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, 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 DECEMBER 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 Dec 31 June 30
1997 1997
-----------------------
Cash and due from banks 8077 7591
Federal Funds sold 1800 0
-----------------------
Total Cash and Cash Equivalents 9877 7591
Available-for-sale securities 10259 11374
Held-to-maturity securities 20276 20328
Loans held for sale 460 0
Total loans 213845 200824
Allowance for loan losses -3439 -3232
-----------------------
Net loans 210406 197592
Premises and equipment 5181 5325
Restricted stock, at cost 1260 1013
Accrued income and other assets 8981 8521
-----------------------
Total Assets 266700 251744
=======================
LIABILITIES
Deposits
Non-interest bearing deposits 27474 24663
Interest-bearing deposits 189360 177944
-----------------------
Total Deposits 216834 202607
Federal Funds purchased 0 0
Short-term borrowings 9606 11985
Other borrowings 10901 7839
Accrued expenses and other liabilities 2559 3837
-----------------------
Total Liabilities 239900 226268
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 18805 17501
Unrealized gain/(loss) on available-for-sale
securities (net of tax) 9 (11)
-----------------------
Total Shareholders' Equity 26800 25476
-----------------------
Total Liabilities & Shareholders' Equity 266700 251744
=======================
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 Ended Six Months Ended
December 31 December 31
1997 1996 1997 1996
-------------------------------------
Interest Income
Loans, including related fees 5008 4346 9856 8497
Securities
Taxable 384 469 791 999
Tax exempt 101 116 197 244
Short-term investments 20 26 20 51
-------------------------------------
Total Interest Income 5513 4957 10864 9791
Interest Expense -------------------------------------
Deposits 2156 1898 4216 3808
Federal Funds Purchased 15 5 74 11
Short-term borrowings 140 132 295 251
Other borrowings 150 96 278 184
-------------------------------------
Total Interest Expense 2461 2131 4863 4254
-------------------------------------
Net Interest Income 3052 2826 6001 5537
Provision for loan losses 150 120 300 240
-------------------------------------
2902 2706 5701 5297
Other income -------------------------------------
Trust fees 84 65 168 130
Service charge income 213 201 420 397
Other 246 203 462 366
-------------------------------------
Total Other Income 543 469 1050 893
Other expenses -------------------------------------
Salaries and employee benefits 1029 947 2025 1906
Occupancy 146 142 293 285
Equipment 180 157 348 300
Other 562 475 1098 969
-------------------------------------
Total Other Expense 1917 1721 3764 3460
-------------------------------------
Income Before Income Tax 1528 1454 2987 2730
Less: Income taxes 555 532 1083 991
-------------------------------------
Net Income 973 922 1904 1739
Per share data: (Note 3) =====================================
Net income per share .84 .80 1.65 1.51
=====================================
Dividends per share .27 .22 .52 .43
=====================================
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)
1997 1996
-------------------
Balance - June 30 25476 24127
Net Income 1904 1739
Dividends (600) (496)
Change in net unrealized
gain/(loss) on available-
for-sale securities 20 95
-------------------
Balance - December 31 26800 25465
===================
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 1997 1996
Net income 1904 1739
Adjustments to reconcile net income to net cash
from operating activities (1470) 174
---------------
Net cash from operating activities 434 1913
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and principal repayments on
available-for-sale securities 2886 5147
Purchases of available-for-sale securities (1774) -0-
Proceeds from maturities and principal repayments
on investment securities 2932 1708
Purchase of investment securities (2900) (170)
Loans made to customers, net of principal
collections thereon (13085) (16849)
Net change in interest-bearing balances with
financial institutions -0- -0-
Purchase of life insurance policies (94) (24)
Property and equipment expenditures (176) (364)
Purchase of restricted stock (247) (242)
---------------
Net cash from investing activities (12458) (10794)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase/(decrease) in deposits 14227 3610
Net increase/(decrease) in short term borrowings (2379) 116
Proceeds from other borrowings 3750 6335
Repayment of other borrowings (688) (4588)
Dividends paid (600) (496)
---------------
Net cash from financing activities 14310 4977
---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2286 (3904)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7591 9889
---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 9877 5985
===============
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, 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
Financial Accounting Standard No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" revised
the accounting for transfers of financial assets, such as loans and
securities, and for distinguishing between sales and secured borrowings.
It was effective for certain transactions occurring after December 31,
1996 and for others in 1998. The impact of partial adoption during 1997
was not significant and management does not expect that full adoption of
the Standard will significantly impact the Company's financial position
or results of operations.
NOTE 3 - PER SHARE DATA
Earnings per share are computed based upon the weighted average number
of shares outstanding which was 1,154,116 for all periods presented.
Application of Financial Accounting Standard No. 128, required for
periods ending after December 15, 1997, did not affect the Bancorp's
earnings per share computations.
