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, 1999
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
(Exact name of registrant as specified in its charter)
Kentucky 61-1017851
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(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
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(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
7,460,141 shares outstanding at November 8, 1999
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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, 1999 and December 31, 1998 3
Unaudited Consolidated Statements of Income -
For the Three and Nine Months Ended
September 30, 1999 and September 30, 1998 4
Unaudited Consolidated Statements of Comprehensive Income -
For the Three and Nine Months Ended
September 30, 1999 and September 30, 1998 5
Unaudited Consolidated Statements of Cash Flows -
For the Nine Months Ended
September 30, 1999 and September 30, 1998 6
Unaudited Consolidated Statements of Changes in Shareholders' Equity -
For the Nine Months Ended
September 30, 1999 and September 30, 1998 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 16
Part II - Other Information
Item 1 - Legal Proceedings 17
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
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September 30, December 31,
(In thousands, except share data) 1999 1998
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ASSETS
Cash and cash equivalents:
Cash and due from banks $74,513 $38,385
Interest bearing deposits in other banks 1,338 1,914
Federal funds sold and securities purchased
under agreements to resell 22,321 51,535
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Total cash and cash equivalents 98,172 91,834
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Investment securities:
Available for sale 174,173 191,487
Held to maturity 63,972 71,369
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Total investment securities 238,145 262,856
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Loans, net of unearned income 631,622 604,683
Allowance for loan losses (9,475) (9,048)
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Loans, net 622,147 595,635
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Premises and equipment 24,843 24,861
Other assets 17,643 17,152
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Total assets $1,000,950 $992,338
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LIABILITIES
Deposits:
Noninterest bearing $162,148 $123,741
Interest bearing 664,032 706,260
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Total deposits 826,180 830,001
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Securities sold under agreements to repurchase 37,838 26,324
Other borrowed funds 3,589 3,926
Dividends payable 2,089 2,113
Other liabilities 5,853 6,135
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Total liabilities 875,549 868,499
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Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock, par value $0.125 per share;
9,608,000 shares authorized; 7,460,541
and 7,520,465 shares issued and
outstanding at September 30, 1999 and
December 31, 1998 respectively 933 940
Capital surplus 11,380 10,520
Retained earnings 114,424 112,010
Accumulated other comprehensive (loss) income (1,336) 369
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Total shareholders' equity 125,401 123,839
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Total liabilities and shareholders' equity $1,000,950 $992,338
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See accompanying notes to consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
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Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 1999 1998 1999 1998
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INTEREST INCOME
Interest and fees on loans $13,748 $13,689 $40,398 $40,610
Interest on investment securities:
Taxable 2,363 2,180 7,018 6,330
Nontaxable 944 916 2,863 2,600
Interest on deposits in other banks 19 50 56 136
Interest on federal funds sold and securities
purchased under agreements to resell 275 717 1,136 2,198
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Total interest income 17,349 17,552 51,471 51,874
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INTEREST EXPENSE
Interest on deposits 6,170 6,961 18,757 20,396
Interest on other borrowed funds 528 495 1,488 1,497
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Total interest expense 6,698 7,456 20,245 21,893
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Net interest income 10,651 10,096 31,226 29,981
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Provision for loan losses 506 216 1,141 650
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Net interest income after provision
for loan losses 10,145 9,880 30,085 29,331
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NONINTEREST INCOME
Service charges and fees on deposits 1,333 1,292 3,883 3,871
Other service charges, commissions, and fees 856 1,057 2,922 3,112
Data processing income 350 384 1,064 1,174
Trust income 327 255 973 860
Investment securities gains (losses) (40) 49 60
Gain (loss) on sale of loans 7 (49) 13
Other 110 152 341 440
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Total noninterest income 2,976 3,107 9,183 9,530
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NONINTEREST EXPENSE
Salaries and employee benefits 4,393 4,430 13,311 13,600
Occupancy expense, net 548 536 1,659 1,569
Equipment expense 747 726 2,206 2,071
Data processing expense 78 188 427 736
Bank franchise tax 283 290 809 836
Other 1,883 1,965 5,952 5,973
