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 March 31, 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
- --------------------------------------------- ---------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
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
7,488,577 shares outstanding at May 7, 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 -
March 31, 1999 and December 31, 1998 3
Unaudited Consolidated Statements of Income -
For the Three Months Ended
March 31, 1999 and March 31, 1998 4
Unaudited Consolidated Statements of Comprehensive Income -
For the Three Months Ended
March 31, 1999 and March 31, 1998 5
Unaudited Consolidated Statements of Cash Flows -
For the Three Months Ended
March 31, 1999 and March 31, 1998 6
Unaudited Consolidated Statements of Changes in Shareholders' Equity -
For the Three Months Ended
March 31, 1999 and March 31, 1998 7
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 14
Part II - Other Information
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Item 6 - Exhibits and Reports on Form 8-K 14
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
UNAUDITED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(In thousands, except share data) 1999 1998
--------------------------------- ---- ----
ASSETS
Cash and cash equivalents:
Cash and due from banks $76,273 $38,385
Interest bearing deposits in other banks 1,867 1,914
Federal funds sold and securities purchased
under agreements to resell 27,995 51,535
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Total cash and cash equivalents 106,135 91,834
Investment securities:
Available for sale 185,703 191,487
Held to maturity 69,526 71,369
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Total investment securities 255,229 262,856
Loans, net of unearned income 600,870 604,683
Allowance for loan losses (9,030) (9,048)
------- -------
Loans, net 591,840 595,635
Premises and equipment, net 25,205 24,861
Other assets 17,267 17,152
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Total assets $995,676 $992,338
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LIABILITIES
Deposits:
Noninterest bearing $159,079 $123,741
Interest bearing 665,746 706,260
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Total deposits 824,825 830,001
Securities sold under agreements to repurchase 34,006 26,324
Other borrowed funds 3,351 3,926
Dividends payable 2,103 2,113
Other liabilities 6,765 6,135
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Total liabilities 871,050 868,499
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock, par value $0.125 per share;
9,608,000 shares authorized; 7,506,783
and 7,520,465 shares issued and
outstanding at March 31, 1999 and
December 31, 1998, respectively 938 940
Capital surplus 10,742 10,520
Retained earnings 112,946 112,010
Accumulated other comprehensive income 369
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Total shareholders' equity 124,626 123,839
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Total liabilities and shareholders' equity $995,676 $992,338
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See accompanying notes to consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended March 31, 1999 1998
- ---------------------------- ---- ----
INTEREST INCOME
Interest and fees on loans $13,177 $13,381
Interest on investment securities:
Taxable 2,337 1,991
Nontaxable 903 766
Interest on deposits in other banks 28 53
Interest on federal funds sold and securities
purchased under agreements to resell 587 837
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Total interest income 17,032 17,028
INTEREST EXPENSE
Interest on deposits 6,334 6,675
Interest on other borrowed funds 508 497
------ ------
Total interest expense 6,842 7,172
------ ------
Net interest income 10,190 9,856
Provision for loan losses 194 232
------ ------
Net interest income after provision
for loan losses 9,996 9,624
NONINTEREST INCOME
Service charges and fees on deposits 1,221 1,277
Other service charges, commissions, and fees 1,053 1,047
Data processing income 323 364
Trust income 320 298
Investment securities gains 3 100
(Loss) gain on sale of loans (5) 5
Other 99 145
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Total noninterest income 3,014 3,236
NONINTEREST EXPENSE
Salaries and employee benefits 4,431 4,195
Occupancy expenses, net 559 499
Equipment expenses 736 669
Data processing expense 182 296
Bank franchise tax 252 264
Other 1,973 1,924
------ ------
Total noninterest expense 8,133 7,847
------ ------
Income before income taxes 4,877 5,013
Income tax expense 1,374 1,431
------ ------
Net income $3,503 $3,582
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NET INCOME PER COMMON SHARE
Basic and diluted $.47 $.47
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted 7,514 7,559
See accompanying notes to consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31, (In thousands) 1999 1998
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NET INCOME $3,503 $3,582
Other comprehensive income:
Unrealized holding loss on available for sale securities arising
during the period, net of tax of $181 and $45 in 1999 and 1998,
respectively (351) (87)
Reclassification adjustment for prior period unrealized gain
recognized during current period, net of tax of $9 and $36
in 1999 and 1998, respectively (18) (70)
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Other comprehensive loss (369) (157)
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COMPREHENSIVE INCOME $3,134 $3,425
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See accompanying notes to consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, (In thousands) 1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,503 $3,582
