UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
7,184,176 shares outstanding at November 1, 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 -
September 30, 2000 and December 31, 1999 3
Unaudited Consolidated Statements of Income -
For the Three Months and Nine Months Ended
September 30, 2000 and September 30, 1999 4
Unaudited Consolidated Statements of Comprehensive Income -
For the Three Months and Nine Months Ended
September 30, 2000 and September 30, 1999 5
Unaudited Consolidated Statements of Cash Flows -
For the Nine Months Ended
September 30, 2000 and September 30, 1999 6
Unaudited Consolidated Statements of Changes in Shareholders' Equity -
For the Nine Months Ended
September 30, 2000 and September 30, 1999 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 14
Part II - Other Information
Item 1 - Legal Proceedings 14
Item 6 - Exhibits and Reports on Form 8-K 15
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
UNAUDITED CONSOLIDATED BALANCE SHEETS
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September 30, December 31,
(In thousands, except share data) 2000 1999
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<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks $87,763 $82,862
Interest bearing deposits in other banks 1,628 11,594
Federal funds sold and securities purchased
under agreements to resell 51,875 40,904
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Total cash and cash equivalents 141,266 135,360
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Investment securities:
Available for sale 158,647 167,944
Held to maturity 54,912 61,896
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Total investment securities 213,559 229,840
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Loans, net of unearned income 678,551 643,190
Allowance for loan losses (10,177) (9,659)
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Loans, net 668,374 633,531
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Premises and equipment, net 25,071 24,409
Other assets 17,553 16,647
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Total assets $1,065,823 $1,039,787
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LIABILITIES
Deposits:
Noninterest bearing $163,208 $176,315
Interest bearing 681,538 685,905
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Total deposits 844,746 862,220
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Securities sold under agreements to repurchase 76,987 41,200
Other borrowed funds 11,744 4,439
Dividends payable 2,102 2,162
Other liabilities 6,840 4,660
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Total liabilities 942,419 914,681
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Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock, par value $0.125 per share
9,608,000 shares authorized; 7,210,376 and 7,437,792
shares issued and outstanding at September 30, 2000
and December 31, 1999, respectively 1,004 1,002
Capital surplus 13,365 12,370
Retained earnings 129,533 125,173
Treasury stock (19,357) (11,498)
820,021 and 581,586 shares at cost at
September 30, 2000 and December 31, 1999,
respectively
Accumulated other comprehensive loss (1,141) (1,941)
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Total shareholders' equity 123,404 125,106
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Total liabilities and shareholders' equity $1,065,823 $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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Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 2000 1999 2000 1999
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<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $15,519 $13,748 $44,901 $40,398
Interest on investment securities:
Taxable 2,140 2,363 6,521 7,018
Nontaxable 859 944 2,620 2,863
Interest on deposits in other banks (38) 19 (3) 56
Interest on federal funds sold and securities
purchased under agreements to resell 666 275 1,514 1,136
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Total interest income 19,146 17,349 55,553 51,471
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INTEREST EXPENSE
Interest on deposits 7,371 6,170 20,988 18,757
Interest on other borrowed funds 999 528 2,252 1,488
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Total interest expense 8,370 6,698 23,240 20,245
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Net interest income 10,776 10,651 32,313 31,226
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Provision for loan losses 460 506 1,887 1,141
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Net interest income after provision for loan losses 10,316 10,145 30,426 30,085
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NONINTEREST INCOME
Service charges and fees on deposits 1,316 1,333 3,884 3,883
Other service charges, commissions, and fees 1,038 832 3,174 2,679
Data processing income 340 350 1,016 1,064
Trust income 406 327 1,225 973
Investment securities gains 49
Gain (loss) on sale of loans 13 28 (49)
Other 33 74 151 231
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Total noninterest income 3,146 2,916 9,478 8,830
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NONINTEREST EXPENSE
Salaries and employee benefits 4,547 4,393 14,053 13,311
Occupancy expenses, net 546 548 1,655 1,659
Equipment expenses 708 747 2,060 2,206
Bank franchise tax 289 283 863 809
Other 2,063 1,901 6,311 6,026
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Total noninterest expense 8,153 7,872 24,942 24,011
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Income before income taxes 5,309 5,189 14,962 14,904
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Income tax expense 1,522 1,421 4,225 3,965
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Net income $3,787 $3,768 $10,737 $10,939
