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 June 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
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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
7,456,385 shares outstanding at August 6, 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 -
June 30, 1999 and December 31, 1998 3
Unaudited Consolidated Statements of Income -
For the Three Months and Six Months Ended
June 30, 1999 and June 30, 1998 4
Unaudited Consolidated Statements of Comprehensive Income -
For the Three Months and Six Months Ended
June 30, 1999 and June 30, 1998 5
Unaudited Consolidated Statements of Cash Flows -
For the Six Months Ended
June 30, 1999 and June 30, 1998 6
Unaudited Consolidated Statements of Changes in Shareholders' Equity -
For the Six Months Ended
June 30, 1999 and June 30, 1998 7
Notes to 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
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Item 1 - Legal Proceedings 16
Item 4 - Submission of Matters to a Vote of Security Holders 16
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
June 30, December 31,
(In thousands, except share data) 1999 1998
- --------------------------------- -------- ------------
ASSETS
Cash and cash equivalents:
Cash and due from banks $80,365 $38,385
Interest bearing deposits in other banks 1,296 1,914
Federal funds sold and securities purchased
under agreements to resell 26,210 51,535
------- ------
Total cash and cash equivalents 107,871 91,834
Investment securities:
Available for sale 181,756 191,487
Held to maturity 67,217 71,369
------- -------
Total investment securities 248,973 262,856
Loans, net of unearned income 617,096 604,683
Allowance for loan losses (9,256) (9,048)
------- -------
Loans, net 607,840 595,635
Premises and equipment, net 24,987 24,861
Other assets 16,968 17,152
---------- --------
Total assets $1,006,639 $992,338
========== ========
LIABILITIES
Deposits:
Noninterest bearing $146,673 $123,741
Interest bearing 662,209 706,260
------- -------
Total deposits 808,882 830,001
Securities sold under agreements to repurchase 60,898 26,324
Other borrowed funds 3,768 3,926
Dividends payable 2,096 2,113
Other liabilities 7,165 6,135
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Total liabilities 882,809 868,499
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock, par value $0.125 per share;
9,608,000 shares authorized; 7,472,976
and 7,555,240 shares issued and
outstanding at June 30, 1999 and
December 31, 1998, respectively 934 940
Capital surplus 11,011 10,520
Retained earnings 113,324 112,010
Accumulated other comprehensive (loss) income (1,439) 369
------- -------
Total shareholders' equity 123,830 123,839
---------- --------
Total liabilities and shareholders' equity $1,006,639 $992,338
========== ========
See accompanying notes to consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
June 30 June 30
(In thousands, except per share data) 1999 1998 1999 1998
- ------------------------------------- ---- ---- ---- ----
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INTEREST INCOME
Interest and fees on loans $13,473 $13,540 $26,650 $26,921
Interest on investment securities:
Taxable 2,318 2,159 4,655 4,150
Nontaxable 1,016 918 1,919 1,684
Interest on deposits in other banks 9 33 37 86
Interest on federal funds sold and securities
purchased under agreements to resell 274 644 861 1,481
------ ------ ------ ------
Total interest income 17,090 17,294 34,122 34,322
INTEREST EXPENSE
Interest on deposits 6,253 6,760 12,587 13,435
Interest on other borrowed funds 452 505 960 1,002
------ ------ ------ ------
Total interest expense 6,705 7,265 13,547 14,437
------ ------ ------ ------
Net interest income 10,385 10,029 20,575 19,885
Provision for loan losses 441 202 635 434
------ ------ ------ ------
Net interest income after provision for loan losses 9,944 9,827 19,940 19,451
NONINTEREST INCOME
Service charges and fees on deposits 1,329 1,302 2,550 2,579
Other service charges, commissions, and fees 1,013 1,008 2,066 2,055
Data processing income 391 426 714 790
Trust income 326 307 646 605
Investment securities gains 46 49 100
(Loss)Gain on sale of loans (44) 1 (49) 6
Other 132 143 231 288
------ ------ ------ ------
Total noninterest income 3,193 3,187 6,207 6,423
NONINTEREST EXPENSE
Salaries and employee benefits 4,487 4,975 8,918 9,170
Occupancy expenses, net 552 534 1,111 1,033
Equipment expenses 723 676 1,459 1,345
Data processing expense 167 252 349 548
Bank franchise tax 274 282 526 546
Other 2,096 2,084 4,069 4,008
------ ------ ------ ------
Total noninterest expense 8,299 8,803 16,432 16,650
------ ------ ------ ------
