 million
in dividends to the Company without obtaining prior approval from regulatory
agencies. As of September 30, 1998, the Parent Company had cash balances of
approximately $37.0 million.
The Company's objective as it relates to liquidity is to insure that 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 banks have several sources of funds available on a daily basis
which can be used for liquidity purposes.
These sources of funds are:
1. The banks' core deposits consisting of both business and nonbusiness deposits
2. Cash flow generated by repayment of loan principal and interest
3. Federal funds purchased and securities sold under agreements to repurchase
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.
Liquid assets consist of cash and due from banks, short-term investments, and
securities available for sale. At September 30, 1998, such assets totaled $284
million, a decrease of $22 million from year end 1997. The decrease in liquid
assets was primarily due to the decrease of the balances maintained by the
Commonwealth of Kentucky as described in preceding sections of this report.
Fluctuations such as this are normal and are anticipated by Management in
analyzing the Company's ongoing liquidity and funding needs.
CAPITAL RESOURCES
Shareholders' equity was $123 million on September 30, 1998, increasing $6.4
million from year end 1997. The Company purchased 7,200 shares of its
outstanding common stock during the first nine months of 1998 for a total cost
of $215 thousand. Dividends of $5.4 million, or $.72 per share, were declared
during the first nine months of 1998, an increase of 17.1% per share compared to
the prior year. The Company issued approximately 8,200 shares of common stock
during the third quarter pursuant to its non-qualified employee stock option
plan.
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, 1998, the
regulatory minimums and the regulatory standard for a "well capitalized"
institution are as follows:
Farmers Capital Regulatory Well
Bank Corporation Minimum Capitalized
Tier 1 risk based 19.05% 4.00% 6.00%
Total risk based 20.30% 8.00% 10.00%
Leverage 12.83% 4.00% 5.00%
The capital ratios of all the subsidiary banks, on an individual basis, were in
excess of the applicable minimum regulatory capital ratio requirements at
September 30, 1998.
<PAGE>
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
computer systems that use two digits rather than four to define the applicable
year. As a result of methods used by earlier programmers, many computer programs
and other equipment using embedded technology, such as microchips, are unable to
distinguish the year 2000 from the year 1900. If left uncorrected this problem
could result in a major system failure, miscalculations, and other disruptions
of operations. A number of computer systems which are affected by the Year 2000
are utilized by the Company to operate its day-to-day business. Most of these
systems use software developed by and licensed from third party software
vendors.
FCB Services, the Company's data processing subsidiary, provides essential
support for virtually all of the Company's subsidiaries as well as providing
data processing services to unrelated third party banks. Therefore, it is vital
that the Year 2000 issues are successfully resolved in a timely matter. Failure
to appropriately examine and correct systems that are critical to the Company's
operations could have a material adverse effect on its operations and financial
performance. The Company's plan for achieving compliance is not only focused on
its own data processing systems, but also of the compliance of its customers. In
particular, commercial loan customers that are not Year 2000 compliant could
become a repayment risk. Therefore, the Company is informing its significant
commercial loan customers of the need to become Year 2000 compliant. The
Company's initial assessment of commercial loan customers indicates no material
impact to the Company. The Company will continue to monitor this risk on an
ongoing basis.
The Company has formed and oversight committee to coordinate the Year 2000
compliance process. This process has been divided into five phases as prescribed
by regulatory guidelines. These phases include awareness, assessment,
renovation, validation, and implementation. The awareness, assessment, and
renovation phases generally include defining the Year 2000 problem and gaining
executive level support for the resources necessary to perform compliance tasks;
establishing a team to develop an overall strategy; assessing the size and
complexity of the problem and detailing the magnitude of the effort necessary to
address the issues, including non information technology systems that are
dependent on embedded microchips; and addressing the need for computer code
enhancements, hardware and software upgrades, system replacements, vendor
certification and other associated changes. These first three phases are
substantially complete. The primary results of the first three phases are as
follows: procedures were established to verify that all new purchases are Year
2000 compliant; the assessment of mission critical applications was completed in
September, 1997; and a new Year 2000 compliant mainframe computer was placed
into service in May, 1998.
