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, 2000
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
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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
7,294,513 shares outstanding at July 31, 2000
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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, 2000 and December 31, 1999 3
Unaudited Consolidated Statements of Income -
For the Three Months and Six Months Ended
June 30, 2000 and June 30, 1999 4
Unaudited Consolidated Statements of Comprehensive Income -
For the Three Months and Six Months Ended
June 30, 2000 and June 30, 1999 5
Unaudited Consolidated Statements of Cash Flows -
For the Six Months Ended
June 30, 2000 and June 30, 1999 6
Unaudited Consolidated Statements of Changes in Shareholders' Equity -
For the Six Months Ended
June 30, 2000 and June 30, 1999 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 13
Part II - Other Information
Item 1 - Legal Proceedings 13
Item 4 - Submission of Matters to a Vote of Security Holders 14
Item 6 - Exhibits and Reports on Form 8-K 15
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
UNAUDITED CONSOLIDATED BALANCE SHEETS
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June 30, December 31,
(In thousands, except share data) 2000 1999
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ASSETS Cash and cash equivalents:
Cash and due from banks $69,562 $82,862
Interest bearing deposits in other banks 1,060 11,594
Federal funds sold and securities purchased
under agreements to resell 46,788 40,904
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Total cash and cash equivalents 117,410 135,360
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Investment securities:
Available for sale 149,837 167,944
Held to maturity 56,526 61,896
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Total investment securities 206,363 229,840
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Loans, net of unearned income 671,339 643,190
Allowance for loan losses (10,088) (9,659)
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Loans, net 661,251 633,531
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Premises and equipment, net 24,541 24,409
Other assets 17,984 16,647
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Total assets $1,027,549 $1,039,787
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LIABILITIES
Deposits:
Noninterest bearing $160,847 $176,315
Interest bearing 677,861 685,905
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Total deposits 838,708 862,220
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Securities sold under agreements to repurchase 49,532 41,200
Other borrowed funds 6,955 4,439
Dividends payable 2,125 2,162
Other liabilities 6,839 4,660
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Total liabilities 904,159 914,681
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Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock, par value $0.125 per share
9,608,000 shares authorized; 7,299,113 and 7,437,792
shares issued and outstanding at June 30, 2000 and
December 31, 1999, respectively 912 930
Capital surplus 12,158 11,686
Retained earnings 112,659 114,431
Accumulated other comprehensive loss (2,339) (1,941)
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Total shareholders' equity 123,390 125,106
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Total liabilities and shareholders'equity $1,027,549 $1,039,787
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See accompanying notes to consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
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(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
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INTEREST INCOME
Interest and fees on loans $14,968 $13,473 $29,382 $26,650
Interest on investment securities:
Taxable 2,127 2,318 4,381 4,655
Nontaxable 870 1,016 1,761 1,919
Interest on deposits in other banks 11 9 35 37
Interest on federal funds sold and
securities purchased under
agreements to resell 491 274 848 861
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Total interest income 18,467 17,090 36,407 34,122
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INTEREST EXPENSE
Interest on deposits 7,104 6,253 13,617 12,587
Interest on other borrowed funds 685 452 1,253 960
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Total interest expense 7,789 6,705 14,870 13,547
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Net interest income 10,678 10,385 21,537 20,575
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Provision for loan losses 1,167 441 1,427 635
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Net interest income after
provision for loan losses 9,511 9,944 20,110 19,940
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NONINTEREST INCOME
Service charges and fees on deposits 1,279 1,329 2,568 2,550
Other service charges, commissions, and fees 1,057 977 2,007 1,966
Data processing income 361 391 676 714
Trust income 457 326 819 646
Investment securities gains 46 49
Gain (loss) on sale of loans 11 (44) 15 (49)
Other 103 132 247 231
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Total noninterest income 3,268 3,157 6,332 6,107
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NONINTEREST EXPENSE
Salaries and employee benefits 4,742 4,487 9,506 8,918
Occupancy expenses, net 549 552 1,109 1,111
Equipment expenses 677 723 1,352 1,459
Data processing expense 66 131 152 249
Bank franchise tax 289 274 574 526
Other 2,184 2,096 4,096 4,069
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Total noninterest expense 8,507 8,263 16,789 16,332
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Income before income taxes 4,272 4,838 9,653 9,715
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Income tax expense 1,320 1,170 2,703 2,544
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Net income $2,952 $3,668 $6,950 $7,171
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NET INCOME PER COMMON SHARE
Basic and diluted $.40 $.49 $.94 $.96
