FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1997
Commission file number 2-87246
THE FARMERS BANCORP, FRANKFORT, INDIANA
(Exact name of registrant as specified in its charter)
INDIANA 35-1565713
(State of incorporation) (I.R.S. Employer
(Identification No.)
P.O. Box 129, Frankfort, Indiana
(Address of principal executive offices)
46041-0129
(Zip Code)
765-654-8731
(Registrant's telephone number, including area code)
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, 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.
CLASS OUTSTANDING AT MARCH 31, 1997
common stock, no par value 1,154,116
Page 1 of 15
FORM 10-Q
INDEX
Part I. Financial Information: Page
Item 1. Financial Statements:
Consolidated Statements of Condition 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in
Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-13
Part II. Other Information:
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Page 2 of 15<PAGE>
PART I, FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENT
THE FARMERS BANCORP
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in Thousands)
ASSETS March 31 June 30
1997 1996
-----------------------
Cash and due from banks 5355 9889
Federal Funds Sold 2100 0
-----------------------
Total cash and cash equivalents 7455 9889
Available-for-sale securities 12571 18610
Held-to-maturity securities 21306 23654
Loans held for sale 46 492
Total loans 191002 173556
Allowance for loan losses -3024 -2741
-----------------------
Net loans 187978 170815
Premises and equipment 5073 4641
Restricted stock, at cost 1012 771
Accrued income and other assets 7873 8172
-----------------------
Total Assets 243314 237044
=======================
LIABILITIES
Deposits
Demand 23714 22115
Savings 66792 67158
Time, $100,000 and over 22368 20250
Other time 85068 81966
-----------------------
197942 191489
Short-term borrowings 8906 12752
Other borrowings 7893 6259
Accrued interest payable 1064 958
Other liabilities 1506 1459
-----------------------
Total Liabilities 217311 212917
SHAREHOLDERS' EQUITY
Common stock, (no par value-2,400,000 shares authorized
and 1,154,116 shares issued and outstanding) 2885 2885
Additional paid-in capital 5101 5101
Retained earnings 18078 16235
Unrealized gain/(loss) on available-for-sale
securities (net of tax) (61) (94)
-----------------------
Total Shareholders' Equity 26003 24127
-----------------------
Total Liabilities & Shareholders' Equity 243314 237044
=======================
See accompanying notes to consolidated financial statements
Page 3 of 15
PART I, FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENT
THE FARMERS BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands except Per Share Amounts)
Three Months Nine Months
Ended Mar 31 Ended Mar 31
1997 1996 1997 1996
------------ ------------
Interest Income:
Loans, including related fees 4420 3650 12917 10957
Securities:
Taxable 444 502 1443 1520
Tax exempt 107 130 351 403
Short-term investments 48 154 99 613
-------------- ------------
Total Interest Income 5019 4436 14810 13493
Interest Expense: -------------- ------------
Deposits 1933 1860 5741 5570
Short-term borrowings 114 102 353 418
Other borrowings 116 74 323 217
-------------- ------------
Total Interest Expense 2163 2036 6417 6205
-------------- ------------
Net Interest Income 2856 2400 8393 7288
Provision for loan losses 165 120 405 360
-------------- ------------
2691 2280 7988 6928
Other income: -------------- ------------
Trust fees 64 61 194 182
Service charge income 189 176 586 534
Security gains (losses) 0 0 0 5
Other 206 176 572 435
-------------- ------------
Total Other Income 459 413 1352 1156
Other expenses: -------------- ------------
Salaries and employee benefits 997 978 2903 2894
Occupancy 146 153 431 443
Equipment 164 144 464 427
Other 506 706 1475 1674
-------------- ------------
Total Other Expense 1813 1981 5273 5438
-------------- ------------
Income Before Income Tax 1337 712 4067 2646
Less: Income taxes 483 239 1474 905
-------------- ------------
Net Income 854 473 2593 1741
Per share data: (Note 3) ============== ============
Net income per share .74 .41 2.25 1.51
============== ============
Dividends per share .22 .20 .65 .60
============== ============
See accompanying notes to consolidated financial statements
Page 4 of 15
PART I, FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENT
THE FARMERS BANCORP
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
1996 1995
-------------------
Balance - June 30 24127 22821
Net Income 2593 1741
Dividends (750) (692)
Change in net unrealized
gain/(loss) on available-
for-sale securities 33 (73)
-------------------
Balance - March 31 26003 23797
===================
See accompanying notes to consolidated financial statements
Page 5 of 15
PART I, FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENT
THE FARMERS BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Nine Months Ended
March 31
CASH FLOWS FROM OPERATING ACTIVITIES 1997 1996
Net income 2593 1741
Adjustments to reconcile net income to net cash
