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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-14412
Farmers Capital Bank Corporation
(Exact name of registrant as specified in its charter)
KENTUCKY 61-1017851
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
P.O. Box 309, 202 West Main St.
Frankfort, Kentucky 40601
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502)227-1600
Securities registered pursuant to Section 12(b) of the Act:
None None
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(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $.125 per share Par Value
----------------------------------------
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
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 [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 18, 1999 was $247,775,814.
As of March 18, 1999, there were 7,508,358 shares issued and outstanding.
Documents incorporated by reference:
Proxy Statement for the annual meeting of shareholders scheduled to be held
May 11, 1999 - portions of which are incorporated by reference in Part III.
An index of exhibits filed with this Form 10-K can be found on page 61.
FARMERS CAPITAL BANK CORPORATION
FORM 10-K
INDEX
Page
Part I
Item 1. Business 4
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters 10
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 28
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 57
Part III
Item 10. Directors and Executive Officers of the Registrant 58
Item 11. Executive Compensation 58
Item 12. Security Ownership of Certain Beneficial Owners
and Management 58
Item 13. Certain Relationships and Related Transactions 58
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 59
Signatures 60
Index of Exhibits 61
PART I
ITEM 1. BUSINESS
ORGANIZATION
Farmers Capital Bank Corporation (the "Registrant") is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended, and was
organized on October 28, 1982, under the laws of the Commonwealth of Kentucky.
Its subsidiaries provide a wide range of banking and bank-related services to
customers throughout Kentucky. The bank subsidiaries owned by the Registrant are
Farmers Bank & Capital Trust Co. ("Farmers Bank"), Frankfort, Kentucky; United
Bank & Trust Co. ("United Bank"), Versailles, Kentucky; Lawrenceburg National
Bank ("Lawrenceburg Bank"), Lawrenceburg, Kentucky; First Citizens Bank,
Shepherdsville, Kentucky; Farmers Bank and Trust Company ("Farmers Georgetown
Bank"), Georgetown, Kentucky; and Kentucky Banking Centers, Inc. ( Ky Banking
Centers ), Glasgow, Kentucky. The Registrant also owns FCB Services, Inc., ("FCB
Services"), a nonbank data processing subsidiary located in Frankfort, Kentucky.
The Registrant's banking operations are aggregated into one reportable operating
segment. As of December 31, 1998, the Registrant had $992 million in
consolidated assets.
Farmers Bank, originally organized in 1850, is a state chartered bank engaged in
a wide range of commercial and personal banking activities, which include
accepting savings, time and demand deposits; making secured and unsecured loans
to corporations, individuals and others; providing cash management services to
corporate and individual customers; issuing letters of credit; renting safe
deposit boxes; and providing funds transfer services. The bank's lending
activities include making commercial, construction, mortgage and personal loans
and lines of credit. The bank serves as an agent in providing credit card loans.
It acts as trustee of personal trusts, as executor of estates, as trustee for
employee benefit trusts, as registrar, transfer agent and paying agent for bond
issues. Farmers Bank also acts as registrar, transfer agent and paying agent for
the Registrant's stock issue. Farmers Bank is the general depository for the
Commonwealth of Kentucky and has been for more than 70 years.
Farmers Bank is the largest bank chartered in Franklin County. It conducts
business in its principal office and four branches within Frankfort, the capital
of Kentucky. Franklin County is a diverse community, including government,
commerce, finance, industry, medicine, education and agriculture. The bank also
serves many individuals and corporations throughout Central Kentucky. On
December 31, 1998, it had total consolidated assets of $429 million, including
net loans of $254 million. On the same date, total deposits were $348 million
and shareholders' equity totaled $41 million.
Farmers Bank had three subsidiaries at year end 1998: Farmers Bank Realty Co.
("Realty"), Leasing One Corporation ("Leasing One"), and Farmers Capital
Insurance Corp. ("Farmers Insurance"). Prior to 1997, Farmers Bank had a fourth
subsidiary, Money One Credit of Kentucky, Inc. ( "Money One"). Farmers Bank,
Realty and Money One owned a partnership - Money One Credit Company ("MOCC")
prior to its dissolution at the end of 1996. Farmers Bank also participates in a
joint venture - Frankfort ATM, Ltd. ("ATM").
Realty was incorporated in 1978 for the purpose of owning certain real estate
used by the Registrant and Farmers Bank in the ordinary course of business.