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WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 7,346 7,488 7,384 7,501
Diluted 7,348 7,488 7,386 7,501
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See accompanying notes to consolidated financial statement
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UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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Three Months Ended Six Months Ended
June 30, June 30,
(In Thousands) 2000 1999 2000 1999
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NET INCOME $2,952 $3,668 $6,950 $7,171
Other comprehensive income (loss):
Unrealized holding gain (loss) on
available for sale securities arising
during the period, net of tax of $38,
$732, $205, and $895, respectively 74 (1,421) (398) (1,737)
Reclassification adjustment for prior
period unrealized gain recognized
during current period, net of tax
of $0, $9, $0, and $37, respectively. (18) (71)
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Other comprehensive income (loss) 74 (1,439) (398) (1,808)
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Comprehensive income $3,026 $2,229 $6,552 $5,363
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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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Six months ended June 30, (In thousands) 2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $6,950 $7,171
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,294 1,451
Net amortization of investment security
premiums and discounts:
Available for sale (229) (97)
Held to maturity (8) 17
Provision for loan losses 1,427 635
Noncash compensation expense 486 518
Mortgage loans originated for sale (3,432) (7,776)
Proceeds from sale of mortgage loans 3,170 10,257
Deferred income tax expense 37 60
Loss (gain) on sale of mortgage loans (15) 49
Gain on sale of available for sale
investment securities (49)
Gain on sale of fixed assets (5) (7)
Decrease in accrued interest receivable 117 569
Increase in other assets (1,110) (40)
Increase (decrease) in accrued interest payable 188 (151)
Increase in other liabilities 1,566 1,447
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Net cash provided by operating activities 10,436 14,054
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from maturities and calls of
investment securities:
Available for sale 50,990 91,777
Held to maturity 5,377 4,134
Proceeds from sale of available for
sale investment securities 13,397
Purchase of investment securities:
Available for sale (33,257) (98,036)
Held to maturity
Loans originated for investment, net of
principal collected (28,870) (15,370)
Purchases of premises and equipment (1,175) (1,523)
Proceeds from sale of equipment 3 214
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Net cash used in investing activities (6,932) (5,407)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (23,512) (21,119)
Dividends paid (4,312) (4,216)
Purchase of common stock (4,636) (1,721)
Stock options exercised 158 30
Net increase in other borrowed funds 10,848 34,416
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Net cash (used in) provided by financing activities (21,454) 7,390
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Net (decrease) increase in cash and cash equivalents (17,950) 16,037
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Cash and cash equivalents at beginning of year 135,360 91,834
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Cash and cash equivalents at end of period $117,410 $107,871
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Supplemental disclosures Cash paid during the period for:
Interest $14,682 $13,698
Income taxes 2,600 2,575
Cash dividend declared and unpaid 2,125 2,096
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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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Accumulated Total
(In thousands, except per share data) Common Stock Capital Retained Other Comprehensive Shareholders'
Six months ended June 30, 2000 and 1999 Shares Amount Surplus Earnings (Loss) Income Equity
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Balance at December 31, 1999 7,438 $930 $11,686 $114,431 $(1,941) $125,106
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Net Income 6,950 6,950
Other comprehensive loss (398) (398)
Cash dividends declared, $.58 per share (4,275) (4,275)
Purchase of common stock (145) (19) (171) (4,447) (4,637)
Stock options exercised, including
related tax benefits 6 1 157 158
Effect of noncash compensation
attributed to stock option grants 486 486
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Balance at June 30, 2000 7,299 $912 $12,158 $112,659 $(2,339) $123,390
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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 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 options grant 518 518
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Balance at June 30, 1999 7,473 $934 $11,011 $113,324 $(1,439) $123,830
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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 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, 1999.
2. Reclassifications
Certain reclassifications have been made to the consolidated financial
statements of prior periods to conform to the current period presentation.
3. Pending Legal Actions
On April 7, 2000, the Company was assessed $99,875 in compensatory damages and
$600,000 in punitive damages as a result of the jury's verdict in the Schilling,
et al. v. Farmers Bank & Capital Trust Company case. The Company has filed a
motion for a judgment notwithstanding the verdict or in the alternative for a
new trial and is awaiting the judge's final ruling. Management, after discussion
with legal counsel, believes it is more than remote but less than likely they
will receive an unfavorable ruling. Accordingly, no expense has been accrued
related to the jury's verdict. The loss, if any, from this case will be
recognized on the date of the judge's final ruling. See Legal Proceedings in
Part II of this Form 10-Q.