from operating activities 1298 1687
---------------
Net cash from operating activities 3891 3428
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and principal repayments on
available-for-sale securities 6082 3208
Purchases of available-for-sale securities -0- (6192)
Proceeds from maturities and principal repayments
on investment securities 2488 10718
Purchase of investment securities (170) (7069)
Loans made to customers, net of principal
collections thereon (17122) (7364)
Net change in interest-bearing balances with
financial institutions -0- -0-
Purchase of life insurance policies (24) (26)
Property and equipment expenditures (828) (719)
Purchase of restricted stock (242) -0-
---------------
Net cash from investing activities (9816) (7444)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase/(decrease) in deposits 6453 13282
Net increase/(decrease) in short term borrowings (3846) (11825)
Proceeds from other borrowings 7335 1650
Repayment of other borrowings (5701) (1191)
Dividends paid (750) (692)
---------------
Net cash from financing activities 3491 1224
---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2434) (2792)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9889 19085
---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 7455 16293
===============
See accompanying notes to consolidated financial statements
Page 6 of 15
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
THE FARMERS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
NOTE 1- ACCOUNTING POLICIES
Except for required accounting changes (see Note 2), the significant
accounting policies followed by The Farmers Bancorp, Frankfort, Indiana
("Bancorp") and its consolidated subsidiary, The Farmers Bank,
Frankfort, Indiana ("Bank") for interim financial reporting are
consistent with the accounting policies followed for annual financial
reporting. All adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for the periods
reported have been included in the accompanying unaudited consolidated
financial statements and all such adjustments are of a normal recurring
nature.
NOTE 2 - ACCOUNTING CHANGES
Effective July 1, 1996, the Bancorp adopted Financial Accounting
Standard No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." Management does not
believe the Bancorp has any material assets subject to this new
Standard.
Effective July 1, 1996, the Bancorp adopted Financial Accounting
Standard No. 122, "Accounting for Mortgage Servicing Rights." This
Standard requires the basis on mortgage loans originated and sold, with
servicing retained, to be allocated between the mortgage loan and the
mortgage servicing right, based upon the relative fair value of such
assets. The effect of this Standard is to increase the gain, or reduce
the loss, recognized upon the sale of a mortgage loan and future
servicing fee income is reduced as the asset is amortized. Application
of this Standard did not significantly effect the Bancorp's financial
condition or results of operation.
NOTE 3 - SHARES OUTSTANDING
On October 14, 1996, the Board approved a 2 for 1 stock split effective
October 28, 1996. All per share data has been restated to give
retroactive effect to that stock split.
Page 7 of 15
PART I FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FARMERS BANCORP
March 31, 1997
FINANCIAL CONDITION:
Total assets increased 2.65 percent from June 30, 1996 to March 31, 1997
and totaled $243,314,000 at period end. During the nine months ended
March 31, 1997 no securities were purchased. However, during the same
period, $8,387,000 of securities matured, were repaid or were called
prior to their maturity. As a result, total securities decreased
$8,387,000 or 19.84 percent. The following table presents, in
thousands, the amortized cost and fair value of securities:
March 31, 1997 Amortized Gross Gross Fair
Cost Unrealized Gains Unrealized Losses Value
Held-to-maturity
Securities $21,306 $146 ($182) $21,270
Available-for-sale
Securities 12,671 22 (122) 12,571
JUNE 30, 1996
Held-to-maturity
Securities 23,654 188 (307) 23,535
Available-for-sale
Securities 18,766 59 (215) 18,610
Other assets totaled $7,873,000 at March 31, 1997, and include insurance
policies with a current cash surrender value of $4,661,000 that were
purchased in conjunction with the formation of deferred compensation and
death benefit programs.
Other borrowings increased to $7,893,000 and consist primarily of
Federal Home Loan Bank advances which were $7,489,000 at March 31, 1997.
The Bank utilized the FHLB advances to fund certain commercial real
estate loans. These advances require annual principal payments, and
have a final maturity of June, 2006. The Bank may occasionally utilize
this source of credit to maintain liquidity, as well as to fund specific
loans. In addition, the Bank entered into a lease purchase arrangement
during 1994. For financial reporting purposes, the lease is considered
to be a capital lease and other borrowings include the remaining present
value of future lease payments of $404,000.