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Total noninterest expense 7,932 8,135 24,364 24,785
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Income before income taxes 5,189 4,852 14,904 14,076
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Income tax expense 1,421 1,322 3,965 3,796
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Net income $3,768 $3,530 $10,939 $10,280
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NET INCOME PER COMMON SHARE
Basic and diluted $0.50 $0.47 $1.46 $1.36
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WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 7,458 7,556 7,487 7,557
Diluted 7,475 7,589 7,487 7,572
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See accompanying notes to consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 1999 1998 1999 1998
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NET INCOME $3,768 $3,530 $10,939 $10,280
Other comprehensive income (loss):
Unrealized holding gain (loss) on
available for sale securities arising
during the period, net of tax of $53,
$442, $842, and $443, respectively 103 858 (1,634) 859
Reclassification adjustment for prior period
unrealized gain recognized during
current period, net of tax $37 and $33 (71) (65)
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Other comprehensive income (loss) 103 858 (1,705) 794
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COMPREHENSIVE INCOME $3,871 $4,388 $9,234 $11,074
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See accompanying notes to consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine months ended September 30, (In thousands) 1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $10,939 $10,280
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,199 2,006
Net amortization of securities premiums and discounts:
Available for sale (111) 1
Held to maturity 20 125
Provision for loan losses 1,141 650
Noncash compensation expense 805 1,141
Mortgage loans originated for sale (9,534) (12,332)
Proceeds from sale of mortgage loans 12,073 11,957
Deferred income tax expense (benefit) 163 (400)
Loss (gain) on sale of mortgage loans 49 (13)
Gain on sale of available for sale investment securities (49) (60)
Gain on sale of fixed assets (7) (1)
Increase in accrued interest receivable (885) (637)
Decrease (increase) in other assets 451 (2,143)
(Decrease) increase in accrued interest payable (96) 205
Increase in other liabilities 80 889
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Net cash provided by operating activities 17,238 11,668
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities:
Available for sale 112,509 95,313
Held to maturity 7,377 26,471
Proceeds from sale of available for sale investment securities 13,397 25,673
Purchase of investment securities:
Available for sale (111,015) (176,351)
Held to maturity (6,650)
Loans originated for investment, net of principal collected (30,241) (8,669)
Purchase of premises and equipment (1,997) (4,887)
Proceeds from sale of equipment 215 11
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Net cash used in investing activities (9,755) (49,089)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (3,821) (33,330)
Dividends paid (6,312) (5,442)
Purchase of common stock (2,322) (215)
Stock options exercised 133 200
Net increase (decrease) in other borrowed funds 11,177 (2,565)
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Net cash used in financing activities (1,145) (41,352)
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Net increase (decrease) in cash and cash equivalents 6,338 (78,773)
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Cash and cash equivalents at beginning of year 91,834 186,740
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Cash and cash equivalents at end of period $98,172 $107,967
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SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $20,341 $20,257
Income taxes 4,325 3,755
Cash dividend declared and unpaid 2,089 1,813
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See accompanying notes to consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
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(In thousands, except per share data) Accumulated Total
Nine months ended September 30, 1999 Common Stock Capital Retained Other Comprehensive Shareholders'
and 1998 Shares Amount Surplus Earnings Income (loss) Equity
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Balance at December 31, 1998 7,520 $940 $10,520 $112,010 $ 369 $123,839
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Net income 10,939 10,939
Other comprehensive loss (1,705) (1,705)
Cash dividends declared, $.84 per share (6,288) (6,288)
Purchase of common stock (64) (8) (77) (2,237) (2,322)
Stock options exercised 5 1 132 133
Effect of noncash compensation
attributed to stock option grants 805 805
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Balance at September 30, 1999 7,461 $933 $11,380 $114,424 $(1,336) $125,401
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Balance at December 31, 1997 7,562 $945 $8,894 $107,105 $ 100 $117,044
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Net income 10,280 10,280
Other comprehensive income 794 794
Cash dividends declared, $.72 per share (5,441) (5,441)
Purchase of common stock (7) (1) (8) (206) (215)
Stock options exercised 8 1 234 235
Effect of noncash compensation
attributed to stock option grants 1,141 1,141
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Balance at September 30, 1998 7,563 $945 $10,261 $111,738 $ 894 $123,838
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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, 1998.
2. RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements of prior periods to conform to the current period presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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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 1999 vs. Third Quarter 1998
-----------------------------------------
The Company reported net income of $3.8 million or $.50 per diluted share for
the third quarter of 1999 compared to net income of $3.5 million or $.47 per
diluted share for the third quarter of 1998. The increase in net income for the
quarter is primarily attributed to an increase in net interest income of $555
thousand or 5.5%.
Return on average assets was 1.52% for the third quarter of 1999 compared to
1.46% reported for the same period of 1998. Return on average equity was 12.06%
for the third quarter of 1999, an increase of 53 basis points from 11.53% during
the same period of 1998.
Net Interest Income
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Net interest income totaled $10.7 million for the third quarter of 1999, an
increase of $555 thousand or 5.5% over the third quarter of 1998. Total interest
income for the third quarter of 1999 was $17.3 million, a decrease of $203
thousand or 1.2% compared to same quarter of 1998. The decrease is due to a 27
basis point decrease in the average rate earned on earning assets, which offset
a $21 million or 2.4% increase in the average balance of earning assets.
Interest expense totaled $6.7 million for the current quarter, a decrease of
$758 thousand or 10.2% compared to the same quarter of the prior year. The
decrease in interest expense is primarily due to a 48 basis point decrease in
the average rate paid on interest bearing liabilities.
Interest and fees on loans remained relatively unchanged at $13.7 million
despite a $31 million or 5.2% increase in average loans. The increase in average
loans was offset by a 42 basis point decrease in the average rate earned on
loans. Interest on taxable securities increased $183 thousand to $2.4 million. A
16 basis point decrease in the average rate earned was offset by a $16.3 million
or 11.3% increase in the average balance. Interest on nontaxable securities
increased $28 thousand or 3.1% due to a slight increase in the average balance.
Interest on short term investments, including time deposits with banks, federal
funds sold, and securities purchased under agreements to resell decreased $473
thousand or 62% due primarily to a $30.7million or 57% decrease in average
balances.
The $758 thousand decrease in total interest expense was primarily due to a $518
thousand or 11.3% decrease in interest expense on time deposits. This decrease
resulted from a 41 basis point decrease in the average rate paid and a $13.7
million or 4.1% decrease in the average balance. Interest expense on demand
deposits decreased $154 thousand or 13.4% despite an $11.4 million or 6.2%
increase in the average balance. The decrease in interest expense is a result of
a 46 basis point decrease in the average rate paid. Interest expense on savings
deposits also declined $118 thousand or 9.6% primarily due to a decrease in the
average rate paid of 46 basis points.
The net interest margin, on a tax equivalent basis, increased to 4.99% during
the third quarter of 1999 compared to 4.85% in the third quarter of 1998. The
spread between rates earned and paid increased 20 basis points to 4.23% for the
current quarter. The increases in margin and spread are primarily attributed to
a general decrease in the cost of interest bearing liabilities.
Noninterest Income
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Noninterest income was $3.0 million for the current quarter, a decrease of $131
thousand or 4.2% from the same quarter last year. Service charges and fees on
deposits increased 3.2% to $1.3 million. Other service charges, commissions, and
fees declined $201 thousand or 19.0% to $856 thousand. The decrease is due
primarily to a $127 thousand decrease in credit card merchant discount fees and
a $79 thousand decrease in custodial and safekeeping fees from services related
to the Commonwealth of Kentucky. Data processing fees decreased $34 thousand or
8.9% due primarily to decreases in ATM authorization fees of $45 thousand. Trust
income improved $72 thousand or 28.2%. Other noninterest income remained
relatively unchanged and totaled $110 thousand.