Income before income taxes 4,838 4,211 9,715 9,224
Income tax expense 1,170 1,043 2,544 2,474
------ ------ ------ ------
Net income $3,668 $3,168 $7,171 $6,750
====== ====== ====== ======
NET INCOME PER COMMON SHARE
Basic and diluted $.49 $.42 $.96 $.89
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 7,488 7,555 7,501 7,557
Diluted 7,488 7,594 7,501 7,559
See accompanying notes to consolidated financial statement
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UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended Six Months Ended
June 30 June 30
(In Thousands) 1999 1998 1999 1998
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NET INCOME $3,668 $3,168 $7,171 $6,750
Other comprehensive income:
Unrealized holding (loss)gain on available for sale
securities arising during the period, net of tax
of $732, $48, $895, and $3, respectively (1,421) 93 (1,737) 6
Reclassification adjustment for prior period
unrealized gain recognized during current period,
net of tax of $9, $0, $37, and $36, respectively. (18) (71) (70)
----- ----- ----- -----
Other comprehensive (loss) income (1,439) 93 (1,808) (64)
------ ------ ------ ------
COMPREHENSIVE INCOME $2,229 $3,261 $5,363 $6,686
====== ====== ====== ======
See accompanying notes to consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, (In thousands) 1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $7,171 $6,750
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,451 1,274
Net amortization of investment security
premiums and discounts:
Available for sale (97) 24
Held to maturity 17 123
Provision for loan losses 635 434
Noncash compensation expense 518 870
Mortgage loans originated for sale (7,776) (7,988)
Proceeds from sale of mortgage loans 10,257 8,085
Deferred income tax expense(benefit) 60 (305)
Loss(gain) on sale of mortgage loans 49 (6)
Gain on sale of available for sale investment securities (49) (100)
Gain on sale of premises and equipment (7) (1)
Decrease(increase) in accrued interest receivable 569 (303)
Increase in other assets (40) (1,491)
(Decrease)increase in accrued interest payable (151) 91
Increase in other liabilities 1,447 232
------ -----
Net cash provided by operating activities 14,054 7,689
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities:
Available for sale 91,777 51,833
Held to maturity 4,134 11,890
Proceeds from sale of available for sale investment securities 13,397 25,394
Purchase of investment securities:
Available for sale (98,036) (115,721)
Held to maturity (6,649)
Loans originated for investment, net of principal collected (15,370) (12,261)
Purchases of premises and equipment (1,523) (4,182)
Proceeds from sale of equipment 214 1
----- ------
Net cash used in investing activities (5,407) (49,695)
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (21,119) (43,109)
Dividends paid (4,216) (3,629)
Purchase of common stock (1,721) (215)
Stock options exercised 30
Net increase(decrease) in other borrowed funds 34,416 (1,385)
----- ------
Net cash provided by (used in) financing activities 7,390 (48,338)
------ ------
Net increase(decrease) in cash and cash equivalents 16,037 (90,344)
Cash and cash equivalents at beginning of year 91,834 186,740
-------- -------
Cash and cash equivalents at end of period $107,871 $96,396
======== =======
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $13,698 $14,346
Income taxes 2,575 2,405
Cash dividend declared and unpaid 2,096 1,813
See accompanying notes to consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated Total
(In thousands, except per share data) Common Stock Capital Retained Other Comprehensive Shareholders'
Six months ended June 30, 1999 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
Net Income 7,171 7,171
Other comprehensive loss (1,808) (1,808)
Cash dividends declared, $.56 per share (4,199) (4,199)
Purchase of common stock (48) (6) (57) (1,658) (1,721)
Stock options exercised, including
related tax benefits 1 30 30
Effect of noncash compensation
attributed to stock option grants 518 518
----- ---- ------- -------- ------- --------
Balance at June 30, 1999 7,473 $934 $11,011 $113,324 $(1,439) $123,830
===== ==== ======= ======== ======= ========
Balance at December 31, 1997 7,562 $945 $8,894 $107,105 $100 $117,044
Net Income 6,750 6,750
Other comprehensive loss (64) (64)
Cash dividends declared, $.48 per share (3,628) (3,628)
Purchase of common stock (7) (1) (8) (206) (215)
Effect of noncash compensation
attributed to stock options grant 870 870
----- ---- ------- -------- ------- --------
Balance at June 30, 1998 7,555 $944 $9,756 $110,021 $36 $120,757
===== ==== ======= ======== ======= ========
See accompanying notes to consolidated financial statements.