The validation and implementation phases consist primarily with testing the
changes made to any hardware or software component and to the certification of
Year 2000 compliance. In addition to testing upgraded components, connections
with other systems must be verified, and all changes should be accepted by
internal and external users. As with other phases, the Company will be in
ongoing discussions with its vendors and customers regarding the success of
their validation efforts. However, the Company cannot control the success of
those efforts. The validation and implementation phases of the Company's plan
are in various stages of completion. The mission critical systems are currently
being tested. These tests are expected to be completed by the end of 1998.
Currently, the Company believes the testing of its mission critical systems will
result in satisfactory Year 2000 compliance ratings. Testing of the remaining
non-critical systems are expected to be completed during the first quarter of
1999.
The Company has recently acquired, installed, and tested a new Year 2000
compliant mainframe computer. Also, a Year 2000 compliant version of the data
processing software is installed and functioning appropriately. However, the
Company continues to maintain its business continuation plans, for which there
are several options in place for partial failure. These plans generally include,
but are not limited to, replacing electronic applications with manual processes.
For a system wide failure, the Company maintains a hot site agreement with
SunGard Recovery Services, Inc., a Pennsylvania Corporation for disaster and
recovery services. This agreement, which has been in place since 1990 and tested
twice a year, provides replacement mainframe and software for the Company to
process with in Philadelphia, Pennsylvania.
The Company believes that expenditures required to bring its systems into
compliance will not have a material adverse effect on the Company's performance.
To date, substantially all of the expenditures have been absorbed in routine
annual maintenance contracts and have not been incremental costs to the Company.
This includes the Company's acquisition and installation of the new mainframe
computer for approximately $1.5 million in 1998 primarily via a capital lease,
which is being financed and depreciated over a five year period. Other related
costs have been negligible. The primary reason for acquiring the new mainframe
was to replace an older, less effective mainframe and to increase the Company's
data processing capacity and to take advantage of newer, state of the art
technology. The mainframe acquisition and related costs were anticipated by the
Company, and were not incurred specifically to address Year 2000 compliance. The
Company believes that future expenditures relating specifically to Year 2000
compliance will not be material. However, the Year 2000 problem is pervasive and
complex and can potentially affect any computer process. Therefore, no assurance
can be given that Year 2000 compliance can be achieved without additional
unanticipated expenditures and uncertainties that might affect future operating
results. The Company's Year 2000 efforts are ongoing and its overall plan,
including contingency planning, will continue to evolve as new information
becomes available.
EFFECT OF IMPLEMENTING RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT
BENEFITS. This Statement revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. It standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures
required in SFAS No. 87, SFAS No.
88 and SFAS No. 106.
This Statement is effective for fiscal years beginning after December 15, 1997,
and requires restatement of disclosures in earlier periods. The Company does not
expect the implementation of this Statement to have a material effect on the
consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This Statement requires companies to
recognize derivatives on the balance sheet and measure them at fair value. Gains
or losses resulting in the changes in fair value of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The key criteria for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. If the derivative is highly effective, but not perfectly
effective and does not exactly offset the changes in fair value or cash flows of
the hedged item, the ineffective portion must be recognized in income at the
same time the change in fair value of the derivative is recognized on the
balance sheet. This Statement amends SFAS No. 52 and SFAS No. 107, and
supersedes SFAS No. 80, SFAS No. 105 and SFAS No. 119.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application should be as of the beginning of an
entity's fiscal quarter. Early application of this Statement is permitted only
as of the beginning of any fiscal quarter that begins after issuance of this
Statement. The Company is currently evaluating the merits of adopting this
Statement before the mandatory date. The Company does not expect the
implementation of this Statement to have a material effect on the consolidated
financial statements.