Noninterest Expense
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Noninterest expenses decreased $203 thousand or 2.5% from the third quarter of
1998 to $7.9 million. Salaries and employee benefits remained unchanged at $4.4
million. Occupancy expense, net of rental income, increased 2.2% or $12 thousand
to $548 thousand. Equipment expense increased $21 thousand or 2.9%. Data
processing expense decreased $110 thousand or 58% from $188 thousand to $78
thousand for the third quarter of 1999. This decrease is primarily attributed to
a reduction in credit card interchange expense. Bank franchise tax was
relatively unchanged at $283 thousand. Other noninterest expense decreased $82
thousand or 4.2% to $1.9 million.
Income Taxes
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Income tax expense for the third quarter of 1999 was $1.4 million, an increase
of $99 thousand or 7.5% from the third quarter of 1998. The effective tax rate
for the current quarter was 27.4%, an increase of 13 basis points over the same
quarter of the prior year.
First Nine Months of 1999
-------------------------
Net income for the nine months ended September 30, 1999 was $10.9 million or
$1.46 per diluted share compared to $10.3 million or $1.36 per diluted share for
the same period in 1998. The increase in year to date net income is primarily
attributed to an increase in net interest income of $1.2 million or 4.2%.
Return on average assets was 1.48% for the nine months ended September 30, 1999,
an increase of 3 basis points from the same period in 1998. Return on average
equity was 11.73%, an increase of 19 basis points over the first nine months of
1998.
Net Interest Income
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Net interest income totaled $31.2 million for the first nine months of 1999, an
increase of $1.2 million or 4.2% from the first nine months of 1998. Total
interest income for the period was $51.5 million, a decrease of $403 thousand or
0.8%. The decrease is due to a 38 basis point decrease in the average rate
earned on earning assets, which offset a $37.3 million increase in the average
balance of earning assets. Interest expense totaled $20.2 million for the
current year to date period, a decrease of $1.6 million or 7.5% compared to the
prior year. The decrease in interest expense is due primarily to a 45 basis
point decrease in the average rate paid on interest bearing liabilities.
Interest and fees on loans remained relatively unchanged at $40.4 million
despite a $26.0 million or 4.5% increase in average loans. The increase in
average loans was offset by a 44 basis point decrease in the average rate earned
on loans. Interest on taxable securities increased $688 thousand or 10.9% as a
result of a $26.4 million or 18.9% increase in the average balance. Interest on
nontaxable securities also increased $263 thousand or 10.1% due to a $7.3
million or 9.5% increase in the average balance. Interest on short term
investments, including time deposits with banks, federal funds sold, and
securities purchased under agreements to resell decreased $1.1 million or 49%
due to a $22.3 million or 40% decrease in the average balance and an 82 basis
point decrease in the average rate earned.
The $1.6 million decrease in total interest expense was due primarily to a $904
thousand or 6.8% decrease in interest expense on time deposits. This decrease
resulted from a 33 basis point decrease in the average rate paid and a slight
decrease in the average balance. Interest expense on savings deposits decreased
$391 thousand or 10.5% as a $9.2 million increase in the average balance was
offset by a decline in the average rate paid of 53 basis points. Interest
expense on demand deposits decreased $343 thousand or 10.4%, which offset a
$13.3 million or 7.5% increase in the average deposit balance.
The net interest margin on a tax equivalent basis increased 1 basis point to
4.91% during the first nine months of 1999 compared to the same period of 1998.
The spread between rates earned and paid increased 8 basis points to 4.16% in
the current period. The increases in margin and spread are primarily due to the
decreases in the average rates paid on interest bearing liabilities.