Realty had total assets of $3.4 million on December 31, 1998.
Money One was incorporated in 1989 and until January 1, 1993, was a direct
subsidiary of the Registrant. It managed the consumer finance company, MOCC. At
December 31, 1996 it had $824 thousand in assets. As of the close of business on
December 31, 1996, Money One was dissolved and all assets were distributed to
Farmers Bank, it sole shareholder.
MOCC was established on June 1, 1994. It was a partnership engaged in consumer
lending activities under Chapter 288 of the Kentucky Revised Statutes. As
mentioned above, the partners included Farmers Bank, Realty and Money One. Prior
to May 31, 1996, MOCC had fourteen offices throughout Kentucky. On May 31, 1996,
MOCC sold its entire loan portfolio and fixed assets to an unrelated third
party. At the close of business on December 31, 1996 its total remaining assets
of $11.0 million were distributed to its partners and the company was dissolved.
Leasing One was incorporated in August, 1993 to operate as a commercial
equipment leasing company. It is located in Frankfort and is currently licensed
to conduct business in thirteen states. In 1997, it began to service leases for
unaffiliated third parties. At year end 1998 it had total assets of $17.2
million.
Farmers Insurance was organized in 1988 to engage in insurance activities
permitted to the Registrant by federal and state law. This corporation, which
had no activity prior to 1998, was capitalized by Farmers Bank in December 1998
and acts as an agent for Commonwealth Land Title Co.
A fourth subsidiary of Farmers Bank, Farmers Financial Services Corporation
("FFSC"), was in existence for the first three quarters of 1995. FFSC was
incorporated in 1985 in order to enter into a partnership with several other
banks to form a statewide electronic network. The partnership, known as
"Transaction Services Company", supported an automated teller machine network
(Quest) with machines throughout Kentucky and Indiana as well as point-of-sale
terminals in retail stores. With the termination of the "Quest" network, the
partnership known as "Transaction Services Company" was also terminated. As a
result, FFSC was dissolved as of September 27, 1995.
Farmers Bank has a 50% interest in ATM, a joint venture for the purpose of
ownership of automatic teller machines in the Frankfort area. State National
Bank, a Frankfort bank not otherwise associated with the Registrant, also has a
50% interest in ATM.
On February 15, 1985, the Registrant acquired United Bank, a state chartered
bank originally organized in 1880. It is engaged in a general banking business
providing full service banking to individuals, businesses and governmental
customers. It conducts business in its principal office and two branches in
Woodford County, Kentucky. During 1997, it purchased a building in Midway for
the purpose of moving its existing Midway branch. The new building allows the
bank to offer drive thru services to its customers. United Bank is the largest
bank chartered in Woodford County with total assets of $130 million and total
deposits of $116 million at December 31, 1998.
On June 28, 1985, the Registrant acquired Lawrenceburg Bank, a national
chartered bank originally organized in 1885. It is engaged in a general banking
business providing full service banking to individuals, businesses and
governmental customers. It conducts business in its principal office and one
branch in Anderson County, Kentucky. During 1997, it applied and was granted
permission by the Office of the Comptroller of the Currency to move its charter
and main office to Harrodsburg, Kentucky in Mercer County. The new site is
currently under construction and is planned to begin operations in the second
quarter of 1999. Lawrenceburg Bank will maintain its offices in Lawrenceburg.
Lawrenceburg Bank is the largest bank chartered in Anderson County with total
assets of $103 million and total deposits of $93 million at December 31, 1998.
On March 31, 1986, the Registrant acquired First Citizens Bank, a state
chartered bank originally organized in 1964. It is engaged in a general banking
business providing full service banking to individuals, businesses and
governmental customers. During 1997, it applied and was granted permission by
the Kentucky Department of Financial Institutions to move its charter and main
office to Shepherdsville, Kentucky in Bullitt County. First Citizens Bank
completed construction of the site and began operations in April 1998. It
conducts business in its five branches in Hardin County, Kentucky along with its
principal office in Shepherdsville. First Citizens Bank is the second largest
bank chartered in Bullitt County with total assets of $129 million and total
deposits of $108 million at December 31, 1998.