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NET INCOME PER COMMON SHARE
Basic and diluted $.52 $.50 $1.46 $1.46
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WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 7,263 7,458 7,343 7,487
Diluted 7,279 7,475 7,346 7,487
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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 Nine Months Ended
September 30, September 30,
(In Thousands) 2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net Income $3,787 $3,768 $10,737 $10,939
Other comprehensive income (loss):
Unrealized holding gain (loss) on available for sale
securities arising during the period, net of tax
of $617, $53, $412, and $(842), respectively 1,198 103 800 (1,634)
Reclassification adjustment for prior period
unrealized gain recognized during current period,
net of tax of $(37) in 1999. (71)
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Other comprehensive income (loss) 1,198 103 800 (1,705)
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Comprehensive income $4,985 $3,871 $11,537 $9,234
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See accompanying notes to consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine months ended September 30, (In thousands) 2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income $10,737 $10,939
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,961 2,199
Net amortization of investment security
premiums and discounts:
Available for sale (364) (111)
Held to maturity (8) 20
Provision for loan losses 1,887 1,141
Noncash compensation expense 726 805
Mortgage loans originated for sale (8,069) (9,534)
Proceeds from sale of mortgage loans 7,700 12,073
Deferred income tax expense 61 163
(Gain) loss on sale of mortgage loans (28) 49
Gain on sale of available for sale investment securities (49)
Gain on sale of fixed assets (4) (7)
Increase in accrued interest receivable (775) (885)
(Increase) decrease in other assets (551) 451
Increase (decrease) in accrued interest payable 486 (96)
Increase in other liabilities 1,268 80
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Net cash provided by operating activities 15,027 17,238
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities:
Available for sale 110,413 112,509
Held to maturity 6,992 7,377
Proceeds from sale of available for sale investment securities 13,397
Purchase of investment securities
Available for sale (99,540) (111,015)
Loans originated for investment, net of principal collected (36,333) (30,241)
Purchases of premises and equipment (2,273) (1,997)
Proceeds from sale of equipment 26 215
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Net cash used in investing activities (20,715) (9,755)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (17,473) (3,821)
Net increase in other borrowed funds 43,092 11,177
Dividends paid (6,437) (6,312)
Purchase of common stock (7,859) (2,322)
Stock options exercised 271 133
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Net cash provided by (used in) financing activities 11,594 (1,145)
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Net increase in cash and cash equivalents 5,906 6,338
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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 $141,266 $98,172
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SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $22,753 $20,341
Income taxes 4,150 4,325
Cash dividend declared and unpaid 2,102 2,089
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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
(In thousands, except per share data) Other Total
Nine months ended September 30, 2000 Common Stock Capital Retained Treasury Comprehensive Shareholders'
and 1999 Shares Amount Surplus Earnings Stock (Loss) Income Equity
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<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 7,438 $1,002 $12,370 $125,173 $(11,498) $(1,941) $125,106
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Net Income 10,737 10,737
Other comprehensive income 800 800
Cash dividends declared, $.87 per share (6,377) (6,377)
Purchase of common stock (238) (7,859) (7,859)
Stock options exercised, including
related tax benefits 11 2 269 271
Effect of noncash compensation
attributed to stock options grant 726 726
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Balance at September 30, 2000 7,211 $1,004 $13,365 $129,533 $(19,357) $(1,141) $123,404
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Balance at December 31, 1998 7,520 $1,001 $11,097 $119,692 $(8,320) $369 $123,839
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Net Income 10,939 10,939
Other comprehensive loss (1,705) (1,705)
Cash dividends declared, $.84 per share (6,288) (6,288)
Purchase of common stock (64) (2,322) (2,322)
Stock options exercised, including
related tax benefits 5 1 132 133
Effect of noncash compensation
attributed to stock options grant 805 805
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Balance at September 30, 1999 7,461 $1,002 $12,034 $124,343 $(10,642) $(1,336) $125,401
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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 September 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
Third Quarter 2000 vs. Third Quarter 1999
-----------------------------------------
The Company reported net income of $3,787,000 or $.52 per diluted share for the
third quarter of 2000 compared to net income of $3,768,000 or $.50 per diluted
share for the third quarter of 1999. Net interest income for the three months
increased $125 thousand or 1.2%. Non-interest income increased $170 thousand or
5.7%, and non-interest expense increased $221 thousand or 2.8%.
