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 December 31, 1996
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 DECEMBER 31, 1996
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 Dec 31 June 30
1996 1996
-----------------------
Cash and due from banks 5985 9889
Total cash and cash equivalents 5985 9889
Available-for-sale securities 13613 18610
Held-to-maturity securities 22095 23654
Loans held for sale 895 492
Total loans 189996 173556
Allowance for loan losses -2975 -2741
-----------------------
Net loans 187021 170815
Premises and equipment 4750 4641
Restricted stock, at cost 1012 771
Accrued income and other assets 8345 8172
-----------------------
Total Assets 243716 237044
=======================
LIABILITIES
Deposits
Demand 24596 22115
Savings 67109 67158
Time, $100,000 and over 20701 20250
Other time 82692 81966
-----------------------
195098 191489
Short-term borrowings 12868 12752
Other borrowings 8006 6259
Accrued interest payable 904 958
Other liabilities 1375 1459
-----------------------
Total Liabilities 218251 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 17478 16235
Unrealized gain/(loss) on available-for-sale
securities (net of tax) 1 (94)
-----------------------
Total Shareholders' Equity 25465 24127
-----------------------
Total Liabilities & Shareholders' Equity 243716 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 Six Months
Ended Dec 31 Ended Dec 31
1996 1995 1996 1995
-------------- ------------
Interest Income:
Loans, including related fees 4346 3655 8497 7307
Securities:
Taxable 469 508 999 1018
Tax exempt 116 137 244 273
Short-term investments 26 250 51 459
-------------- ------------
Total Interest Income 4957 4550 9791 9057
Interest Expense: -------------- ------------
Deposits 1898 1864 3808 3710
Short-term borrowings 125 154 239 316
Other borrowings 108 67 207 143
-------------- ------------
Total Interest Expense 2131 2085 4254 4169
-------------- ------------
Net Interest Income 2826 2465 5537 4888
Provision for loan losses 120 120 240 240
-------------- ------------
2706 2345 5297 4648
Other income: -------------- ------------
Trust fees 65 60 130 121
Service charge income 201 177 397 358
Security gains (losses) 0 5 0 5
Other 203 161 366 259
-------------- ------------
Total Other Income 469 403 893 743
Other expenses: -------------- ------------
Salaries and employee benefits 947 1012 1906 1916
Occupancy 142 144 285 290
Equipment 157 142 300 283
Other 475 496 969 968
-------------- ------------
Total Other Expense 1721 1794 3460 3457
-------------- ------------
Income Before Income Tax 1454 954 2730 1934
Less: Income taxes 532 328 991 666
-------------- ------------
Net Income 922 626 1739 1268
Per share data: (Note 3) ============== ============
Net income per share .80 .54 1.51 1.10
============== ============
Dividends per share .22 .20 .43 .40
============== ============
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 1739 1268
Dividends (496) (462)
Change in net unrealized gain on
available-for-sale securities 95 (1)
-------------------
Balance - December 31 25465 23626
===================
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)
Six Months Ended
December 31
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995
Net income 1739 1268
Adjustments to reconcile net income to net cash
from operating activities 174 1290
---------------
Net cash from operating activities 1913 2558
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and principal repayments on
available-for-sale securities 5147 1391
Purchases of available-for-sale securities -0- (4447)
Proceeds from maturities and principal repayments
on investment securities 1708 7666
Purchase of investment securities (170) (6032)
Loans made to customers, net of principal
collections thereon (16849) (3642)
Net change in interest-bearing balances with
financial institutions -0- -0-
Purchase of life insurance policies (24) -0-
Property and equipment expenditures (364) (571)
Purchase of restricted stock (242) -0-
---------------
Net cash from investing activities (10794) (5635)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase/(decrease) in deposits 3610 12902
Net increase/(decrease) in short term borrowings 116 (8289)
Proceeds from other borrowings 6335 -0-
Repayment of other borrowings (4588) (637)
Dividends paid (496) (462)
---------------
Net cash from financing activities 4977 3514
---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3904) 437
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9889 19085
---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 5985 19522
===============
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
December 31, 1996
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 CHANGE
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
December 31, 1996
FINANCIAL CONDITION:
Total assets increased 2.81 percent from June 30, 1996 to December 31,
1996 and totaled $243,716,000 at period end. During the six months
ended December 31, 1996 $170,000 of securities were purchased. However,
during the same period, $6,885,000 of securities matured, were repaid or
were called prior to their maturity. As a result, total securities
decreased $6,556,000 or 15.51 percent. The following table presents, in
thousands, the amortized cost and fair value of securities:
DECEMBER 31, 1996 Amortized Gross Gross Fair
Cost Unrealized Gains Unrealized Losses Value
Held-to-maturity
Securities $22,095 $288 ($71) $22,312
Available-for-sale
Securities 13,610 56 (53) 13,613
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 $8,345,000 at December 31, 1996, and include
insurance policies with a current cash surrender value of $4,601,000
that were purchased in conjunction with the formation of deferred
compensation and death benefit programs.