On June 30, 1986, the Registrant acquired Farmers Georgetown Bank, a state
chartered bank originally organized in 1850. It is engaged in a general banking
business providing full service banking to individuals, businesses and
governmental customers. It conducts business in its principal office and three
branches in Scott County, Kentucky. During 1996, Farmers Georgetown Bank
received notice from the State of Kentucky that it would exercise its power of
eminent domain at the site of the downtown Georgetown branch. This branch has
subsequently been relocated in the downtown Georgetown area. Farmers Georgetown
Bank is the largest bank chartered in Scott County with total assets of $134
million and total deposits of $118 million at December 31, 1998.
On June 15, 1987, the Registrant acquired Horse Cave Bank, a state chartered
bank originally organized in 1926. During 1997, it received approval from the
Kentucky Department of Financial Institutions to move its charter to Glasgow,
Kentucky. Subsequent to that approval, Horse Cave State Bank changed its name to
Kentucky Banking Centers, Inc. Ky Banking Centers is engaged in a general
banking business providing full service banking to individuals, businesses, and
governmental customers. It conducts business in its principal office in Glasgow
and two branches in Hart County, Kentucky. Ky Banking Centers is the fourth
largest bank chartered in Glasgow with total assets of $91 million and total
deposits of $80 million at December 31, 1998.
The Registrant's subsidiary banks make first and second residential mortgages
secured by the real estate not to exceed 90% loan to value without seeking third
party guarantees. Commercial real estate loans are made in the low to moderate
range, secured by the real estate not exceeding 80% loan to value. Other
commercial loans are asset based loans secured by equipment and lines of credit
secured by receivables. Secured and unsecured consumer loans generally are made
for automobiles and other motor vehicles. In most cases loans are restricted to
the subsidiaries' general market area.
FCB Services, organized in 1992, provides data processing services and support
for the Registrant and its subsidiaries. It is located in Frankfort, Kentucky.
During 1994, FCB Services began performing data processing services for
nonaffiliated banks. FCB Services had total assets of $2.7 million at December
31, 1998.
SUPERVISION AND REGULATION
The Registrant, as a registered bank holding company, is restricted to those
activities permissible under the Bank Holding Company Act of 1956, as amended,
and is subject to regulation, supervision and examination by the Board of
Governors of the Federal Reserve System thereunder. It is required to file
various reports with the Federal Reserve Board ("FRB") regarding its business
operations and the business operations of its subsidiaries. In addition, the FRB
regulates the Registrant's business activities in a variety of other ways,
including, but not limited to, limitations on acquiring control of other banks
and bank holding companies, limitations on activities and investments, and
regulatory capital requirements.
The Registrant's state bank subsidiaries are subject to state banking law and to
regulation and periodic examinations by the Kentucky Department of Financial
Institutions. Lawrenceburg Bank, a national bank, is subject to similar
regulation and supervision by the Comptroller of the Currency under the National
Bank Act and the Federal Reserve System under the Federal Reserve Act. Other
regulations that apply to the Registrant's bank subsidiaries include, but are
not limited to, insurance of deposit accounts, capital ratios, payment of
dividends, liquidity requirements, the nature and amount of investments that can
be made, transactions with affiliates, community and consumer lending, and
internal policies and control.
The operations of the Registrant and its subsidiary banks also are affected by
other banking legislation and policies and practices of various regulatory
authorities. Such legislation and policies include statutory maximum rates on
some loans, reserve requirements, domestic monetary and fiscal policy, and
limitations on the kinds of services which may be offered.
The Bank Holding Company Act formerly prohibited the Federal Reserve Board from
approving an application from a bank holding company to acquire shares of
another bank across its own state lines. However, effective September 1995, new
legislation abolished those restrictions and now allows bank holding companies
to acquire shares of out of state banks, subject to certain conditions.
Currently, the Company has no plans to purchase shares of an out of state bank.
The Financial Reform, Recovery and Enforcement Act of 1989 provides that a
holding company's controlled insured depository institutions are liable for any
loss incurred by the Federal Deposit Insurance Corporation ("FDIC") in
connection with the default of, or any FDIC assisted transaction involving, an
affiliated insured bank.
Deposits of the Registrant's subsidiary banks are insured by the Federal Deposit
Insurance Corporation Bank Insurance Fund, which subjects the banks to
regulation and examination under the provisions of the Federal Deposit Insurance
Act.
Under the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), the
FDIC was required to establish a risk-based assessment system for insured
depository institutions which became effective January 1, 1994. The FDIC has
adopted a risk-based deposit insurance assessment system under which the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC which is determined
by the institution's capital level.