Page 8 of 15
RESULTS OF OPERATIONS:
The Bancorp reported net income, for the first nine months of the fiscal
year ending June 30, 1997 of $2,593,000, as compared to $1,741,000 for
the prior year. Earnings per share were $2.25 and $1.51, respectively,
based on an average of 1,154,116 shares outstanding for the nine months
ended March 31, 1997 and March 31, 1996. The factor most affecting
operating results in fiscal 1997, as compared to 1996, is the increase
in net interest income which is being driven by continued focus on loan
growth.
Total interest income was $14,810,000 for the nine months ended March
31, 1997, compared to $13,493,000 for the nine months ended March 31,
1996, an increase of $1,317,000 or 9.76 percent. This increase resulted
from a $1,960,000 (17.89 percent) increase in interest and fees on loans
offset by a $514,000 decrease in interest income on short-term
investments. Loans, including those held for sale, increased
$27,511,000, or 16.82 percent, from March 31, 1996 to March 31, 1997.
Total interest expense was $6,417,000 for the nine months ended March
31, 1997, compared to $6,205,000 for the same period in 1996, an
increase of $212,000, or 3.42 percent. Total interest bearing deposits
and repurchase agreements increased $6,922,000, or 3.93 percent from
March 31, 1996 to March 31, 1997. Interest bearing transaction account
balances decreased $1,099,000 from March 31, 1996 to March 31, 1997, and
time deposits outstanding increased $9,106,000 for the same period.
Repurchase agreements increased only $40,000 or .45 percent, from March
31, 1996 to March 31, 1997.
Average earning assets increased to $225,529,000 during the nine months
ended March 31, 1997. This represents an approximate increase of 5.45
percent compared to $213,864,000 for the nine months ended March 31,
1996. The tax-equivalent yield on average earning assets was 8.86
percent for the nine months ended March 31, 1997, compared to 8.52
percent for the nine months ended March 31, 1996. Total interest
expense to average interest bearing liabilities was 4.48 percent for the
nine months ended March 31, 1997, compared to 4.53 percent for the nine
months ended March 31, 1996. This results in a tax-equivalent net
interest margin (net tax-equivalent interest income divided by average
earning assets) of 5.06 percent and 4.66 percent for the nine months
ended March 31, 1997 and 1996, respectively. The increase in average
earning assets and the increase in margin resulted in net interest
income increasing by $1,105,000, or 15.16 percent. The increase in
interest margin is a trend that management anticipates will level off
and remain stable.
Page 9 of 15
RESULTS OF OPERATIONS (cont.)
The provision for loan losses totaled $405,000 for the nine months ended
March 31, 1997 compared to $360,000 for the nine months ended March 31,
1996. Net chargeoffs for the nine months ended March 31, 1997 totaled
$122,000. Net chargeoffs (recoveries) by loan type aggregated $64,000
for commercial and agricultural loans, $67,000 for consumer loans,
$(35,000) for real estate loans, and $26,000 for credit card loans. On
March 31, 1997, the allowance for loan losses totaled $3,024,000 or 1.58
percent of loans, compared to $2,741,000 or 1.57 percent of loans on
June 30, 1996, and $2,632,000 or 1.61 percent of loans at March 31,
1996. The provision is determined by management based upon a detailed
review of the risk factors affecting the loan portfolio, including
changes in the portfolio's size and mix, past loan loss experience, and
the financial condition of borrowers in the prevailing economic
environment. Reserves are allocated based upon the Bank's historical
loss experience, adjusted for recent loss trends, the economic
environment, current levels of non-performing loans, and management's
expectations for the future.
The Bancorp's Loan Review function develops a quarterly "watch list"
report representing loans with more than a normal degree of risk. These
credits are reviewed and, as needed, specific allocations of the reserve
are made for specific loans to provide for potential loss exposure.
Impaired loans are also identified and evaluated as part of that
analysis. The amount of the reserve allocated to impaired loans is
determined based upon the present value of estimated future cash flows
or the present value of the collateral securing the loans. In general,
all loans included on the watch list are evaluated for impairment.
However, small dollar consumer and residential mortgage loans are
evaluated collectively as opposed to individually for impairment. At
March 31, 1997, management designated $1,480,000 of loans as impaired
and allocated $125,000 of the allowance to such loans compared to
$1,233,000 of loans and $125,000 of the allowance at June 30, 1996. A
summary of management's calculation of the adequacy of the Bank's loan
loss reserve is presented below for both March 31, 1997 and March 31,
1996.