Other borrowings increased to $8,006,000 and consist primarily of
Federal Home Loan Bank advances which were $7,561,000 at December 31,
1996. 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 $445,000.
Page 8 of 15
RESULTS OF OPERATIONS:
The Bancorp reported net income, for the first six months of the fiscal
year ending June 30, 1997 of $1,739,000, as compared to $1,268,000 for
the prior year. Earnings per share were $1.51 and $1.10, respectively,
based on an average of 1,154,116 shares outstanding for the six months
ended December 31, 1996 and December 31, 1995. 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 $9,791,000 for the six months ended December
31, 1996, compared to $9,057,000 for the six months ended December 31,
1995, an increase of 8.10 percent. This increase resulted from a 16.29
percent increase in interest and fees on loans offset by a $408,000
decrease in interest income on short-term investments. Loans, including
those held for sale, increased $31,161,000, or 19.51 percent, from
December 31, 1995 to December 31, 1996. Interest and fees on loans
totaled $8,497,000 for the six months ended December 31, 1996, compared
to $7,307,000 for the six months ended December 31, 1995, an increase of
$1,190,000, or 16.29 percent. Total interest expense was $4,254,000 for
the six months ended December 31, 1996, compared to $4,169,000 for the
same period in 1995, an increase of $85,000, or 2.04 percent. Total
interest bearing deposits and repurchase agreements increased
$5,489,000, or 3.10 percent from December 31, 1995 to December 31, 1996.
Interest bearing transaction account balances decreased $2,445,000 from
December 31, 1995 to December 31, 1996, and time deposits outstanding
increased $8,168,000 for the same period. Repurchase agreements
decreased approximately $234,000 or 1.89 percent, from December 31, 1995
to December 31, 1996, as fewer corporate customers utilized the Bank's
Sweep Agreement.
Average earning assets increased to $224,132,000 during the six months
ended December 31, 1996. This represents an approximate increase of
4.90 percent compared to $213,662,000 for the six months ended December
30, 1995. The tax-equivalent yield on average earning assets was 8.81
percent for the six months ended December 31, 1996, compared to 8.53
percent for the six months ended December 31, 1995. Total interest
expense to average interest bearing liabilities was 4.45 percent for the
six months ended December 31, 1996, compared to 4.54 percent for the six
months ended December 31, 1995. This results in a tax-equivalent net
interest margin (net tax-equivalent interest income divided by average
earning assets) of 5.04 percent and 4.66 percent for the six months
ended December 31, 1996 and 1995, respectively. The increase in average
earning assets and the increase in margin resulted in net interest
income increasing by $649,000, or 13.28 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 $240,000 for both six month
periods ended December 31, 1996 and December 31, 1995. Net chargeoffs
for the six months ended December 31, 1996 totaled $6,000. Net
chargeoffs (recoveries) by loan type aggregated $(4,000) for commercial
and agricultural loans, $37,000 for consumer loans, $(42,000) for real
estate loans, and $15,000 for credit card loans. On December 31, 1996,
the allowance for loan losses totaled $2,975,000 or 1.56 percent of
loans, compared to $2,741,000 or 1.57 percent of loans on June 30, 1996,
and $2,735,000 or 1.71 percent of loans at December 31, 1995. 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
December 31, 1996, management designated $979,000 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 December 31, 1996 and December
31, 1995.