Under FDICIA, the federal banking regulators are required to take prompt
corrective action if an institution fails to satisfy certain minimum capital
requirements, including a leverage limit, a risk-based capital requirement, and
any other measure deemed appropriate by the federal banking regulators for
measuring the capital adequacy of an insured depository institution. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees that would cause the
institution to become undercapitalized.
The purpose of the Community Reinvestment Act ("CRA") is to encourage banks to
respond to the credit needs of the communities they serve, including low and
moderate income neighborhoods. CRA states that banks should accomplish this
while still preserving the flexibility needed for safe and sound operations. It
is designed to increase the bank's sensitivity to investment opportunities which
will benefit the community. Of the Registrant's six subsidiary banks, three have
an outstanding CRA rating and three have a satisfactory rating.
References under the caption "Supervision and Regulation" to applicable statutes
and regulations are brief summaries of portions thereof which do not purport to
be complete and which are qualified in their entirety by reference thereto.
COMPETITION
The Registrant and its subsidiaries compete for banking business with various
types of businesses other than commercial banks and savings and loan
associations. These include, but are not limited to, credit unions, mortgage
lenders, finance companies, insurance companies, stock and bond brokers,
financial planning firms, and department stores which compete for one or more
lines of banking business. The banks also compete for commercial and retail
business not only with banks in Central Kentucky, but with banking organizations
from Ohio, Indiana, Tennessee and Pennsylvania which have banking subsidiaries
located in Kentucky and may possess greater resources than the Corporation.
The primary areas of competition pertain to quality of services, interest rates
and fees.
The business of the Registrant is not dependent upon any one customer or on a
few customers, and the loss of any one or a few customers would not have a
materially adverse effect on the Registrant.
No material portion of the business of the Registrant is seasonal. No material
portion of the business of the Registrant is subject to renegotiation of profits
or termination of contracts or subcontracts at the election of the government,
though certain contracts are subject to such renegotiation or termination.
The Registrant is not engaged in operations in foreign countries.
EMPLOYEES
As of December 31, 1998, the Registrant and its subsidiaries had 439 full-time
equivalent employees. Employees are provided with a variety of employee
benefits. A retirement plan, a profit-sharing (401K) plan, group life insurance,
hospitalization, dental, and major medical insurance are available to eligible
personnel. The employees are not represented by a union. Management and employee
relations are good.
During 1997, the Registrant's Board of Directors approved its Stock Option Plan
("Plan") which grants certain eligible employees the option to purchase a
limited number of the Registrant's common stock. The Plan specifies the
conditions and terms that the grantee must meet in order to exercise the
options. The Plan was subsequently ratified by the Registrant's shareholders at
its annual meeting held on May 12, 1998.
ITEM 2. PROPERTIES
The Registrant leases its main office from Realty.
Farmers Bank and its subsidiaries currently own or lease nine buildings. Farmers
Bank operates at five locations, two of which it owns and three of which it
leases. United Bank owns its two branch offices and approximately 52% of a
condominiumized building which houses its main office. Lawrenceburg Bank owns
its main office and its branch office, and is currently constructing a new
office in Harrodsburg, Kentucky. First Citizens Bank owns its main office and
three of its five branches. The other two branch locations of First Citizens
Bank are leased facilities, one of which is located in a grocery store. Farmers
Georgetown Bank owns its main office, another branch in Georgetown, and one in
Stamping Ground, Kentucky. Farmers Georgetown Bank's third branch is located in
a leased facility. Ky Banking Centers owns its main office in Glasgow, Kentucky
and its branch site in Horse Cave, Kentucky. It leases its branch facilities in
Munfordville, Kentucky.
Prior to the sale of its entire loan portfolio and fixed assets on May 31, 1996,
MOCC operated out of fourteen leased offices in fourteen cities within Kentucky.
ITEM 3. LEGAL PROCEEDINGS
Farmers Bank was named, on September 10, 1992, as a defendant in Case No.