March 31,
1997 1996
Specific Allocations:
Allocated to impaired loans $ 125,000 $ 125,000
Allocated to other loans 497,000 407,000
Allocated to types of loans 238,000 552,000
---------- ----------
860,000 1,084,000
Unallocated 2,164,000 1,548,000
---------- ----------
ACTUAL BALANCE OF RESERVE $3,024,000 $2,632,000
========== ==========
Page 10 of 15
RESULTS OF OPERATIONS (cont.)
The 1996 performance of the Bancorp's agricultural customers followed
historical trends and was not adversely affected by the long planting
season or dry weather conditions experienced last year. Management
continues to monitor and evaluate individual credits to forecast
expected levels of loan repayment, collateral values and attendant loss
exposure.
Non-performing loans, consisting of non-accrual loans, restructured
loans and those over 90 days past due, decreased to $1,803,000 at March
31, 1997, compared to $2,373,000 at June 30, 1996. Non-performing loans
at March 31, 1997 represented .94 percent of total loans and 59.62
percent of the Reserve for Loan Losses. The following table shows the
composition of non-performing loans at both period ends.
March 31, June 30,
1997 1996
Real Estate Loans $ 236,000 (2) $ 104,000
Consumer Loans 78,000 134,000
Commercial and Agricultural 1,489,000 (3) 2,135,000(1)
---------- ----------
$1,803,000 $2,373,000
========== ==========
Notes:
1. Includes five agricultural loans totaling $632,000 on non-
accrual, two commercial real estate loans totaling $361,000
on non-accrual, one agricultural credit past due more than
90 days in the amount of $280,000, two commercial loans past
due more than 90 days totaling $114,000, four restructured
agricultural loans totaling $579,000, and two restructured
commercial loans in the amount of $169,000.
2. Includes four residential mortgages totaling $179,000 past
due more than 90 days, one agricultural real estate loan past due
more than 90 days in the amount of $13,000, and two residential
mortgage loans totaling $44,000 on non-accrual.
3. Includes five agricultural loans totaling $810,000 on non-accrual,
one commercial loan totaling $1,000 on non-accrual, two
commercial loans past due more than 90 days in the amount of
$153,000, two agricultural loans past due more than 90 days in
the amount of $128,000, two restructured agricultural loans
totaling $233,000, and two commercial restructured loans in the
amount of $164,000. The nonaccrual loans are deemed to be
impaired, as defined by FAS No. 114, whereas the restructured
loans were recast prior to June 30, 1995, are currently performing
as agreed, and are not considered to be impaired loans.
Page 11 of 15
RESULTS OF OPERATIONS (cont.)
Non-interest income increased 16.96 percent or $196,000 to $1,352,000
for the nine months ended March 31, 1997, compared to $1,156,000 for the
nine months ended March 31, 1996. Other income, consisting of gains the
sale of mortgage loans, commissions on credit life insurance sales, safe
deposit box rent, and other miscellaneous income increased 31.49 percent
or $137,000 to $572,000 for the nine months ended March 31, 1997
compared to $435,000 for the nine months ended March 31, 1996. This
increase is primarily attributable to commission income received for a
new check card program and increased income recognized as the cash
surrender value of insurance policies owned by the Bank increases.
Non-interest expense decreased $165,000 and totaled $5,273,000 for the
nine months ended March 31, 1997, compared to $5,438,000 for the nine
months ended March 31, 1996. Other operating expense, consisting
entirely of overhead expenses decreased $199,000 or 11.89% to $1,475,000
for the nine months ended March 31, 1997 compared to $1,674,000 for the
nine months ended March 31, 1996. In the third quarter of 1996, the
Bank recorded a loss of $175,000 when a branch building was abandoned.
This cost did not recur in 1997.
Income tax expense increased to $1,474,000 for the nine months ended
March 31, 1997 from $905,000 for the same period in the prior year. The
increase was primarily driven by increased income before income tax but
the effective tax rate also increased to 36 percent this year from 34
percent in 1996 due primarily to lower relative levels of tax exempt
income.