Return on average assets was 1.48% for the third quarter of 2000 compared to
1.52% reported for the same period of 1999. Return on average equity was 12.18%
for the third quarter of 2000, compared to 12.06% in the same period of 1999.
Net Interest Income
-------------------
Net interest income totaled $10.8 million for the third quarter of 2000, an
increase of $125 thousand or 1.2% over the third quarter of 1999. Total interest
income was $19.1 million for the third quarter of 2000, an increase of $1.8
million or 10.4%. Total interest expense was $8.3 million for the current
quarter, an increase of $1.7 million or 25.0% compared to the same period in
1999. Average interest bearing liabilities increased $35.2 million while the
rate paid increased 71 basis points to 4.47%.
Interest and fees on loans increased $1.8 million mainly due to an increase in
volume. Average loans increased $52.8 million, or 8.5% while the yield increased
35 basis points to 9.21%. Interest on taxable securities decreased $223 thousand
or 9.4% mainly due to a $26.5 million decrease in the average balance. The
decrease in the average balance was partially offset by a 49 basis point
increase in the average rate earned on these securities. Interest on nontaxable
securities decreased $85 thousand or 9.0% due to a decrease in the average
balance. Interest on short-term investments increased $334 thousand, which is
primarily due to a $16.1 million increase in the average balance.
The net interest margin on a tax equivalent basis decreased to 4.84% during the
third quarter of 2000 compared to 4.99% in the third quarter of 1999. The spread
between rates earned and paid was 3.98% for the current quarter compared to
4.23% in the same period last year. The decrease is the result of the 71 basis
point increase in the average rate paid on interest bearing liabilities while
the yield earned on interest earning assets only increased 46 basis points.
Noninterest Income
------------------
Noninterest income was $3.1 million for the current quarter, up $230 thousand or
7.9% 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 $206 thousand and
totaled $1.0 million. Trust fees increased $79 thousand to $406 thousand. Other
noninterest income decreased $41 thousand.
Noninterest Expense
-------------------
Total noninterest expenses increased $281 thousand or 3.6% from the third
quarter of 1999 to $8.2 million. Salaries and employee benefits, the largest
component of noninterest expense, increased $154 thousand or 3.5%. Occupancy
expense, net of rental income, was relatively unchanged at $546 thousand.
Equipment expense decreased $39 thousand or 5.2%. Bank franchise tax was
relatively unchanged at $289 thousand. Other noninterest expense increased $162
thousand or 8.5% to $2.1 million.
Income Taxes
------------
Income tax expense for the third quarter of 2000 was $1.5 million, an increase
of $101 thousand or 7.1% from the third quarter of 1999. The effective tax rate
was 28.7% for the current quarter, an increase from 27.4% from the third 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 Nine Months of 2000 vs. First Nine Months of 1999
-------------------------------------------------------
Net income for the nine months ended September 30, 2000 was $10.7 million
compared to $10.9 million for the same period in 1999, a decrease of $202
thousand or 1.8%. Diluted net income per share remained unchanged at $1.46.
Fueled by loan growth, net interest income for the nine months increased $1.1
million or 3.5%, but was offset by a $746 thousand increase in the provision for
loan losses and an increase in noninterest expense of $578 thousand.
Return on average assets was 1.42% for the nine months ended September 30, 2000,
a decrease of 6 basis points from the same period in 1999. Return on average
equity was 11.55%, a decrease from 11.79% for the first nine months of 1999.
Net Interest Income
-------------------
Net interest income totaled $32.3 million for the nine months ended September
30, 2000, an increase of $1.1 million or 3.5% compared to the same period in
1999. Total interest income was $55.6 million compared to $51.5 million a year
ago. Total interest expense increased $3.0 million to a total of $23.2 million.
Interest and fees on loans increased $4.5 million or 11.1%. The increase is
attributed to an increase in average loans of $53.0 million, or 8.7%, and the
increase in the yield of 18 basis points to 9.09%. Interest on taxable
securities decreased $497 thousand as volume declined, but the yield increased
68 basis points to 6.33%. Interest on nontaxable securities decreased $243
thousand or 8.5% almost entirely on volume. Interest on short-term investments
increased $319 thousand or 26.8%, which is primarily due to an increase of 136
basis points in the average rate earned.
Interest expense on deposits increased $2.2 million or 11.9%. Interest expense
on other borrowed funds increased $764 thousand. The increase of interest
expense on deposits was mainly the result of an increase of 41 basis points in
the average rate paid. The increase of interest expense on other borrowed funds
was primarily the result of an increase in the average balance of $11.0 million.