92CI05734 in Jefferson Circuit Court, Louisville, Kentucky, EARL H. SHILLING 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 (the "Series A Bonds") and County of Jefferson, Kentucky
Nursing Home Improvement Bonds (Filson Care Home Project) Series 1986B (the
"Series B Bonds") (collectively the "Bonds"). The plaintiffs alleged that the
class which they purported to represent has been damaged in the approximate
amount of $2,000,000 through the reduction in value of the Bonds and the
collateral security therefore, and through the loss of interest on the Bonds
since June 1, 1989, as a result of alleged negligence, breach of trust, and
breach of fiduciary duty on the part of Farmers Bank in its capacity as
indenture trustee for the Bonds. A subsequent amendment to the complaint further
alleges that Farmers Bank conspired with and aided and abetted the former
management of the Filson Care Home in its misappropriation of the nursing home's
revenues and assets to the detriment of the Bondholders and in order to
unlawfully secure and benefit Farmers Bank. The amendment seeks unspecified
punitive damages against Farmers Bank. On July 6, 1993, the Circuit Court denied
the plaintiff's motion to certify the case as a class action on behalf of all
present and former owners of the Bonds. Under that ruling, the action may be
maintained only with respect to the individual claims of the named plaintiffs
and any other Bondholders whom the court might allow to join in the action with
respect to their own individual claims. Since the denial of class
certifications, the complaint has been amended twice to join additional
Bondholders as plaintiffs. The existing plaintiffs claim to hold Bonds having an
aggregate face value of $470,000. The case is presently in the process of
discovery. Farmers Bank, after discussion with legal counsel, believes that the
claims of the plaintiffs are unfounded and totally without merit, and Farmers
Bank intends to vigorously contest any further proceedings in the case.
Two of the original named plaintiffs in the case before the Circuit Court filed
a similar action, EARL H. SCHILLING ET AL V. FARMERS BANK & CAPITAL TRUST
COMPANY, on July 7, 1992 in the United State District Court for the Western
District of Kentucky at Louisville, Case No. C-920399 L-M. That action has been
dismissed without prejudice on the grounds that the plaintiffs did not appear to
be able to establish federal jurisdiction.
The Registrant's Georgetown, Kentucky affiliate, Farmers Georgetown Bank, and
its Executive Vice President, have been named defendants in a civil action
brought on August 1, 1994 by a loan customer of the Bank, in which the customer
alleges (1) fraud, (2) breach of good faith and fair dealing, (3) disclosure of
false credit information (defamation) and (4) outrageous conduct. As earlier
reported, the initial amount in controversy for the first three counts was
unspecified. The amount originally sought as punitive damages for outrageous
conduct was $10,000,000. By order of the Scott County Circuit Court, Georgetown,
Kentucky, the plaintiffs were required to quantify the amounts in controversy.
For the count of fraud the plaintiffs seek $50,000; for the count of breach of
good faith and fair dealing the plaintiff seeks $12,900,000; for the count of
defamation the plaintiffs seek $14,800,000 plus an estimated $75,000 in legal
costs. Further the amount now sought as punitive damages is $21,000,000.
The conduct complained about in counts 1 and 2 involves former officers of
Farmers Georgetown Bank. The Bank at this time has had the opportunity to
examine those former officers knowledge of the events alleged to have taken
place and believes there is no merit to the allegations. The Farmers Georgetown
Bank, after discussion with legal counsel, also believes that there is no merit
to the allegations in counts 3 and 4 and intends to vigorously defend all
claims.
The case was set for trial in both November 1995 and February 1996, but was
continued the second time to September 1996. In September of 1996, the court
granted the defendant's motion for summary judgement on all counts of the
complaint. The plaintiff's appealed to the Court of Appeals of the Commonwealth
of Kentucky and that Court upheld the lower Court's granting of the summary
judgement. The plaintiffs then moved for a review of the court's findings and
that review was denied. Thereafter, the plaintiffs sought a discretionary review
by the Supreme Court of the Commonwealth of Kentucky and that motion is
presently still pending.
As of December 31, 1998, there were various other pending legal actions and
proceedings against the Company, including these above, arising from the normal
course of business and in which claims for damages are asserted. Management,
after discussion with legal counsel, believes that these actions are without
merit and that the ultimate liability resulting from these legal actions and
proceedings, if any, will not have a material adverse effect upon the
consolidated financial statements of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders, through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Registrant's stock is traded on the National Association of Security Dealers
Automated Quotation System (NASDAQ) SmallCap Market tier of the NASDAQ Stock
Market, with sales prices reported under the symbol: FFKT. The table below is a
summary of the stock prices and dividends declared for 1998 and 1997.