December 31,
1996 1995
Specific Allocations:
Allocated to impaired loans $ 125,000 $ 185,000
Allocated to other loans 620,000 438,000
Allocated to types of loans 358,000 643,000
---------- ----------
1,103,000 1,266,000
Unallocated 1,872,000 1,469,000
---------- ----------
ACTUAL BALANCE OF RESERVE $2,975,000 $2,735,000
========== ==========
Page 10 of 15
RESULTS OF OPERATIONS (cont.)
The 1996 performance of the Bancorp's agricultural customers followed
historical trends and were 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 $2,275,000 at
December 31, 1996, compared to $2,373,000 at June 30, 1996.
Non-performing loans at December 31, 1996 represented 1.19 percent of
total loans and 76.47 percent of the Reserve for Loan Losses. The
following table shows the composition of non-performing loans at both
period ends.
December 31, June 30,
1996 1996
Real Estate Loans $ 200,000 (2) $ 104,000
Consumer Loans 216,000 134,000
Commercial and Agricultural 1,859,000 (3) 2,135,000(1)
---------- ----------
$2,275,000 $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 three residential mortgages totaling $177,000 past
due more than 90 days, and one residential mortgage loan
totaling $23,000 on non-accrual.
3. Includes four agricultural loans totaling $579,000 on non-accrual,
one commercial loan totaling $3,000 on non-accrual, two commercial
real estate loans totaling $361,000 on non-accrual, three
commercial loans past due more than 90 days in the amount of
$173,000, four restructured agricultural loans totaling $578,000,
and two commercial restructured loans in the amount of $165,000.
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 20.19 percent or $150,000 to $893,000 for
the six months ended December 31, 1996, compared to $743,000 for the six
months ended December 31, 1995. Other income, consisting of gains on
the sale of mortgage loans, commissions on credit life insurance sales,
safe deposit box rent, and other miscellaneous income increased 41.31
percent or $107,000 to $366,000 for the six months ended December 31,
1996 compared to $259,000 for the six months ended December 31, 1995.
This increase is primarily attributable to commission income received
for a new check card program and income recognized for the cash
surrender value of a death benefit insurance policy owned by the Bank.
Non-interest expense increased $3,000 and totaled $3,460,000 for the six
months ended December 31, 1996, compared to $3,457,000 for the six
months ended December 31, 1995. Salaries and employee benefits expense
decreased .52 percent or $10,000, to $1,906,000. Equipment expense
increased 6.00% or $17,000 and totaled $300,000 for the six months ended
December 31, 1996 compared to $283,000 for the six months ended December
31, 1995.
Income tax expense increased to $991,000 for the six months ended
December 31, 1996 from $666,000 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
$9,791,000 at December 31, 1996. In addition, the Bancorp has $895,000
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
18.45 percent on December 31, 1996. At December 31, 1996 Bancorp had
unfunded loan commitments of $43,669,000, primarily available balances
on customer lines of credit, and outstanding letters of credit of
$970,000. 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 six months of fiscal 1997, and at December 31, 1996, 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 December 31, 1996:
Tier I Capital $25,464,000
Total Capital $27,947,000
Risk Weighted Assets $198,139,000
Leverage Ratio 10.50%
Risk-based Capital; Tier I 12.85%
Total Risk-based Capital 14.10%
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 January 13, 1997, the Bancorp
declared a $.22 per share quarterly dividend totaling $254,000, payable
February 14, 1996 to shareholders of record as of January 27, 1997. The
book value of common stock on December 31, 1996 was $22.06 based on
1,154,116 shares outstanding.
Page 13 of 15
PART II OTHER INFORMATION
THE FARMERS BANCORP
December 31, 1996
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 December 31, 1996.
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: February 13, 1997 -------------------------------
Tom Rohrabaugh, President
(Principal Executive Officer)
Date: February 13, 1997 --------------------------------
Karen I. Miller
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
Page 15 of 15
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