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 720 633
Net amortization of securities
premiums and discounts:
Available for sale (49) (25)
Held to maturity 26 104
Provision for loan losses 194 232
Noncash compensation expense 231
Mortgage loans originated for sale (7,726) (5,878)
Proceeds from sale of mortgage loans 5,806 5,658
Deferred income tax expense (benefit) 55 (1)
Loss (gain) on sale of mortgage loans 5 (5)
Gain on sale of available for sale investment securities (3) (100)
Decrease in accrued interest receivable 122 419
Increase in other assets (367) (874)
(Decrease) increase in accrued interest payable (30) 163
Increase in other liabilities 795 754
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Net cash provided by operating activities 3,282 4,662
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity or call of investment securities:
Available for sale 78,426 45,886
Held to maturity 1,817 7,084
Proceeds from sale of available for sale investment securities 5,028 25,394
Purchase of investment securities:
Available for sale (78,177) (69,615)
Held to maturity (6,809)
Loans originated for investment, net of principal collected 5,516 10,062
Purchase of premises and equipment (934) (2,888)
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Net cash provided by investing activities 11,676 9,114
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (5,176) (67,125)
Dividends paid (2,113) (1,815)
Purchase of common stock (482) (215)
Stock options exercised 7
Net increase (decrease) in other borrowed funds 7,107 (10,303)
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Net cash used in financing activities (657) (79,458)
------ ------
Net increase (decrease) in cash and cash equivalents 14,301 (65,682)
Cash and cash equivalents at beginning of year 91,834 186,740
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Cash and cash equivalents at end of period $106,135 $121,058
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SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $6,872 $7,009
Income taxes 350
Cash dividend declared and unpaid 2,103 1,814
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
Three months ended March 31, 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 3,503 3,503
Other comprehensive loss (369) (369)
Cash dividends declared, $.28 per share (2,103) (2,103)
Purchase of common stock (14) (2) (16) (464) (482)
Stock options exercised, including
related tax benefits 1 7 7
Effect of noncash compensation
attributed to stock option grants 231 231
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Balance at March 31, 1999 7,507 $958 $10,742 $112,946 0 $124,626
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Balance at December 31, 1997 7,562 $945 $8,894 $107,105 $100 $117,044
Net Income 3,582 3,582
Other comprehensive loss (157) (157)
Cash dividends declared, $.24 per share (1,814) (1,814)
Purchase of common stock (7) (1) (8) (206) (215)
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Balance at March 31, 1998 7,555 $944 $8,886 $108,667 $(57) $118,440
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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 Company's banking operations are considered by management to
be aggregated into one reporting operating segment.
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. These
reclassifications do not affect net income or shareholders' equity as previously
reported.
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.
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
First Quarter 1999 vs. First Quarter 1998
-----------------------------------------
The Company reported earnings of $3.5 million or $.47 per diluted share for the
first quarter of 1999, compared to earnings of $3.6 million or $.47 per diluted
share for the first quarter of 1998.
Return on average assets was 1.43% for the first quarter of 1999, compared to
1.55% reported for the same period of 1998. Return on average equity was 11.55%
for the first quarter of 1999, a decrease from 12.39% during the same period of
1998.
Net Interest Income
- -------------------
Net interest income totaled $10.2 million for the first quarter of 1999, an
increase of $334 thousand or 3.4% compared to $9.9 million for the first quarter
1998. Interest income was $17.0 million for the first quarter of 1999,
relatively unchanged from the same period a year earlier. Interest expense
totaled $6.8 million for the current quarter, a decrease of $330 thousand or
4.6% compared to the previous year period.
Interest and fees on loans decreased $204 thousand or 1.5% to $13.2 million
despite a $21.6 million or 3.7% increase in average loans. The decrease in
interest and fees on loans was primarily attributed to a 46 basis point decrease
in the average rate earned on loans. Interest on taxable securities increased
$346 thousand or 17.4% and interest on nontaxable securities increased $137
thousand or 17.9%. The increase in interest income on both taxable and
nontaxable securities is primarily the result of increases in the average
balances of each category. The average balance of taxable securities increased
$32.8 million or 24.8% and average nontaxable securities increased $12.6 million
or 17.4%. Interest on short term investments, including time deposits in other
banks, federal funds sold, and securities purchased under agreements to resell
decreased $275 thousand or 30.9%. The decrease is due to a combination of a
$12.8 million decrease in the average balance of these investments and a 77
basis point decrease in the average rate earned.