Stock Prices
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Dividends
High Low Declared
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1998
Fourth Quarter $37.500 $29.000 $0.28
Third Quarter 52.000 31.000 0.24
Second Quarter 50.500 35.125 0.24
First Quarter 35.500 28.500 0.24
1997
Fourth Quarter $34.750 $25.750 0.24
Third Quarter 26.500 20.250 0.205
Second Quarter 21.000 19.750 0.205
First Quarter 21.000 20.000 0.205
As of January 1, 1999, there were 876 shareholders of record. This figure does
not include individual participants in security position listings.
Payment of dividends by the Registrant's subsidiary banks is subject to certain
regulatory restrictions as set forth in national and state banking laws and
regulations. At December 31, 1998, combined retained earnings of the subsidiary
banks were approximately $47,210,000 of which $9,101,000 was available for the
payment of dividends in 1999 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.
Stock Transfer Agent and Registrar:
Farmers Bank & Capital Trust Co.
P.O. Box 309
Frankfort, Kentucky 40602
The Registrant offers shareholders automatic reinvestment of dividends in shares
of stock at the market price without fees or commissions. For a description of
the plan and an authorization card, contact the Registrar above.
NASDAQ Market Makers:
J.J.B. Hilliard, W.L. Lyons, Inc. Herzog, Heine, Geduld, Inc.
(502)588-8400 (800)221-3600
(800)444-1854
J.C. Bradford and Co., Inc. Morgan, Keegan and Company
(800)443-8749 (800)260-0280
Knight Securities LP
(800) 302-9197
ITEM 6. SELECTED FINANCIAL DATA
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December 31,
(In thousands, except per share data) 1998 1997 1996 1995 1994
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RESULTS OF OPERATIONS
Interest income $69,681 $67,360 $ 67,485 $ 67,261 $ 57,750
Interest expense 29,147 27,450 28,703 28,115 21,586
Net interest income 40,534 39,910 38,782 39,146 36,164
Provision for loan losses 1,134 1,830 4,162 3,727 2,125
Net income 14,247 14,103 12,656 10,389 10,250
PER SHARE DATA
Net income -
Basic $1.89 $1.86 $1.65 $1.34 $1.33
Diluted 1.86 1.86 1.65 1.34 1.33
Cash dividends declared 1.00 .855 .745 .675 .615
Book value 16.47 15.48 14.43 13.57 12.94
SELECTED RATIOS
Percentage of net income to:
Average shareholders' equity (ROE) 11.93% 12.50% 11.80% 10.20% 10.55%
Average total assets (ROA) 1.49 1.56 1.41 1.21 1.22
Percentage of dividends declared
to net income 53.02 45.90 45.21 50.24 46.40
Percentage of average shareholders'
equity to average total assets 12.51 12.46 11.94 11.81 11.57
Total shareholders' equity $123,839 $117,044 $109,596 $104,929 $100,064
Total assets 992,338 1,014,183 925,319 906,113 851,703
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 7,555 7,572 7,684 7,732 7,732
Diluted 7,646 7,572 7,684 7,732 7,732
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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
management of Farmers Capital Bank Corporation (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
Farmers Capital Bank Corporation recorded net income of $14.2 million for the
year ended December 31, 1998 compared to $14.1 million for 1997, an increase of
1.0%. Diluted net income per share was $1.86 for 1998, unchanged from 1997. Net
interest income increased $624 thousand, or 1.6% to $40.5 million. The provision
for loan losses decreased $696 thousand to $1.1 million. Noninterest income
increased $266 thousand, or 2.1%. Noninterest expense increased $1.98 million,
or 6.4%. Return on average assets for 1998 was 1.49%, a decrease from 1.56% in
1997. Return on average equity declined from 12.50% in 1997 to 11.93% in 1998.
INTEREST INCOME
Interest income results from interest earned on earnings assets, which primarily
include loans and securities. Interest income is affected by the volume,
composition of earning assets, and the related rates earned thereon. Total
interest income on a tax equivalent basis was $71.6 million, an increase of $2.5
million or 3.7% over the prior year. The increase in interest income was driven
by increases in the average balances of each category of earning assets. The
increase in the average balances more than offset the 11 basis point decrease in
the overall rate earned on average earning assets.
The average balance on taxable securities increased slightly to $144 million.