Noninterest Income
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Noninterest income was $9.2 million for the nine months ending September 30,
1999. This is a decrease of $347 thousand or 3.6% compared to a year earlier.
Service charges and fees on deposits remained unchanged in the comparison at
$3.9 million. Other service charges, commissions, and fees decreased $190
thousand or 6.1% to $2.9 million. The decrease is primarily related to decreases
in credit card merchant discount fees. Data processing fees decreased $110
thousand or 9.4% due to decreases in ATM authorization fees of $126 thousand.
Trust income increased $113 thousand or 13.1%. Gains on the sale of available
for sale investment securities totaled $49 thousand, a decline of $11 thousand
compared to the prior year. Losses on the sale of loans totaled $49 thousand in
the current period compared to recorded gains of $13 thousand in the prior year
comparison. Other noninterest income was $341 thousand, a decrease of $99
thousand.
Noninterest Expense
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Noninterest expense decreased $421 thousand or 1.7% to $24.4 million for the
first nine months of 1999. Salaries and employee benefits decreased $289
thousand or 2.1% primarily as a result of a decrease in noncash compensation
expense related to the Company's stock option plan. Occupancy expense, net of
rental income, increased $90 thousand or 5.7%. Equipment expense increased $135
thousand primarily due to increases in depreciation. Data processing expense was
$427 thousand, a decrease of $309 thousand or 42% in the comparison. The
decrease is primarily attributed to $291 thousand decrease in credit card
interchange and processing expense. Bank franchise tax decreased $27 thousand or
3.2%. Other noninterest expense decreased $21 thousand or less than 1%.
Income Taxes
- ------------
Income tax expense for the first nine months of 1999 was $4.0 million, an
increase of $169 thousand or 4.5% compared to $3.8 million for the same period
in 1998. The effective tax rate was 26.6% for the first nine months of 1999,
down 37 basis points from the prior year. The decrease in the effective tax rate
is primarily due to increases in tax free interest income and investment tax
credits.
FINANCIAL CONDITION
Total assets were $1.0 billion on September 30, 1999, an increase of $8.6
million or 0.9% from December 31, 1998. Fluctuations in assets and deposits are
typical due to the relationship between the Company's principal subsidiary,
Farmers Bank & Capital Trust Co. and the Commonwealth of Kentucky. Farmers Bank
provides various services to state agencies of the Commonwealth. 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 are likely to
occur on a daily basis. On an average basis, total assets were $986 million for
the first nine months of 1999, an increase of $31 million or 3.2% from year end
1998.
Loans
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Loans, net of unearned income, totaled $632 million, an increase of $26.9
million or 4.5% from December 31, 1998. On average, loans represented 68.3% of
earning assets at September 30, 1999, an increase of 1 basis point from year end
1998. As loan demand fluctuates, the available funds are redirected between
temporary investments or investment securities.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses was $9.5 million at September 30, 1999, an
increase of $427 thousand or 4.7% from the prior year end. The allowance was
1.5% of net loans at quarter end. The provision for loan losses increased $491
thousand in the current nine months as compared to the same period last year.
Nonperforming loans totaled $3.5 million at September 30, 1999, an increase of
$588 thousand from year end 1998. The increase in nonperforming loans is a
result of an increase in nonaccrual loans of $847 thousand and a decrease in
loans past due 90 days or more of $259 thousand. Nonperforming loans as a
percentage of net loans was .56% at September 30, 1999, an increase of 8 basis
points from December 31, 1998. Net charge offs for the nine months ending
September 30, 1999 were $714 thousand, a decrease of $136 thousand or 16%
compared to the same period last year.
Nonperforming Assets
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Nonperforming assets for the Company include nonperforming loans, other real
estate owned, and other foreclosed assets. Nonperforming assets totaled $4.4
million at September 30, 1999, a decrease of $296 thousand from December 31,
1998. The decrease is primarily the result of a $936 thousand decrease in other
real estate owned which was partially offset by an increase in nonperforming
loans of $588 thousand as detailed above. Nonperforming assets to total equity
decreased from 3.8% at year end 1998 to 3.5% at September 30, 1999.