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, 1997
FINANCIAL CONDITION:
Total assets increased 5.94 percent from June 30, 1997 to December 31,
1997 and totaled $266,700,000 at period end. During the six month
period ended December 31, 1997 total loans increased $13,021,000 (6.48
percent) funded primarily by increased deposits and borrowings. The
total amortized cost of securities decreased $1,201,000 or 3.79 percent.
The following table presents, in thousands, the amortized cost and fair
value of securities:
December 31, 1997 Amortized Gross Gross Fair
Cost Unrealized Gains Unrealized Losses Value
Held-to-maturity
Securities $20,276 $301 ($20) $20,557
Available-for-sale
Securities 10,243 31 (15) 10,259
JUNE 30, 1997
Held-to-maturity
Securities 20,328 208 (63) 20,473
Available-for-sale
Securities 11,392 32 (50) 11,374
The Bank utilizes several funding sources, in addition to deposits which
increased $14,227,000 (7.02 percent), to support increasing loan demand.
Short-term borrowings consist of retail repurchase agreements totaling
$9,606,000 at December 31, 1997. Short-term borrowings actually
decreased by $2,379,000 (19.8 percent) during the six month period.
Other borrowings increased to $10,901,000 and consist primarily of
Federal Home Loan Bank advances which were $10,624,000 at December 31,
1997. These advances were matched to specific loan pools for comparable
terms and at a favorable interest rate spread to the Bank. The advances
require monthly interest payments and periodic principal reductions, and
have a final maturity of November, 2001. The Bank utilizes this source
of credit to maintain liquidity, as well as to fund specific loans.
Page 8 of 15
RESULTS OF OPERATIONS:
The Bancorp reported net income for the first six months of the fiscal
year ending June 30, 1998 of $1,904,000, as compared to $1,739,000 for
the prior year. Earnings per share were $1.65 and $1.51, respectively.
Increased net interest income and other income more than offset
increased other expense and income taxes.
Total interest income was $10,864,000 for the six months ended December
31, 1997, compared to $9,791,000 for the six months ended December 31,
1996, an increase of $1,073,000 or 10.96 percent. This increase
resulted from a $1,359,000 (15.99 percent) increase in interest and fees
on loans offset by a $286,000 decrease in interest income on securities
and short-term investments. Loans, including those held for sale,
increased $23,414,000, or 12.27 percent, from December 31, 1996 to
December 31, 1997. Total interest expense was $4,863,000 for the six
months ended December 31, 1997, compared to $4,254,000 for the same
period in 1996, an increase of $609,000, or 14.32 percent. Total
interest bearing deposits and repurchase agreements increased
$16,296,000, or 8.92 percent from December 31, 1996 to December 31,
1997. Interest bearing transaction account balances increased
$7,500,000 from December 31, 1996 to December 31, 1997, and time
deposits outstanding increased $11,358,000 for the same period.
Repurchase agreements decreased $2,562,000 or 26.67 percent, from
December 31, 1996 to December 31, 1997.
Average earning assets increased to $241,307,000 during the six months
ended December 31, 1997. This represents an approximate increase of
7.66 percent compared to $224,132,000 for the six months ended December
31, 1996. The tax-equivalent yield on average earning assets was 9.03
percent for the six months ended December 31, 1997, compared to 8.81
percent for the six months ended December 31, 1996. Total interest
expense to average interest bearing liabilities was 4.73 percent for the
six months ended December 31, 1997, compared to 4.45 percent for the six
months ended December 31, 1996. This results in a tax-equivalent net
interest margin (net tax-equivalent interest income divided by average
earning assets) of 5.04 percent for both six month periods ended
December 31, 1997 and 1996. The increase in average earning assets
resulted in net interest income increasing by $464,000, or 8.38 percent.
The interest margin has remained relatively stable through first six
months of fiscal 1998 as anticipated by management.
Page 9 of 15
RESULTS OF OPERATIONS (cont.)
The provision for loan losses totaled $300,000 for the six months ended
December 31, 1997 compared to $240,000 for the six months ended December
31, 1996. Net chargeoffs (recoveries) for the six months ended December
31, 1997 totaled $93,000. Net chargeoffs (recoveries) by loan type
aggregated $(63,000) for commercial and agricultural loans, $142,000 for
consumer loans, $(5,000) for real estate loans, and $19,000 for credit
card loans. On December 31, 1997, the allowance for loan losses totaled
$3,439,000 or 1.60 percent of loans, compared to $3,232,000 or 1.61
percent of loans on June 30, 1997, and $2,975,000 or 1.56 percent of
loans at December 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
December 31, 1997, management designated $1,356,000 of loans as impaired
and allocated $200,000 of the allowance to such loans compared to
$1,300,000 of loans and $125,000 of the allowance at June 30, 1997. A
summary of management's calculation of the adequacy of the Bank's loan
loss reserve is presented below for both December 31, 1997 and December
31, 1996.