As of June 30, 2000 there were various pending legal actions and proceedings
against the Company arising from the normal course of business and in which
claims for damages are asserted. Management, after discussion with legal
counsel, believes these actions are without merit and the ultimate liability
resulting from these legal actions and proceedings, if any, will not have a
material adverse effect upon the consolidated financial statements of the
Company.
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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
Second Quarter 2000 vs. Second Quarter 1999
-------------------------------------------
The Company reported net income of $3.0 million or $.40 per diluted share for
the second quarter of 2000 compared to net income of $3.7 million or $.49 per
diluted share for the second quarter of 1999. Net interest income for the three
months increased $293 thousand or 2.8%, but was more than offset by the $726
thousand increase in the provision for loan losses inherent in the loan
portfolio. Non-interest expense increased $244 thousand, or 3.0%.
Return on average assets was 1.17% for the second quarter of 2000 compared to
1.49% reported for the same period of 1999. Return on average equity was 9.51%
for the second quarter of 2000, compared to 11.79% in the same period of 1999.
Net Interest Income
-------------------
Net interest income totaled $10.7 million for the second quarter of 2000, an
increase of $293 thousand or 2.8% over the second quarter of 1999. Total
interest income was $18.5 million for the second quarter of 2000, an increase of
$1.4 million or 8.1%. Total interest expense was $7.8 million for the current
quarter, an increase of $1.1 million or 16.2% compared to the same period in
1999. Average interest bearing liabilities increased $14.4 million while the
rate paid increased 52 basis points to 4.29%.
Interest and fees on loans increased $1.5 million mainly due to an increase in
volume. Average loans increased $58.5 million, or 9.6% while the yield increased
10 basis points to 9.08%. Interest on taxable securities decreased $191 thousand
or 8.2% mainly due to a $37.3 million decrease in the average balance. The
decrease in the average balance was partially offset by a 92 basis point
increase in the average rate earned on these securities. Interest on nontaxable
securities decreased $146 thousand or 14.4% due to a decrease in the average
balance. Interest on short-term investments increased $217 thousand due to
increases in both the average balance and rates earned.
The net interest margin on a tax equivalent basis decreased to 4.90% during the
second quarter of 2000 compared to 4.92% in the second quarter of 1999. The
spread between rates earned and paid was 4.08% for the current quarter compared
to 4.21% in the same period last year. The decrease is the result of the 52
basis point increase in the average rate paid on interest bearing liabilities
while the yield earned on interest earning assets only increased 39 basis
points.
Noninterest Income
------------------
Noninterest income was $3.3 million for the current quarter, up $111 thousand or
3.5% compared to the prior year. Service charges and fees on deposits, the
largest component of noninterest income, remained relatively unchanged at $1.3
million. Other service charges, commissions, and fees were up $80 thousand and
totaled $1.1 million. Data processing income decreased $30 thousand for the
second quarter of 2000. Trust fees increased $131 thousand to $457 thousand.
Gains on the sale of available for sale investment securities, which were zero
in the second quarter of 2000, totaled $46 thousand in the previous year. The
gain on sale of loans increased $55 thousand. Other noninterest income decreased
$29 thousand.
Noninterest Expense
-------------------
Total noninterest expenses increased $244 thousand or 3.0% from the second
quarter of 1999 to $8.5 million. Salaries and employee benefits, the largest
component of noninterest expense, increased $255 thousand or 5.7%. Occupancy
expense, net of rental income, was relatively unchanged at $549 thousand.
Equipment expense decreased $46 thousand or 6.4%. Data processing expense
decreased $65 thousand for the second quarter of 2000. 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 $289 thousand. Other noninterest
expense increased $88 thousand or 4.2% to $2.2 million.
Income Taxes
------------
Income tax expense for the second quarter of 2000 was $1.3 million, an increase
of $150 thousand or 12.8% from the second quarter of 1999. The effective tax
rate was 30.9% for the current quarter, an increase from 24.2% from the second
quarter of 1999. The increase in the effective tax rate is due to a decrease in
tax-exempt income from both municipal loans and municipal securities.
First six months of 2000
-------------------------
Net income for the six months ended June 30, 2000 was $6.95 million compared to
$7.2 million for the same period in 1999, a decrease of $221 thousand or 3.1%.