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NOTES TO 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 of the Company 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.
3. 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.
Accordingly, 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.
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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
Second Quarter 1999 vs. Second Quarter 1998
-------------------------------------------
The Company reported net income of $3.7 million or $.49 per diluted share for
the second quarter of 1999 compared to net income of $3.2 million or $.42 per
diluted share for the second quarter of 1998. The increase in net income is
primarily attributed to a reduction in salaries and employee benefits of
$488,000 or 9.8% and an increase in net interest income of $356,000 or 3.5%
Return on average assets was 1.49% for the second quarter of 1999 compared to
1.35% reported for the same period of 1998. Return on average equity was 11.81%
for the second quarter of 1999, an increase of 112 basis points from 10.69% in
the same period of 1998.
Net Interest Income
- -------------------
Net interest income totaled $10.4 million for the second quarter of 1999, an
increase of $356 thousand or 3.5% over the second quarter of 1998. Total
interest income was $17.1 million for the second quarter of 1999, a decrease of
$204 thousand or 1.2%. Total interest expense was $6.7 million for the current
quarter, a decrease of $560 thousand or 7.7% compared to the same period in
1998. The decrease in interest expense is due primarily to a 47 basis point
decrease in the average rate paid on interest bearing liabilities.
Interest and fees on loans decreased $67 thousand despite an increase in average
loans of $23.5 million in the comparison. The decrease is primarily attributed
to a 40 basis point decrease in the average rate earned on loans. Interest on
taxable securities increased $159 thousand or 7.4% due to a $30.0 million
increase in the average balance. The increase in the average balance offset a 69
basis point decrease in the average rate earned on these securities. Interest on
nontaxable securities increased $98 thousand or 10.7% due to slight increases in
both the average balance and rate earned. Interest on short term investments
decreased $394 thousand due to decreases in both the average balance and rates
earned.
The net interest margin on a tax equivalent basis decreased to 4.93% during the
second quarter of 1999 compared to 4.94% in the second quarter of 1998. The
spread between rates earned and paid was 4.20% for the current quarter compared
to 4.12% in the same period last year. The increase is primarily the result of
the 47 basis point decrease in the average rate paid on interest bearing
liabilities.
<PAGE>
Noninterest Income
- ------------------
Noninterest income was $3.2 million for the current quarter, unchanged compared
to the prior year. Service charges and fees on deposits, the largest component
of noninterest income, remained unchanged at $1.3 million. Other service
charges, commissions, and fees were also unchanged at $1.0 million. Data
processing income decreased $35 thousand to $391 thousand for the second quarter
of 1999. The decrease is primarily due to an $41 thousand decrease in ATM
authorization fees, which is the result of a decrease in the number of
noncustomer ATM transactions. Trust fees increased $19 thousand or 6.2% to $326
thousand. Gains on the sale of available for sale investment securities, which
were zero in the second quarter of 1998, totaled $46 thousand in the current
quarter. Other noninterest income decreased $56 thousand.
Noninterest Expense
- -------------------
Total noninterest expenses decreased $504 thousand or 5.7% from the second
quarter of 1998 to $8.3 million. Salaries and employee benefits, the largest
component of noninterest expense, decreased $488 thousand or 9.8%. The decrease
in salaries and employee benefits is primarily attributed to a $583 thousand
decrease in noncash compensation related to the Company's stock option plan.
Occupancy expense, net of rental income, increased $18 thousand to $552
thousand. Equipment expense decreased $47 thousand or 7.0%. Data processing
expense decreased $85 thousand or 33.7% to $167 thousand for the second quarter
of 1999. The decrease in data processing expense is due primarily to a decrease
in credit card interchange expenses, which is the result of a lower volume of
credit card transactions. Bank franchise tax was relatively unchanged at $274
thousand. Other noninterest expense increased $12 thousand or less than 1% to
2.1 million.
Income Taxes
- ------------
Income tax expense for the second quarter of 1999 was $1.2 million, an increase
of $127 thousand or 12.2% from the second quarter of 1998. The effective tax
rate was 24.18% for the current quarter, a decrease of 59 basis points from the
second quarter of 1998. The decrease in the effective tax rate is due to an
increase in tax exempt income and an increase of investment tax credits through
participation in low income housing projects.
First six months of 1999
------------------------
Net income for the six months ended June 30, 1999 was $7.2 million or $.96 per
diluted share compared to earnings of $6.8 million or $.89 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 $690 thousand or 3.5%. Also
contributing to the increase in net income was a reduction in salaries and
employee benefits of $252 thousand or 2.7% and a $199 thousand or 36.3% decrease
in data processing expense.