Net interest margin on a tax equivalent basis increased to 4.95% during the
first nine months of 2000 compared to 4.91% for the same period of 1999. The
spread between rates earned and paid was down 4 basis points to 4.12% in the
nine-month comparison.
Noninterest Income
------------------
Noninterest income was $9.5 million for the first nine months of 2000, an
increase of $648 thousand or 7.3% compared to the same period in 1999. Service
charges and fees on deposits remained relatively unchanged at $3.9 million.
Other service charges, commissions, and fees increased $495 thousand or 18.5%.
Data processing fees decreased $48 thousand or 4.5%. Trust fees increased $252
thousand to a total of $1.2 million. 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 $77 thousand.
Noninterest Expense
-------------------
Noninterest expense was $25.0 million for the first nine months of 2000, an
increase of $931 thousand or 3.9% compared to the same period in 1999. Salaries
and employee benefits, the largest component of noninterest expense, increased
$742 thousand or 5.6%. Occupancy expense, net of rental income, was unchanged at
$1.7 million. Equipment expense decreased $146 thousand or 6.6%. Bank franchise
tax expense increased $54 thousand or 6.7%. Other noninterest expense increased
$285 thousand or 4.7% to $6.3 million.
Income Taxes
------------
Income tax expense for the first nine months of 2000 was $4.2 million, an
increase of $260 thousand compared to the same period in 1999. The effective tax
rate was 28.2% for the first nine months of 2000, up from 26.6% 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 $1.1 billion on September 30, 2000, an increase of $26 million
or 2.5% 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 the 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 nine months of 2000, an increase of $18
million or 1.8% from year-end 1999.
Loans
-----
Loans, net of unearned income, totaled $679 million at September 30, 2000, an
increase of $35.4 million or 5.5% 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 $10.2 million at September 30, 2000, an
increase of $518 thousand from the prior year end. The allowance for loan losses
was 1.5% of net loans at September 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 $746 thousand in the current
period compared to the same period in 1999. The Company had net charge-offs of
$1.4 million in the first nine months of 2000 compared to net charge-offs of
$714 thousand in the same period of 1999. A significant percentage of the net
charge-offs has been confined to a relatively small number of loans. 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
September 30, 2000, a decrease of $1.3 million or 23.3% from the prior year-end.
Nonperforming assets to total equity decreased from 4.6% at year-end 1999 to
3.5% at September 30, 2000. Nonperforming loans totaled $3.4 million at
September 30, 2000, a decrease of $1.5 million or 30.1% compared to year-end
1999. Nonperforming loans as a percentage of net loans decreased from .76% at
year-end to .50% at September 30, 2000.
Other real estate owned, which had a balance of $735 thousand at year-end 1999,
increased to $765 thousand as of September 30, 2000.
Temporary Investments
---------------------
Time deposits with banks, federal funds sold and securities purchased under
agreements to resell averaged $32.9 million, an increase of $2.0 million or 6.3%
from year end 1999. Temporary investments are reallocated as loan demand
presents the opportunity.
Investment Securities
---------------------
Investment securities were $214 million on September 30, 2000, a decrease of
$16.3 million or 7.1% from year-end 1999. Available for sale and held to
maturity securities were $159 and $55 million, respectively. Investment
securities averaged $214 million for the first nine months of 2000, a decrease
of $31.9 million or 12.9% from year end 1999. The Company had an unrealized loss
on available for sale investment securities of $1.1 million, net of tax, at
September 30, 2000 compared to $1.9 million at year end 1999.
Deposits
--------
Total deposits were $845 million at September 30, 2000, a decrease of $17.5
million or 2.0% from year-end 1999. Noninterest bearing deposits decreased $13.1
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 $145.0 million during the current period, an increase of $4.4
million or 3.1%. Interest bearing deposits decreased $4.4 million during the
nine months ended September 30, 2000 compared to year-end 1999. On average,
interest bearing deposits were $680 million in the current period, an increase
of $5.8 million from year end 1999. Total deposits averaged $825 million, an
increase of $10.2 million or 1.2% from year-end 1999.
Borrowed Funds
--------------
Borrowed funds totaled $88.7 million at September 30, 2000, an increase of $43.1
million from year-end 1999. 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. Total borrowed funds averaged
$52.4 million, an increase of $7.0 million or 15.5% from year-end 1999.