Diluted net income per share was $.94 compared to $.96 for the same period in
1999, a decrease of $.02 or 2.1%. Fueled by loan growth, net interest income for
the six months increased $962,000, or 4.7%, but was nearly offset by a $792,000
increase in the provision for loan losses inherent in the loan portfolio. Net
loan charge-offs increased $571,000. Non-interest expense increased $457,000, or
2.8%.
Return on average assets was 1.39% for the six months ended June 30, 2000, a
decrease of 7 basis point from the same period in 1999. Return on average equity
was 11.24%, a decrease from 11.65% for the first six months of 1999.
Net Interest Income
-------------------
Net interest income totaled $21.5 million for the six months ended June 30,
2000, an increase of $962 thousand or 4.7% compared to the same period in 1999.
Total interest income was $36.4 million compared to $34.1 million a year ago.
Total interest expense increased $1.3 million to a total of $14.9 million.
Interest and fees on loans increased $2.7 million or 10.3%. The increase is
attributed to the increase in average loans of $53.2 million, or 8.8%, and the
increase in the yield of 10 basis points to 9.08%. Interest on taxable
securities decreased $274 thousand as volume declined, but the yield increased
78 basis points to 6.37%. Interest on nontaxable securities decreased $158
thousand or 8.2% almost entirely on volume. Interest on short-term investments
was relatively unchanged at $848 thousand.
Interest expense on deposits increased $1.0 million or 8.2%. Interest expense on
other borrowed funds increased $293 thousand. The increase for both categories
was mainly the result of an increase in the average rate paid.
Net interest margin on a tax equivalent basis increased to 4.98% during the
first six months of 2000 compared to 4.83% for the same period of 1999. The
spread between rates earned and paid was up 9 basis points to 4.22% in the
six-month comparison.
Noninterest Income
------------------
Noninterest income was $6.3 million for the first six months of 2000, an
increase of $225 thousand or 3.7% compared to the same period in 1999. Service
charges and fees on deposits remained relatively unchanged at $2.6 million.
Other service charges, commissions, and fees were also relatively unchanged at
$2.0 million. Trust fees increased $173 thousand to a total of $819 thousand.
Gains on the sale of available for sale investment securities were $49 thousand
in the prior year with none in the current year. The gain on sale of loans
increased $64 thousand.
Noninterest Expense
-------------------
Noninterest expense was $16.8 million for the first six months of 2000, an
increase of $457 thousand or 2.8% compared to the same period in 1999. Salaries
and employee benefits, the largest component of noninterest expense, increased
$588 thousand or 6.6%. Occupancy expense, net of rental income, was unchanged at
$1.1 million. Equipment expense decreased $107 thousand or 7.3%. Data processing
expense was $152 thousand, a decrease of $97 thousand. Bank franchise tax
expense increased $48 thousand or 9.1%.
Income Taxes
------------
Income tax expense for the first six months of 2000 was $2.7 million, an
increase of $159 thousand compared to the same period in 1999. The effective tax
rate was 28.0% for the first six months of 2000, up from 26.2% in the prior
year. The increase in the effective tax rate is due to a decrease in tax-exempt
income from both municipal loans and municipal securities.
FINANCIAL CONDITION
Total assets were $1.0 billion on June 30, 2000, a decrease of $12 million or
1.2% from December 31, 1999. 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 $1.0 billion for the first six
months of 2000, an increase of $14 million or 1.4% from year-end 1999.
Loans
-----
Loans, net of unearned income, totaled $671 million at June 30, 2000, an
increase of $28.1 million or 4.4% from year-end 1999. On average, loans
represented 72.9% of earning assets compared to 69.1% for year-end 1999. 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 $10.1 million at June 30, 2000, an increase of
$429 thousand from the prior year end. The allowance for loan losses was 1.5% of
net loans at June 30, 2000. 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 $792 thousand in the current period compared to the
same period in 1999. The Company had net charge-offs of $998 thousand in the
first six months of 2000 compared to net charge-offs of $427 thousand in the
same period of 1999. 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 $5.6 million at
June 30, 2000, a decrease of $146 thousand or 2.6% from the prior year-end.
Nonperforming assets to total equity increased from 4.1% at year-end 1999 to
4.5% at June 30, 2000. Nonperforming loans totaled $4.7 million at June 30,
2000, a decrease of $214 thousand or 4.4% compared to year-end 1999.
Nonperforming loans as a percentage of net loans decreased from .76% at year-end
to .69%.