Return on average assets was 1.46% for the six months ended June 30, 1999, an
increase of 1 basis point from the same period in 1998. Return on average equity
was 11.68%, an increase from 11.52% for the first six months of 1998.
<PAGE>
Net Interest Income
- -------------------
Net interest income totaled $20.6 million for the six months ended June 30,
1999, an increase of $690 thousand or 3.5% compared to the same period in 1998.
The increase in net interest income is primarily attributed to a decrease in
interest expense of $890 thousand. The decrease in interest expense is the
result of a 42 basis point decrease in the average rate paid on interest bearing
liabilities.
Interest and fees on loans decreased $271 thousand or 1.0%. The decrease is
primarily attributed to a decrease in the average rate earned on loans of 43
basis points. Interest on taxable securities increased $505 thousand or 12.2%.
The increase is primarily attributed to a $31.4 million increase in the average
balance. Interest on nontaxable securities increased $235 thousand or 14.0% due
to slight increases in both the average balance and average rate earned on these
securities. Interest on short term investments decreased $669 thousand. This
decrease is due to decreases in both the average balance and average rate earned
on these investments.
Interest expense on deposits decreased $848 thousand or 6.3%. The decrease is
primarily due to a decrease in rates paid of approximately 42 basis points.
Interest expense on other borrowed funds decreased $42 thousand or 4.2%. The
decrease is the result of a 41 basis point decrease in the average rate paid.
Net interest margin on a tax equivalent basis decreased to 4.87% during the
first six months of 1999 compared to 4.93% for the same period of 1998. The
spread between rates earned and paid remained unchanged at 4.12% in the six
month comparison.
Noninterest Income
- ------------------
Noninterest income was $6.2 million for the first six months of 1999, a decrease
of $216 thousand or 3.4% compared to the same period in 1998. Service charges
and fees on deposits remained relatively unchanged at $2.6 million. Other
service charges, commissions, and fees also was relatively unchanged at $2.1
million. Data processing fees decreased $76 thousand or 9.6% primarily due to a
decrease in ATM authorization fees of $81 thousand. Trust fees increased 6.8% to
$646 thousand. Gains on the sale of available for sale investment securities
were $49 thousand, a decrease of $51 thousand compared to the prior year period.
Other noninterest income totaled $182 thousand, a decrease of $112 thousand
compared to 1998. The decrease is primarily attributed to losses recorded on
the sale of loans of $49 thousand in the current period.
Noninterest Expense
- -------------------
Noninterest expense was $16.4 million for the first six months of 1999, a
decrease of $218 thousand or 1.3% compared to the same period in 1998. Salaries
and employee benefits, the largest component of noninterest expense, decreased
$252 thousand or 2.7%. A decrease of $352 thousand in noncash compensation
related to the Company's stock option plan is the primary factor for the
decrease. Occupancy expense, net of rental income, increased 7.6% to $1.1
million. The increase is partially attributed to the Company's ongoing efforts
to expand into new markets. Equipment expense increased $114 thousand or 8.5%.
The increase in equipment expense is primarily due to increases in depreciation
and maintenance related to equipment purchases. Data processing expense was $349
thousand, a decrease of $199 thousand or 36.3%. This decrease is primarily
attributed to a $179 thousand decrease in credit card interchange and
processing. Bank franchise tax expense decreased $20 thousand or 3.7%. Other
noninterest expense increased $61 thousand or 1.5%.
Income Taxes
- ------------
Income tax expense for the first six months of 1999 was $2.5 million, an
increase of $70 thousand compared to the same period in 1998. The effective tax
rate was 26.19% for the first six months of 1999, down from 26.82% in the prior
year. The decrease in the effective tax rate is due to an increase in tax exempt
income and an increase of investment tax credits through participation in low
income housing projects.
FINANCIAL CONDITION
Total assets were $1.0 billion on June 30, 1999, an increase of $14.3 million or
1.4% 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 of
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 $989 million for the first six
months of 1999, an increase of $34.3 million or 3.6% from year end 1998.