However, the interest income on these securities decreased $37 thousand. This
decrease is due primarily to a 4 basis point decrease in the average rate
earned, which totaled 6.0% for 1998. Interest on nontaxable securities increased
$636 thousand or 14.0% due primarily to an $11.2 million increase in the average
balance. The tax equivalent average rate earned on nontaxable securities was
6.7% in 1998, a decrease of 17 basis points from 1997.
Interest income on time deposits with banks, federal funds sold, and securities
purchased under agreements to resell totaled $2.9 million for 1998, an increase
of $350 thousand or 13.8%. The increase is attributable to a $6.6 million
increase in the average balance. The average rate on these assets decreased 1
basis point to 5.4%.
Interest and fees on loans, on a tax equivalent basis, increased $1.6 million or
3.0%. The increase is primarily due to a $23.4 million or 4.1% increase in
average loans compared to 1997. The average rate earned on loans for 1998 was
9.31%, a decrease of 11 basis points from 1997.
INTEREST EXPENSE
Interest expense results from incurring interest on interest bearing
liabilities, which primarily include interest bearing deposits, securities sold
under agreements to repurchase, and other borrowed funds. Interest expense is
affected by the volume, composition of the interest bearing liabilities, and the
related rates paid thereon. Total interest expense for 1998 was $29.1 million,
an increase of $1.7 million or 6.2% from the prior year. The increase in
interest expense is primarily attributable to increases in the average balance
of each of the interest bearing liabilities. The average rate paid on interest
bearing liabilities, which increased 6 basis points to 4.17%, also contributed
to the increase in interest expense.
Interest expense on interest bearing demand deposits increased 2.9% to $4.3
million due primarily to a $7.5 million or 4.3% increase in the average balance.
The average rate paid on these deposits decreased 3 basis points to 2.41% for
1998. Interest expense on savings deposits increased $410 thousand or 9.2% due
to an $8.5 million increase in the average balance and a slight increase in
rates paid. Interest on time deposits totaled $17.9 million for 1998, a $691
thousand or 4.0% increase from 1997. The average rate paid on time deposits
equaled 5.5%, a 10 basis point increase from the prior year.
Interest expense on securities sold under agreements to repurchase and other
borrowed funds increased $472 thousand, which was due primarily to an increase
in the average liability of $8.0 million. The average rate paid on these
liabilities was 5.1% for 1998, an increase of 19 basis points.
NET INTEREST INCOME
Net interest income is the most significant component of the Company's earnings.
Net interest income is the excess of the interest income earned on assets over
the interest paid for funds to support those assets. The following table
represents the major components of interest earning assets and interest bearing
liabilities on a tax equivalent basis (TE) where tax exempt income is adjusted
upward by an amount equivalent to the federal income taxes that would have been
paid if the income had been fully taxable (assuming a 34% tax rate).
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL
December 31, 1998 1997 1996
Average Average Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -------------- ------- -------- ---- ------- -------- ---- ------- -------- ----
EARNING ASSETS
Investment securities
Taxable $143,567 $8,598 5.99% $143,162 $8,635 6.03% $155,738 $9,121 5.86%
Nontaxable 1 77,676 5,189 6.68 66,500 4,553 6.85 61,981 4,154 6.70
Time deposits with banks,
federal funds sold and
securities purchased
under agreements
to resell 54,260 2,942 5.42 47,702 2,592 5.43 51,619 2,714 5.26
Loans 1,2,3 589,714 54,908 9.31 566,033 53,328 9.42 546,040 53,140 9.73
------- ------ ---- ------- ------ ---- ------- ------ ----
Total earning assets 865,217 71,637 8.28% 823,397 69,108 8.39% 815,378 69,129 8.48%
Allowance
for loan losses (9,134) (8,871) (8,610)
------ ------ ------
Total earning assets,
net of allowance
for loan losses 856,083 814,526 806,768
NONEARNING ASSETS
Cash and due from banks 62,001 58,561 59,353
Premises and equipment, net 24,083 20,538 19,614
Other assets 12,973 12,295 12,874
------ ------ ------
Total assets $955,140 $905,920 $898,609
======== ======== ========
INTEREST BEARING LIABILITIES
Deposits
Interest bearing demand $180,265 $4,343 2.41% $172,803 $4,219 2.44% $165,551 $4,014 2.42%
Savings 150,499 4,879 3.24 141,961 4,469 3.15 145,134 4,642 3.20
Time 328,351 17,916 5.46 321,376 17,225 5.36 330,294 18,514 5.61
Securities sold under
agreements to repurchase 34,788 1,762 5.06 27,424 1,307 4.77 25,706 1,314 5.11
Other borrowed funds 4,581 247 5.39 3,896 230 5.90 3,719 219 5.89
----- --- ---- ----- --- ---- ----- --- ----
Total interest bearing
liabilities 698,484 29,147 4.17% 667,460 27,450 4.11% 670,404 28,703 4.28%
------ ---- ------ ---- ------ ----
NONINTEREST BEARING LIABILITIES
Commonwealth of Kentucky
deposits 28,245 27,214 25,713
Other demand deposits 100,907 90,127 86,486
Other liabilities 8,032 8,270 8,720
----- ----- -----
Total liabilities 835,668 793,071 791,323
Shareholders' equity 119,472 112,849 107,286
------- ------- -------
Total liabilities and
shareholders' equity $955,140 $905,920 $898,609
======== ======== ========
Net interest income 42,490 41,658 40,426
TE basis adjustment (1,956) (1,748) (1,644)