In October 1998, the FASB issued SFAS No. 134, ACCOUNTING FOR MORTGAGE-BACKED
SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY
A MORTGAGE BANKING ENTERPRISE. This Statement changes the way mortgage banking
enterprises (and enterprises that conduct operations that are substantially
similar to the primary operations of a mortgage banking enterprise) account for
certain securities and other interests they retain after securitizing mortgage
loans that were held for sale. Prior to SFAS No. 134, mortgage banking
enterprises were required to classify all mortgage-backed securities retained
after the securitization of mortgage loans held for sale as trading. This
classification resulted in recognizing unrealized gains and losses currently in
earnings. SFAS No. 134 now requires mortgage banking enterprises to classify
mortgage-backed securities retained after the securitization of mortgage loans
held for sale based on its ability and intent to sell or hold those investments.
This treatment conforms the accounting treatment for securities retained after
securitization of mortgage loans by mortgage banking enterprises to the
accounting treatment for securities retained after the securitization of other
types of assets by a nonmortgage banking enterprise. This Statement amends SFAS
No. 65, SFAS No. 115, SFAS No. 124, and SFAS No. 133.
This Statement is effective for the first fiscal quarter beginning after
December 15, 1998. Early application is permitted as of the issuance of the
Statement. The Company does not expect the implementation of this Statement to
have a material impact on the consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
There have been no material changes in the Company's market risk from December
31, 1997. For information regarding the Company's market risk, refer to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a) List of Exhibits
----------------
11 Statement re computation of per share earnings
27 Financial data schedule (for SEC use only)
b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the fiscal quarter.
However, on November 12, 1998, the Company filed a report on Form 8-K
pursuant to Item 5 of that Form announcing the Company's plan to
purchase up to 400,000 shares of its outstanding common stock to be
used for general corporate purposes. No financial statements were filed
as a part of that Form.
<PAGE>
SIGNATURES
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: 11/12/98 /s/ Charles S. Boyd
-------- -------------------
Charles Scott Boyd,
President and CEO (Principal Executive Officer)
Date: 11/12/98 /s/ C. Douglas Carpenter
-------- ------------------------
Cecil Douglas Carpenter
Vice President and CFO (Principal Financial
and Accounting Officer)
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11
Statement re computation of per share earnings
----------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 1998 1997 1998 1997
- ------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income, basic and diluted $3,706 $3,462 $11,022 $10,638
====== ====== ======= =======
Average shares outstanding 7,556 7,562 7,557 7,575
Effect of dilutive stock options 106 100
------ ------ ------- ------
Average diluted shares outstanding 7,662 7,562 7,657 7,575
====== ====== ======= =======
Net income per share, basic $ .49 $ .46 $ 1.46 $ 1.40
Net income per share, diluted .48 .46 1.44 1.40
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
September 30, 1998 financial statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 80,266
<INT-BEARING-DEPOSITS> 2,733
<FED-FUNDS-SOLD> 24,968
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 175,704
<INVESTMENTS-CARRYING> 75,740
<INVESTMENTS-MARKET> 77,254
<LOANS> 594,147
<ALLOWANCE> 8,914
<TOTAL-ASSETS> 985,775
<DEPOSITS> 801,646
<SHORT-TERM> 47,218
<LIABILITIES-OTHER> 9,600
<LONG-TERM> 3,872
0
0
<COMMON> 945
<OTHER-SE> 122,494
<TOTAL-LIABILITIES-AND-EQUITY> 985,775
<INTEREST-LOAN> 40,610
<INTEREST-INVEST> 8,930
<INTEREST-OTHER> 2,334
<INTEREST-TOTAL> 51,874
<INTEREST-DEPOSIT> 20,396
<INTEREST-EXPENSE> 21,893
<INTEREST-INCOME-NET> 29,981
<LOAN-LOSSES> 650
<SECURITIES-GAINS> 60
<EXPENSE-OTHER> 23,644
<INCOME-PRETAX> 15,217
<INCOME-PRE-EXTRAORDINARY> 15,217
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,022
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.44
<YIELD-ACTUAL> 4.90
<LOANS-NON> 2,654
<LOANS-PAST> 2,579
<LOANS-TROUBLED> 1,140
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,114
<CHARGE-OFFS> 1,260
<RECOVERIES> 410
<ALLOWANCE-CLOSE> 8,914
<ALLOWANCE-DOMESTIC> 8,914
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