Loans
- -----
Loans, net of unearned income, totaled $617 million at June 30, 1999, an
increase of $12.5 million or 2.1% from year end 1998. On average, loans
represented 67.5% of earning assets compared to 68.2% for year end 1998. As loan
demand fluctuates, the available funds are redirected between either temporary
investments or investment securities.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses was $9.3 million at June 30, 1999, an increase of
$208 thousand from the prior year end. The allowance for loan losses was 1.5% of
net loans at June 30, 1999. In management's opinion, the allowance for loan
losses is adequate to cover losses inherent in the loan portfolio. The provision
for loan losses increased $201 thousand in the current period compared to the
same period in 1998. The Company had net charge-offs of $427 thousand in the
first six months of 1999 compared to net charge-offs of $585 thousand in the
same period of 1998. Management continues to emphasize collection efforts and
evaluation of risks within the portfolio.
Nonperforming Assets
- --------------------
Nonperforming assets for the Company include nonperforming loans, other real
estate owned, and other foreclosed assets. Nonperforming loans consists of
nonaccrual loans, restructured loans, and loans past due ninety days or more on
which interest in still accruing. Nonperforming assets totaled $4.4 million at
June 30, 1999, a decrease of $246 thousand or 5.3% from the prior year end.
Nonperforming assets to total equity decreased from 3.8% at year end 1998 to
3.6% at June 30, 1999. Nonnperforming loans totaled $3.3 million at June 30,
1999, an increase of $352 thousand or 12.0% compared to year end 1998.
Nonperforming loans as a percentage of net loans increased from .48% at year end
to .53%.
Other real estate owned, which had a balance of $1.7 million at year end 1998,
decreased $628 thousand or 37.6% to $1.0 million as of June 30, 1999.
Temporary Investments
- ---------------------
Time deposits with banks, federal funds sold and securities purchased under
agreements to resell averaged $38.4 million, a decrease of $15.8 million or
29.2% from year end 1998. Temporary investments are reallocated as loan demand
presents the opportunity.
<PAGE>
Investment Securities
- ---------------------
Investment securities were $249 million on June 30, 1999, a decrease of $13.4
million or 5.3% from year end 1998. Available for sale and held to maturity
securities were $182 and $67 million, respectively. Investment securities
averaged $253 million for the first six months of 1999, an increase of $31.5
million or 14.2% from year end 1998. The Company had an unrealized loss on
available for sale investment securities of $1.8 million, net of tax, during the
first six months of 1999.
Deposits
- --------
Total deposits were $809 million at June 30, 1999, a decrease of $21.1 million
or 2.5% from year end 1998. Noninterest bearing deposits increased $22.9 million
in the comparison. This increase 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. On average, noninterest bearing deposits
were $141.1 million during the current period, an increase of $12.0 million or
9.3%. Interest bearing deposits decreased $44.1 million during the six months
ended June 30, 1999 compared to year end 1998. Interest bearing checking
accounts make up $32.2 million of the decrease. On average, interest bearing
deposits were $677 million in the current period, an increase of $18.1 million
or 2.8% from year end 1998. Total deposits averaged $818 million, an increase of
$30.0 million or 3.8% from year end 1998.
Borrowed Funds
- --------------
Borrowed funds totaled $64.7 million at June 30, 1999, an increase of $34.4
million from year end 1998. This increase is due primarily to an increase in fed
funds purchased of $19.4 million and an increase in repurchase agreements
entered into with the Commonwealth of Kentucky of $8.7 million. The fluctuations
in repurchase agreements with the Commonwealth are due to the relationship as
described in preceding sections of this report. Total borrowed funds averaged
$40.9 million, an increase of $1.6 million or 4.0%.
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 June 30,
1999 combined retained earnings of the subsidiary banks were $54.9 million, of
which $15.8 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 $27.7 million at June 30, 1999.
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 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 June 30, 1999, such assets totaled $290
million, an increase of $6.3 million from year end 1998. Net cash provided by
operating activities increased $6.4 million in the six months ended June 30,
1999 compared to the same period last year. The increase is primarily attributed
to increases in the proceeds from the sale of mortgage loans and an increase in
other liabilities. Net cash used in investing activities was $5.4 million, a
decrease of $44.3 million. The decrease is primarily attributed to an increase
in the proceeds from the sale of available sale investment securities of $40.0
million and a decrease in the purchase of investment securities of $24.3
million. Net cash provided by financing activities was $7.4 million for the
period ended June 30, 1999 compared to net cash used of $48.3 million in the
prior year comparison. The increase is due primarily to the changes in deposits
and other borrowed funds in the six month periods.