Interest expense on deposits decreased $341 thousand or 5.1% due primarily to a
38 basis point decrease in the average rates paid on deposits. Interest expense
on time deposits decreased $195 thousand or 4.4%. Interest expense on interest
bearing demand deposits decreased $102 thousand or 9.3% and interest expense on
savings deposits decreased $44 thousand or 3.6%. Interest expense on short term
borrowings increased $16 thousand or 3.7% due primarily to an increase in the
average outstanding borrowings of $5.9 million.
The net interest margin, on a tax equivalent basis, decreased to 4.80% during
the first quarter of 1999 compared to 4.82% in the first quarter of 1998. The
spread between rates earned and paid for the first quarter of 1999 increased 4
basis points to 4.03% compared to the same period a year earlier.
Noninterest Income
- ------------------
Noninterest income decreased $222 thousand or 6.9% to $3.0 million for the first
quarter of 1999. Service charges and fees on deposits decreased $56 thousand or
4.4%. Other service charges, commissions, and fees remained relatively unchanged
at $1.1 million. Data processing income decreased $41 thousand or 11.3%. Trust
fees increased 7.4% to $320 thousand. Gains on the sale of available for sale
investment securities totaled $3 thousand, a decrease of $97 thousand compared
to the prior year. Other noninterest income decreased $56 thousand in 1999
compared to 1998.
Noninterest Expense
- -------------------
Total noninterest expenses increased $286 thousand or 3.6% from the first
quarter of 1998 to $8.1 million. Salaries and employee benefits, the largest
component of noninterest expense, increased $236 thousand or 5.6%. The increase
in salaries and employee benefits is primarily attributed to $231 thousand in
noncash compensation expense recorded in the current quarter attributed to the
Company's stock option plan. No such expense was recorded in the first quarter
of 1998. Occupancy expense, net of rental income, increased $60 thousand to $559
thousand. The increase is partially attributed to the Company's efforts to
expand into new markets. Equipment expense increased $67 thousand or 10.0%. Data
processing expense decreased $114 thousand to $182 thousand. The decrease in
data processing expense is primarily attributed to a decrease in credit card
interchange expenses, which is the result of a lower volume of credit card
transactions. Bank franchise taxes decreased $12 thousand to $252 thousand.
Other noninterest expenses increased $49 thousand to $2.0 million for the
quarter ended March 31, 1999.
Income Taxes
- ------------
Income tax expense for the quarter ended March 31, 1999 was $1.4 million,
unchanged from the first quarter of 1998. The first quarter 1999 effective tax
rate was 28.2%, a decrease of 40 basis points from 28.6% for the first quarter
of 1998.
FINANCIAL CONDITION
Total assets were $996 million on March 31, 1999, an increase of $3.3 million or
less than 1% from December 31, 1998. Total assets and deposits are affected by
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 service 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. Total assets averaged $992 million for the first quarter of 1999, an
increase of $37 million or 3.9% from year end 1998.
Loans
- -----
Loans, net of unearned income, decreased $3.8 million or less than 1% from
December 31, 1998 to $601 million. Average loans, net of unearned income
increased $11.6 million or 2.0%. On average, loans represented 67% of earning
assets compared to 68% at year end 1998. As loan demand fluctuates, the
available funds are redirected between either temporary investments or
investment securities.
Allowance for Loan Losses
- -------------------------
The provision for loan losses decreased $38 thousand or 16.4% compared to the
first quarter 1998. The Company recorded net charge-offs of $212 thousand in the
first quarter of 1999, a slight decrease compared to net charge-offs of $215
thousand in the same period of 1998. The allowance for loan losses was 1.5% of
net loans for the first quarter of 1999, unchanged from year end 1998.
Management continues to emphasize collection efforts and evaluation of risks
within the portfolio.
Nonperforming Assets
- --------------------
Nonperforming assets, consisting of nonaccrual loans, restructured loans, loans
past due ninety days or more on which interest in still accruing, other real
estate owned, and other foreclosed assets, totaled $4.4 million on March 31,
1999, a decrease of $239 thousand or 5.1% from year end 1998. Nonperforming
assets to total equity decreased from 3.8% at year end 1998 to 3.6% at March 31,
1999. Nonperforming loans as a percentage of net loans decreased from .48% at
year end to .46%.
Other real estate owned, which had a balance of $1.7 million at year end 1998,
decreased to $1.6 million as of March 31, 1999.