LIQUIDITY:
Bancorp's liquidity is a measurement of its ability to raise cash when
needed without an adverse impact on profits. Primary sources of asset
liquidity are securities maturing or having a call feature within one
year, time deposits in other banks, federal funds sold, term funds sold,
and banker's acceptances. All of these sources combined totaled
$11,419,000 at March 31, 1997. In addition, the Bancorp has $46,000 in
mortgage loans being held for sale into the secondary market. The
factors which have and will continue to affect the general liquidity of
the Bancorp are increasing loan demand and the continued offering of a
deposit instrument based primarily on money market rates. All of these
factors have contributed to the liquidity ratio (net cash, short term
investments and other marketable assets to volatile liabilities) of
16.06 percent on March 31, 1997. At March 31, 1997 Bancorp had unfunded
loan commitments of $43,782,000, primarily available balances on
customer lines of credit, and outstanding letters of credit of
$1,151,000. However, management expects many of these will expire
without being used. In addition, the Bancorp intends to continue the
sale of newly originated fixed rate residential mortgages into the
secondary market for the foreseeable future.
Page 12 of 15
LIQUIDITY: (cont.)
The asset/liability committee continues to review the matching of loan
demand with deposits, and maturities of assets and liabilities to help
ensure the level of liquidity remains satisfactory. The asset/liability
committee has managed the rate sensitive assets and liabilities during
the first nine months of fiscal 1997, and at March 31, 1997, the
Bancorp's one year gap position was slightly negative.
CAPITAL RESOURCES:
The Bank and Bancorp are subject to regulations established by their
respective regulators, which require the maintenance of established
levels of capital and, as a result, limit the amount of dividends which
may be paid by the companies. The ability of the Bancorp to pay
dividends depends primarily upon the ability of the Bank to pay
dividends to the Bancorp. The Bank is regulated by the Indiana
Department of Financial Institutions and the FDIC, while the Bancorp is
subject to the regulations issued by the Federal Reserve Board. These
regulations establish minimum levels of Tier I (as defined) capital to
total assets (the leverage ratio) and minimum levels of Tier I and Total
Capital (as defined) to risk-based assets. Also, FDIC regulations
establish various levels of capital compliance. Under these
regulations, a "well capitalized" financial institution must maintain a
leverage ratio of at least 5 percent, a Tier I risk-based capital ratio
of at least 6 percent and a total risk-based capital ratio of at least
10 percent. Institutions which do not meet these guidelines are subject
to higher deposit insurance assessments and, in certain cases,
operational restrictions. Presented below are the Bancorp's actual
capital ratios as of March 31, 1997:
Tier I Capital $26,064,000
Total Capital $28,560,000
Risk Weighted Assets $199,114,000
Leverage Ratio 10.65%
Risk-based Capital; Tier I 13.09%
Total Risk-based Capital 14.34%
On October 14, 1996 a 2-for-1 stock split was declared, increasing the
number of shares outstanding from 577,058 to 1,154,116, to shareholders
of record as of October 28, 1996. All previous per share data has been
revised to reflect this stock split. On April 14, 1997, the Bancorp
declared a $.25 per share quarterly dividend totaling $289,000 payable
May 15, 1997 to shareholders of record as of April 28, 1997. The book
value of common stock on March 31, 1997 was $22.53 based on 1,154,116
shares outstanding.
Page 13 of 15
PART II OTHER INFORMATION
THE FARMERS BANCORP
March 31, 1997
Item 1. LEGAL PROCEEDINGS
The Bancorp is not a party to any material pending legal proceedings
before any court, regulatory authority, administrative agency or other
tribunal. Further, the Bancorp is not aware of the threat of any such
proceeding.
As a part of its ordinary course of business, the Bank is a party to
several lawsuits involving a variety of claims and in the collection of
delinquent accounts. All such litigation is incidental to the Bank's
business. No litigation is pending or, to the Bank's knowledge,
threatened in which the Bank faces potential loss or exposure which
would have a material adverse effect upon the financial condition of the
Bank. The Bancorp and the Bank are not involved in any administrative
or judicial proceedings arising under any Federal, State or Local
provisions which have been enacted or adopted to regulate the discharge
of materials into the environment or otherwise relating to the
protection of the environment.
Item 2. CHANGES IN SECURITIES
None to be reported.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None to be reported.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None to be reported.
Item 5. OTHER INFORMATION
None to be reported.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit #27 - Financial data statement as of March 31, 1997.
B. Form 8-K - None to be reported.
Page 14 of 15
PART II OTHER INFORMATION
THE FARMERS BANCORP
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.
THE FARMERS BANCORP
(Registrant)
Date: May 13, 1997 -------------------------------
Tom Rohrabaugh, President
(Principal Executive Officer)
Date: May 13, 1997 --------------------------------
Karen I. Miller
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
Page 15 of 15
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