CAPITAL RESOURCES
Shareholders' equity was $124 million on June 30, 1999, relatively unchanged
from year end 1998. The Company purchased 48 thousand shares of its outstanding
common stock during the first six months of 1999 for a total cost of $1.7
million. The Company issued 1,255 shares of common stock during the first six
months pursuant to its nonqualified stock option plan. Dividends of $4.2 million
or $.56 per share were declared during the first six 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 $1.4 million, net of
tax at June 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 June 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 19.11% 4.00% 6.00%
Total risk based 20.37% 8.00% 10.00%
Leverage 12.57% 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 June
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 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 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 are substantially complete. 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
- --------------------------
In the case of Earl H. Shilling et al. v. Farmers Bank & Capital Trust Company,
Case No. 92CIO5734 filed in Jefferson Circuit Court, Louisville, Kentucky, a
pretrial conference was held on July 15, 1999 in which a trial date was set for
March 28, 2000.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The annual meeting of shareholders was held May 11, 1999. The matters that were
voted upon included:
a) The election of four directors for three-year terms ending in 2002 or until
their successors have been elected and qualified.
b) The transaction of such other business as may properly come before the
meeting.
<TABLE>
<CAPTION>
The outcome of the voting was as follows:
NAME FOR AGAINST WITHHELD ABSTAINED
<S> <C> <C> <C> <C>
Stokes A. Baird IV 6,395,935 0 6,162 0
G. Anthony Busseni 6,399,097 0 3,000 0
James H. Childers 6,395,037 0 7,000 0
Michael M. Sullivan 6,373,037 0 29,060 0
The transaction of other business 6,243,032 140,292 0 18,773
</TABLE>
<PAGE>
Listed below is the name of each director whose term of office continued after
the meeting.
Frank W. Sower, Jr. Stokes A. Baird IV Harold G. Mays
J. Barry Banker James H. Childers Cecil D. Bell, Jr.
Robert Roach, Jr. Michael M. Sullivan G. Anthony Busseni
Lloyd C. Hillard, Jr. Charles S. Boyd Dr. John D. Sutterlin
In addition to the directors above, Dr. John P. Stewart, Chairman Emeritus, E.
Bruce Dungan, and Charles T. Mitchell serve as advisory directors for the
Company.
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 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: 8/10/99 /s/ Charles Scott Boyd
------- ----------------------
Charles Scott Boyd,
President and CEO (Principal Executive Officer)
Date: 8/10/99 /s/ Cecil 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 Six Months Ended
June 30, June 30,
(In thousands, except per share data) 1999 1998 1999 1998
- ------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income, basic and diluted $3,668 $3,168 $7,171 $6,750
====== ====== ====== ======
Average shares outstanding 7,488 7,555 7,501 7,557
Effect of dilutive stock options 39 2
----- ------ ------ -----
Average diluted shares outstanding 7,488 7,594 7,501 7,559
Net income per share, basic $ .49 $ .42 $ .96 $ .89
Net income per share, diluted .49 .42 .96 .89
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the March
31,1999 financial statements and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 80,365
<INT-BEARING-DEPOSITS> 1,296
<FED-FUNDS-SOLD> 26,210
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 181,756
<INVESTMENTS-CARRYING> 67,217
<INVESTMENTS-MARKET> 67,516
<LOANS> 617,096
<ALLOWANCE> 9,256
<TOTAL-ASSETS> 1,006,639
<DEPOSITS> 808,882
<SHORT-TERM> 61,803
<LIABILITIES-OTHER> 12,124
<LONG-TERM> 2,863
0
0
<COMMON> 934
<OTHER-SE> 124,335
<TOTAL-LIABILITIES-AND-EQUITY> 1,006,639
<INTEREST-LOAN> 26,650
<INTEREST-INVEST> 6,574
<INTEREST-OTHER> 898
<INTEREST-TOTAL> 34,122
<INTEREST-DEPOSIT> 12,587
<INTEREST-EXPENSE> 13,547
<INTEREST-INCOME-NET> 20,575
<LOAN-LOSSES> 635
<SECURITIES-GAINS> 49
<EXPENSE-OTHER> 16,432
<INCOME-PRETAX> 9,715
<INCOME-PRE-EXTRAORDINARY> 9,715
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,171
<EPS-BASIC> 0.96
<EPS-DILUTED> 0.96
<YIELD-ACTUAL> 4.87
<LOANS-NON> 807
<LOANS-PAST> 2,476
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,048
<CHARGE-OFFS> 865
<RECOVERIES> 438
<ALLOWANCE-CLOSE> 9,256
<ALLOWANCE-DOMESTIC> 9,256
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