December 31,
1997 1996
Specific Allocations:
Allocated to impaired loans $ 200,000 $ 125,000
Allocated to other watch list loans 289,000 620,000
Allocated to types of loans 387,000 358,000
---------- ----------
876,000 1,103,000
Unallocated 2,563,000 1,872,000
---------- ----------
ACTUAL BALANCE OF RESERVE $3,439,000 $2,975,000
========== ==========
Page 10 of 15
RESULTS OF OPERATIONS (cont.)
The 1997 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, increased to $2,435,000 at
December 31, 1997, compared to $2,098,000 at June 30, 1997.
Non-performing loans at December 31, 1997 represented 1.14 percent of
total loans and 70.81 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,
1997 1997
Real Estate Loans $ 846,000 (2) $ 432,000
Consumer Loans 294,000 206,000
Commercial and Agricultural 1,295,000 (3) 1,460,000(1)
---------- ----------
$2,435,000 $2,098,000
========== ==========
Notes:
1. Includes three agricultural loans totaling $443,000 on non-
accrual, three commercial operating loans totaling $284,000
on non-accrual, two commercial loans past due more than 90
days totaling $153,000, three restructured agricultural loans
totaling $419,000, and two restructured commercial loans in
the amount of $161,000.
2. Includes one residential mortgage totaling $48,000 past due
more than 90 days, two farmland mortgage loans totaling
$318,000 on non-accrual, two construction mortgages totaling
$121,000 on non-accrual, four residential mortgage loan totaling
$347,000 on non-accrual, and one commercial mortgage loan
totaling $12,000 past due more than 90 days.
3. Includes two agricultural loans totaling $77,000 on non-accrual,
five commercial loans totaling $371,000 on non-accrual, one
commercial loan past due more than 90 days in the amount of
$59,000, one agriculture loan past due more than 90 days in
the amount of $210,000, three restructured agricultural loans
totaling $419,000, and two commercial restructured loans in the
amount of $159,000. 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 17.58 percent or $157,000 to $1,050,000
for the six months ended December 31, 1997, compared to $893,000 for the
six months ended December 31, 1996. 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
26.23 percent or $96,000 to $462,000 for the six months ended December
31, 1997 compared to $366,000 for the six months ended December 31,
1996. This increase is primarily attributable to increased commission
income received for the Visa check card program, increased income
recognized as the cash surrender value of insurance policies owned by
the Bank increases and increased commission income earned on credit life
insurance policies sold by the Bank.
Non-interest expense increased 8.79 percent or $304,000 and totaled
$3,764,000 for the six months ended December 31, 1997, compared to
$3,460,000 for the six months ended December 31, 1996. Equipment
expense increased $48,000, or 16.00 percent to total $348,000 for the
six months ended December 31, 1997 compared to $300,000 for the same
period in 1996. Other operating expense, consisting entirely of
overhead expenses increased $129,000 or 13.31 percent and total
$1,098,000 for the six months ended December 31, 1997 compared to
$969,000 for the six months ended December 31, 1996.
LIQUIDITY:
Bancorp's liquidity is a measurement of its ability to raise cash when
needed without an adverse impact on profits. Asset liquidity is
provided primarily by the maturity of loans. Additionally Bancorp
considers all 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 to be sources of asset liquidity. All of these
sources combined totaled $9,498,000 at December 31, 1997. In addition,
the Bancorp has $460,000 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 14.02 percent on December 31, 1997. The level
at December 31, 1997 is deemed by management to be adequate for funding
purposes. In addition the Bancorp has wholesale funding sources with
Federal Home Loan Bank and the Federal Reserve. At December 31, 1997
Bancorp had unfunded loan commitments of $42,297,000, primarily
available balances on customer lines of credit, and outstanding letters
of credit of $2,426,000. 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, 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 December 31, 1997:
Tier I Capital $26,791,000
Total Capital $29,582,000
Risk Weighted Assets $222,596,000
Leverage Ratio 10.18%
Risk-based Capital; Tier I 12.04%
Total Risk-based Capital 13.29%
On October 13, 1997, the Bancorp declared a $.27 per share quarterly
dividend totaling $312,000 payable November 14, 1997 to shareholders of
record as of October 27, 1997. The book value of common stock on
September 30, 1997 was $22.65 based on 1,154,116 shares outstanding. On
January 12, 1998, the Bancorp declared a $.29 per share quarterly
dividend totaling $335,000 payable February 13, 1998 to shareholders of
record as of January 26, 1998. The book value of common stock on
December 31, 1997 was $23.22 based on 1,154,116 shared outstanding.
Page 13 of 15
PART II OTHER INFORMATION
THE FARMERS BANCORP
December 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 December 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: February 11, 1998 -------------------------------
Tom Rohrabaugh, President
(Principal Executive Officer)
Date: February 11, 1998 --------------------------------
Karen I. Miller
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
Page 15 of 15
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