Temporary Investments
- ---------------------
Time deposits with banks, federal funds sold and securities purchased under
agreements to resell averaged $33.3 million for the nine months ending September
30, 1999, a decrease of $21.0 million or 38.6% from year end 1998. Temporary
investments have been reallocated to loans and other investment securities as
funding opportunities and loan demand are presented.
Investment Securities
- ---------------------
Investment securities were $238 million on September 30, 1999, a decrease of
$24.7 million or 9.4% from year end 1998. Available for sale and held to
maturity securities were $174 and $64 million, respectively. Investment
securities averaged $250 million for the first nine months of 1999, an increase
of $28.5 million or 12.9% from year end 1998. The Company had an unrealized loss
on securities available for sale, net of taxes, of $1.3 million on September 30,
1999, as compared to a net unrealized gain of $369 thousand on December 31,
1998.
Deposits
- --------
Total deposits were $826 million at September 30, 1999, a decrease of $3.8
million or .5% from December 31, 1998. Noninterest bearing deposits increased
$38.4 million in the comparison. This fluctuation is primarily due to the
relationship between the Company's principal subsidiary and the Commonwealth of
Kentucky as described in preceding sections of this report. Noninterest bearing
deposits from the Commonwealth increased $45 million at September 30, 1999
compared to year end 1998. Noninterest bearing deposits averaged $141 million
for the current nine months, an increase of $11.8 million or 9.2% from the 1998
average. Interest bearing deposits decreased $42.2 million as of September 30,
1999 compared to December 31, 1998. On an average basis, interest bearing
deposits increased $14.6 million or 2.2%. Total deposits averaged $815 million,
an increase of $26.4 million or 3.4% from year end 1998.
Borrowed Funds
- --------------
Borrowed funds totaled $41.4 million, an increase of $11.2 million from year end
1998. The increase in borrowed funds at September 30, 1999 offset the decrease
in deposits and helped support loan growth. On an average basis, borrowed funds
were $41.4 million, an increase of $2.0 million or 5.1%.
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, 1999 combined retained earnings of the subsidiary banks were $50.4
million, of which $11.4 million was available for the payment of dividends to
the Parent Company without obtaining prior approval from bank regulatory
agencies. As a practical matter, payment of future dividends is also subject to
the maintenance of other capital ratio requirements. Management expects that in
the aggregate, its subsidiary banks will continue to have the ability to
dividend adequate funds to the Parent Company during the remainder of 1999. The
Parent Company had cash balances of $33.1 million at September 30, 1999.
The Company's objective as it relates to liquidity is to ensure 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 primarily
include the subsidiary banks' core deposits, consisting of both business and
nonbusiness deposits; cash flow generated by repayment of loan principal and
interest; and 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, 1999, such assets totaled $272
million, a decrease of $11.0 million from year end 1998. Net cash provided by
operating activities increased $5.6 million in the nine months ended September
30, 1999 compared to the same period last year. Net cash used in investing
activities was $9.8 million, a decrease of $39.3 million. The decrease is
primarily attributed to a decrease in the proceeds from sold, called, and
matured investment securities of $14.2 million, a decrease of $72.0 million in
purchases of investment securities, and an increase in net loans originated for
investment of $21.6 million. Net cash used in financing activities was $1.1
million for the period ended September 30, 1999 compared to net cash used of
$41.4 million in the prior year comparison. The decrease in net cash used in
financing activities is primarily the result of a $29.5 million decrease in
deposit outflows in the current period in relation to the same period a year
earlier.
CAPITAL RESOURCES
Shareholders' equity was $125 million on September 30, 1999, an increase of $1.6
million or 1.3% from year end 1998. The Company purchased 64 thousand shares of
its outstanding common stock during the first nine months of 1999 for a total
cost of $2.3 million. The Company issued approximately 5 thousand shares of
common stock during the first nine months pursuant to its nonqualified stock
option plan. Dividends of $6.3 million or $.84 per share were declared during
the first nine months of 1999, an increase of 16.7% per share compared to the
prior year. The Company's available for sale investment securities portfolio had
unrealized losses of $1.3 million, net of tax at September 30, 1999.