LIQUIDITY
The liquidity of the Parent Company is primarily affected by the receipt of
dividends from its subsidiary banks and cash balances maintained. As of
September 30, 2000 combined retained earnings of the subsidiary banks were $51.8
million, of which $14.7 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 2000. The
Parent Company had cash balances of $25.5 million at September 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 September 30, 2000, such assets totaled $300
million, a decrease of $3 million from year-end 1999. Net cash provided by
operating activities decreased $2.2 million in the nine months ended September
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 $20.7 million, an increase of $11.0
million. Net cash provided by financing activities was $11.6 million for the
period ended September 30, 2000 compared to net cash used in financing
activities of $1.1 million in the prior year comparison. The increase in net
cash provided by financing activities is due primarily to the increase in other
borrowed funds.
CAPITAL RESOURCES
Shareholders' equity was $123 million on September 30, 2000, down $1.7 million
from year-end 1999. The Company purchased 238 thousand shares of its outstanding
common stock during the first nine months of 2000 for a total cost of $7.9
million. The Company issued 11,019 shares of common stock during the first nine
months pursuant to its nonqualified stock option plan. Dividends of $6.4 million
or $.87 per share were declared during the first nine 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 $1.1
million at September 30, 2000, down 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 September 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 17.46% 4.00% 6.00%
Total risk based 18.72% 8.00% 10.00%
Leverage 12.19% 4.00% 5.00%
The capital ratios of all the subsidiary banks, on an individual basis, were in
excess of the applicable minimum regulatory capital ratio requirements at
September 30, 2000.
EFFECT OF IMPLEMENTING RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133", which delays the effective date of SFAS 133 until January 1,
2001; however, early adoption is permitted. In June 2000, the FASB issued SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities", which provides guidance with respect to certain implementation
issues related to SFAS No. 133. On adoption, the provisions of SFAS No. 133 must
be applied prospectively. The Company will adopt SFAS No. 133 on January 1,
2001. Because the Company currently has no derivative instruments or hedging
activities, the Company believes the effect of adoption will not have a material
impact on the consolidated financial statements. Any derivative instruments
acquired or hedging activities entered into will be recorded in the financial
statements as required by SFAS No. 133 and SFAS No. 138.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" that replaces
SFAS No. 125. This Statement provides consistent standards for distinguishing
transfers of financial assets that are sales, from transfers that are secured
borrowings. The standards are based on the consistent application of the
financial components approach, where upon after a transfer, an entity recognizes
the financial and servicing assets it controls and the liabilities it has
incurred, and derecognizes financial liabilities when extinguished.
This Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. This Statement is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000.
A transfer of financial assets in which the transferor surrenders control is
accounted for as a sale to the extent that consideration other than beneficial
interests in the transferred assets is received in exchange. This Statement
requires that liabilities and derivatives transferred be initially measured at
fair value, if practicable. Servicing assets and other retained interest in the
transferred assets are to be measured by allocating the previous carrying amount
between the assets and retained interest sold, if any, based on their relative
fair values on the date of the transfer.
This Statement requires that servicing assets and liabilities be subsequently
measured by amortization in proportion to and over the period of estimated net
servicing income or loss, and assessment for asset impairment or increased
obligation based on their fair values.
This Statement requires that a liability be derecognized if the debtor pays the
creditor and is relieved of its obligation for the liability, or the debtor is
legally released from being the primary obligor under the liability either
judicially or by the creditor.
The Company does not expect the implementation of this Statement to have a
material effect on the consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
There have been no material changes in the Company's market risk from December
31, 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 September 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 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
-------------------
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: 11/9/00 /s/ Charles Scott Boyd
----------- -----------------------------------------------------
Charles Scott Boyd,
President and CEO (Principal Executive Officer)
Date: 11/9/00 /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 Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income, basic and diluted $3,787 $3,768 $10,737 $10,939
------------------------------------------------------------------------------------------------------
Average shares outstanding 7,263 7,458 7,343 7,487
Effect of dilutive stock options 16 17 3
------------------------------------------------------------------------------------------------------
Average diluted shares outstanding 7,279 7,475 7,346 7,487
------------------------------------------------------------------------------------------------------
Net income per share, basic $.52 $.50 $1.46 $1.46
Net income per share, diluted $.52 $.50 $1.46 $1.46
------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