Temporary Investments
- ---------------------
Time deposits with banks, federal funds sold and securities purchased under
agreements to resell averaged $51.2 million, a decrease of $3.0 million or 5.6%
from year end 1998.
Investment Securities
- ---------------------
Investment securities were $255 million on March 31, 1999, a decrease of $7.6
million or 2.9% from year end 1998. Available for sale and held to maturity
securities were $186 and $69 million, respectively. Investment securities
averaged $250 million for the first quarter of 1999, an increase of $28.4
million or 12.8% from year end 1998. The unrealized gain on available for sale
investment securities decreased $369 thousand, net of tax, during the quarter
ending March 31, 1999.
Deposits
- --------
Total deposits decreased $5.2 million or less than 1%, from year end 1998 to
$825 million. Noninterest bearing deposits increased $35.3 million or 28.6%
while interest bearing deposits have decreased $40.5 million or 5.7%. The
increase in noninterest bearing deposits 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. Deposits averaged $821 million,
an increase of $32.3 million or 4.1% from year end 1998.
Borrowed Funds
- --------------
Borrowed funds totaled $37.4 million, an increase of $7.1 million or 23.5% from
year end 1998. This increase is due primarily to repurchase agreements entered
into with the Commonwealth of Kentucky. Fluctuations occur due to the
relationship with the Commonwealth as described under the caption "FINANCIAL
CONDITION". Borrowed funds averaged $41.2 million for the first quarter of 1999,
an increase of $1.9 million or 4.7%.
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 March
31, 1999 combined retained earnings of the subsidiary banks were $51.0 million,
of which $11.7 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 $30.4 million on March 31, 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 March 31, 1999, such assets totaled $292
million, an increase of $9 million from year end 1998. Net cash provided by
operating activities totaled $3.3 million for the first quarter of 1999, a
decrease of $1.4 million compared to the same quarter last year. The decrease is
primarily due to an increase in net mortgage loans originated for sale of $1.7
million for the current quarter. Net cash provided by investing activities was
$11.7 million for the current quarter, an increase of $2.6 million. The increase
is a result of an increase in net securities purchased of $5.2 million, a
decrease in net loans originated for investment of $ 4.5 million, and a decrease
in premises and equipment purchases of $2.0 million. Net cash used in financing
activities was $657 thousand for the period ended March 31, 1999 compared to
$79.5 million in the same period in 1998. The decrease is primarily attributed
to a $61.9 million decrease in net cash used related to deposits and a $17.4
million increase in net cash provided related to other borrowed funds.
CAPITAL RESOURCES
Shareholders' equity was $125 million on March 31, 1999, an increase of $787
thousand from year end 1998. The Company purchased 14 thousand shares of its
outstanding common stock during the first quarter of 1999 for a total cost of
$482 thousand. The Company issued 285 shares of common stock during the first
quarter pursuant to its nonqualified employee stock option plan. Dividends of
$2.1 million or $.28 per share were declared during the first quarter of 1999,
an increase of 16.7% per share compared to the first quarter of 1998.
Consistent with the objective of operating a sound financial organization, the
Company's goal is to maintain capital ratios well above the regulatory
requirements. The Company's capital ratios as of March 31, 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 19.30% 4.00% 6.00%
Total risk based 20.55% 8.00% 10.00%
Leverage 12.45% 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 March
31, 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
systems is complete and have resulted in satisfactory results. Testing of
noncritical systems is substantially complete and have also resulted in
satisfactory results. The Company currently plans to complete the testing of its
remaining noncritical systems by the end of June 1999. Although mission critical
testing is complete and noncritical system testing is substantially complete,
the Company will continue to monitor and evaluate these systems 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 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: 5/11/99 /s/ Charles S. Boyd
- -------------- -------------------
Charles Scott Boyd,
President and CEO (Principal Executive Officer)
Date: 5/11/99 /s/ Cecil Douglas Carpenter
- -------------- ---------------------------
Cecil Douglas Carpenter
Vice President and CFO (Principal Financial and
Accounting Officer)
<PAGE>
Exhibit 11
Statement re computation of per share earnings
----------------------------------------------
(In thousands, except per share data)
Three months ended March 31, 1999 1998
- ---------------------------- ---- ----
Net income, basic and diluted $ 3,503 $ 3,582
======= ========
Average shares outstanding, basic and diluted 7,514 7,559
===== =====
Net income per share, basic and diluted $ .47 $ .47
<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>
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<PERIOD-START> JAN-01-1999
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