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, 1999, 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 19.20% 4.00% 6.00%
Total risk based 20.45% 8.00% 10.00%
Leverage 12.77% 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, 1999.
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 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 on the compliance of its customers and
other third parties. In particular, commercial loan customers that are not Year
2000 compliant could become a repayment risk. Therefore, the Company is
continuing to inform 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. However, the Company will
continue to monitor this risk on an ongoing basis.
The Company has formed an 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 noninformation 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
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 of 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, customers, and other third parties
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 have also been completed. Testing of mission critical and
noncritical systems is complete and have resulted in satisfactory results.
Although planned systems testing is complete, the Company will continue to
monitor and evaluate its systems and upgraded components throughout the
remainder of 1999 and into the year 2000 and take appropriate action where
necessary.
During 1998, the Company acquired, installed, and tested a new Year 2000
compliant mainframe. Also, a Year 2000 compliant version of the data processing
software was installed and is currently 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 financial
position. 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.
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. Other related costs have
been negligible. The Company does not have a system in place for tracking
payroll and related costs for the time that internal employees spend on the Year
2000 project. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
There have been no material changes in the Company's market risk from December
31, 1998. 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, 1998.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
On August 20, 1999 the Supreme Court of the Commonwealth of Kentucky denied the
plaintiff's appeal in the Mark Smith vs. Farmers Bank and Trust Company case.
There is no further appeal from the order denying discretionary review. Farmers
Bank and Trust Company is the Georgetown affiliate of the Registrant.
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.
<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: 11/10/99 /s/ Charles S. Boyd
-------- -----------------------------------------------
Charles Scott Boyd,
President and CEO (Principal Executive Officer)
Date: 11-10-99 /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) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income, basic and diluted $3,768 $3,530 $10,939 $10,280
====== ====== ======= =======
Average shares outstanding 7,458 7,556 7,487 7,557
Effect of dilutive stock options 17 33 15
----- ----- ----- -----
Average diluted shares outstanding 7,475 7,589 7,487 7,572
===== ===== ===== =====
Net income per share, basic and diluted $0.50 $0.47 $1.46 $1.36
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
September 30,1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 74,513
<INT-BEARING-DEPOSITS> 1,338
<FED-FUNDS-SOLD> 22,321
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 174,173
<INVESTMENTS-CARRYING> 63,972
<INVESTMENTS-MARKET> 64,149
<LOANS> 631,622
<ALLOWANCE> 9,475
<TOTAL-ASSETS> 1,000,950
<DEPOSITS> 826,180
<SHORT-TERM> 38,655
<LIABILITIES-OTHER> 10,714
<LONG-TERM> 2,772
0
0
<COMMON> 933
<OTHER-SE> 125,804
<TOTAL-LIABILITIES-AND-EQUITY> 1,000,950
<INTEREST-LOAN> 40,398
<INTEREST-INVEST> 9,881
<INTEREST-OTHER> 1,192
<INTEREST-TOTAL> 51,471
<INTEREST-DEPOSIT> 18,757
<INTEREST-EXPENSE> 20,245
<INTEREST-INCOME-NET> 31,226
<LOAN-LOSSES> 1,141
<SECURITIES-GAINS> 49
<EXPENSE-OTHER> 24,364
<INCOME-PRETAX> 14,904
<INCOME-PRE-EXTRAORDINARY> 14,904
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,939
<EPS-BASIC> 1.46
<EPS-DILUTED> 1.46
<YIELD-ACTUAL> 4.91
<LOANS-NON> 2,133
<LOANS-PAST> 1,386
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,048
<CHARGE-OFFS> 1,312
<RECOVERIES> 598
<ALLOWANCE-CLOSE> 9,475
<ALLOWANCE-DOMESTIC> 9,475
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