Other real estate owned, which had a balance of $735 thousand at year-end 1999,
increased to $801 thousand as of June 30, 2000.
Temporary Investments
---------------------
Time deposits with banks, federal funds sold and securities purchased under
agreements to resell averaged $28.1 million, a decrease of $2.8 million or 9.2%
from year end 1999. Temporary investments are reallocated as loan demand
presents the opportunity.
Investment Securities
---------------------
Investment securities were $206 million on June 30, 2000, a decrease of $23.5
million or 10.2% from year-end 1999. Available for sale and held to maturity
securities were $150 and $56 million, respectively. Investment securities
averaged $217 million for the first six months of 2000, a decrease of $29.6
million or 12.0% from year end 1999. The Company had an unrealized loss on
available for sale investment securities of $2.3 million, net of tax, at June
30, 2000 compared to $1.9 million at year end 1999.
Deposits
--------
Total deposits were $839 million at June 30, 2000, a decrease of $23.5 million
or 2.7% from year-end 1999. Noninterest bearing deposits decreased $15.5 million
in the comparison. This decrease 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 $146.6 million during the current period, an increase of $5.9 million or
4.2%. Interest bearing deposits decreased $8.0 million during the six months
ended June 30, 2000 compared to year-end 1999. On average, interest bearing
deposits were $681 million in the current period, an increase of $7.1 million or
1.1% from year end 1999. Total deposits averaged $828 million, an increase of
$13.1 million or 1.6% from year-end 1999.
Borrowed Funds
--------------
Borrowed funds totaled $56.5 million at June 30, 2000, an increase of $10.8
million from year-end 1999. Total borrowed funds averaged $44.0 million, a
decrease of $1.4 million or 3.0%.
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,
2000 combined retained earnings of the subsidiary banks were $59.4 million, of
which $22.2 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 2000. The Parent Company had
cash balances of $20.0 million at June 30, 2000.
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, 2000, such assets totaled $267
million, a decrease of $36.1 million from year-end 1999. Net cash provided by
operating activities decreased $3.6 million in the six months ended June 30,
2000 compared to the same period last year. The decrease is primarily attributed
to the decrease in the proceeds from the sale of mortgage loans. Net cash used
in investing activities was $6.9 million, an increase of $1.5 million. Net cash
used in financing activities was $21.5 million for the period ended June 30,
2000 compared to net cash provided of $7.4 million in the prior year comparison.
The increase in net cash used in financing activities is due primarily to the
decrease in utilizing other borrowed funds.
CAPITAL RESOURCES
Shareholders' equity was $123 million on June 30, 20000, down $1.7 million from
year-end 1999. The Company purchased 145 thousand shares of its outstanding
common stock during the first six months of 2000 for a total cost of $4.6
million. The Company issued 6,450 shares of common stock during the first six
months pursuant to its nonqualified stock option plan. Dividends of $4.3 million
or $.58 per share were declared during the first six months of 2000, an increase
of 3.6% per share compared to the prior year. The Company's available for sale
investment securities portfolio had net unrealized losses of $2.3 million at
June 30, 2000, up from a net unrealized loss of $1.9 million at year-end.
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, 2000, 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 18.07% 4.00% 6.00%
Total risk based 19.32% 8.00% 10.00%
Leverage 12.32% 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, 2000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
There have been no material changes in the Company's market risk from December
31, 1999. 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, 1999.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
In September 1992, Farmers Bank (the "Bank") was named as a defendant in Case
No. 92CI05734 in Jefferson Circuit Court, Louisville, Kentucky, in a case styled
Schilling, et al. v. Farmers Bank & Capital Trust Company. The named plaintiffs
purported to represent a class consisting of all present and former owners of
the County of Jefferson, Kentucky, Nursing Home Refunding Revenue Bonds (Filson
Care Home Project) Series 1986A and County of Jefferson, Kentucky, Nursing Home
Improvement Revenue Bonds (Filson Care Home Project) Series 1986B (collectively
"the Bonds"). The plaintiffs alleged that the class had been damaged through a
reduction in the value of the Bonds and a loss of interest on the Bonds because
of the actions of the Bank in its capacity as indenture trustee for the
Bondholders. The plaintiffs demanded compensatory and punitive damages.
On July 6, 1993, the Court denied the plaintiffs' motion to certify the case as
a class action. Subsequently, the plaintiffs amended their complaint to join
additional Bondholders as plaintiffs. The plaintiffs claimed to hold Bonds in
the aggregate principal amount of $480,000. Before trial, the Court dismissed
thirty-nine of the plaintiffs because they were unable or unwilling to present
testimony to support their claims.
The case was tried to a jury beginning on March 28, 2000 on the claims of four
plaintiffs holding Bonds in the aggregate principal amount of $80,000. The Court
granted a directed verdict in favor of the Bank on the plaintiffs' claim that
the Bank had engaged in commercial bribery and that the legal fees that were
paid by the Bank should be disgorged because of an alleged conflict of interest
of the Bank's counsel. The jury found for the plaintiffs on the claim that the
Bank had breached its fiduciary duty and awarded the plaintiffs $99,875 in
compensatory damages and $600,000 in punitive damages.
The Bank has filed a motion for judgment notwithstanding the verdict or, in the
alternative, for a new trial, asserting that the jury's verdict that the Bank
breached its fiduciary duty was not supported by sufficient evidence, that the
jury's award of damages was speculative and was not supported by the evidence,
and that the jury's award of punitive damages was not supported by sufficient
evidence. The Bank has also asserted that a new trial is warranted because of
the erroneous admission of evidence concerning legal fees paid by the Bank.
Plaintiffs filed appeals contending that the denial of class certification was
erroneous, that the individual plaintiffs should not have been dismissed from
the lawsuit, that certain evidence was erroneously excluded, and that the
directed verdict regarding the disgorgement of legal fees and the commercial
bribery claims was erroneous. On August 1, 2000 the Kentucky Court of Appeals
dismissed the appeals as having been prematurely filed.
Farmers Bank intends to vigorously pursue its pending motion for judgment
notwithstanding the verdict or, in the alternative, for a new trial, or, in the
event the trial court denies the motion, to appeal the trial court's judgment to
the Kentucky Court of Appeals. It is not possible at this stage of the
proceedings to make any prediction as to the outcome.
As of June 30, 2000, there were various other pending legal actions and
proceedings against the Company arising from the normal course of business and
in which claims for damages are asserted. Management, after discussion with
legal counsel, believes that these actions are without merit and that the
ultimate liability resulting from these legal actions and proceedings, if any,
will not have a material adverse effect upon the consolidated financial
statements of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
The annual meeting of shareholders was held May 9, 2000. The matters that were
voted upon included:
a) The election of four directors for three-year terms ending in 2003 or
until their successors have been elected and qualified.
b) The transaction of such other business as may properly come before the
meeting.
The outcome of the voting was as follows:
Name For Against Withheld Abstained
Frank W. Sower, Jr. 6,604,338 0 1,100 0
J. Barry Banker 6,598,068 0 7,370 0
Charles S. Boyd 6,598,218 0 7,220 0
Glen Birdwhistell 6,590,202 0 15,236 0
The transaction of other business 6,378,909 159,334 0 67,195
Listed below is the name of each director whose term of office continued after
the meeting.
Stokes A. Baird IV Harold G. Mays
James H. Childers Robert Roach, Jr.
Michael M. Sullivan G. Anthony Busseni
Lloyd C. Hillard, Jr. 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
-------------------
On July 25, 2000, the Company filed a Form 8-K to announce that it intends to
purchase up to 500,000 shares of its outstanding common stock. This is in
addition to the stock purchase plan announced on November 9, 1998 to purchase
400,000 shares. Under the previously announced plan, 283,955 have been purchased
as of July 25, 2000. The purchase will be dependent on market conditions and
there will be no guarantee as to the exact number of shares to be purchased by
the Company. Shares purchased would be used for general corporate purposes.
Consistent with the objective of maximizing shareholder value, the Company
considers the purchase of its outstanding shares in the current price range to
be a good investment of the Company's available funds.
Financial statements were not required with this Form 8-K.
<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: 8/11/00 /s/ Charles Scott Boyd
------------- ------------------------------------------------
Charles Scott Boyd,
President and CEO (Principal Executive Officer)
Date: 8/11/00 /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) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income, basic and diluted $2,952 $3,668 $6,950 $7,171
----------------------------------------------------------------------------------------------------------
Average shares outstanding 7,346 7,488 7,384 7,501
Effect of dilutive stock options
----------------------------------------------------------------------------------------------------------
Average diluted shares outstanding 7,346 7,488 7,384 7,501
----------------------------------------------------------------------------------------------------------
Net income per share, basic $.40 $.49 $.94 $.96
Net income per share, diluted $.40 $.49 $.94 $.96
----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