------ ------ ------
Net interest income $40,534 $39,910 $38,782
======= ======= =======
Net interest spread 4.11% 4.28% 4.20%
Net interest margin 4.91% 5.06% 4.96%
1 Income and yield stated at a fully tax equivalent basis, using a 34% tax rate.
2 Loan balances include principal balances on nonaccrual loans.
3 Loan fees included in interest income amounted to $2,049,000, $1,573,000, and
$1,977,000, in 1998, 1997, and 1996, respectively.
Tax equivalent net interest income was $42.5 million for 1998, an increase of
$832 thousand or 2.0% over 1997. The net interest margin decreased 15 basis
points to 4.91% compared to 5.06% in the prior year. Changes in net interest
income and margin result from the interaction between the volume and composition
of earning assets, the related yields, and the associated cost and composition
of interest bearing liabilities. Accordingly, portfolio size, composition, and
the related yields earned and average rates paid can have a significant impact
on net interest income and margin.
The increase in net interest income was driven primarily by a $41.5 million
increase in average earning assets. This increase was led by a $23.4 million
increase in average loans, which contributed an additional $1.6 million in
interest income over the prior year.
Tax equivalent net interest spread decreased 17 basis points to 4.11% compared
to 4.28% in the prior year. The decrease is the result of an 11 basis point
decrease in the average rate earned on earning assets and an increase of 6 basis
points in the average rate paid on interest bearing liabilities.
The following table is an analysis of the change in net interest income.
ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX EQUIVALENT BASIS)
Variance Variance Attributed to Variance Variance Attributed to
(In thousands) 1998/1997 1 Volume Rate 1997/1996 1 Volume Rate
- -------------- ----------- ------ ---- ----------- ------ ----
INTEREST INCOME
Taxable investment securities $(37) $23 $(60) $(486) $(747) $261
Nontaxable investment securities2 636 751 (115) 399 305 94
Time deposits with banks, federal
funds sold and securities
purchased under agreements
to resell 350 355 (5) (122) (209) 87
Loans2 1,580 2,209 (629) 188 1,911 (1,723)
----- ----- ---- --- ----- ------
Total interest income 2,529 3,338 (809) (21) 1,260 (1,281)
INTEREST EXPENSE
Interest bearing demand deposits 124 177 (53) 205 172 33
Savings deposits410 278 132 (173) (101) (72)
Time deposits 691 372 319 (1,289) (486) (803)
Securities sold under agreements
to repurchase 455 371 84 18 111 (93)
Other borrowed funds 17 38 (21) (14) (23) 9
-- -- --- --- --- -
Total interest expense 1,697 1,236 461 (1,253) (327) (926)
----- ----- --- ------ ---- ----
Net interest income 832 2,102 (1,270) 1,232 1,587 (355)
=== ===== ====== ===== ===== ====
Percentage change 100.0% 252.6% (152.6)% 100.0% 128.8% (28.8)%
1 The changes which are not solely due to rate or volume are allocated on a
percentage basis, using the absolute values of rate and volume variances as
a basis for allocation.
2 Income stated at fully tax equivalent basis using a 34% tax rate.
NONINTEREST INCOME
Noninterest income increased $266 thousand or 2.1% to $12.8 million for 1998.
Service charges and fees on deposits, the largest component of noninterest
income, decreased $171 thousand to $5.2 million. These declines were offset by
increases in trust department income and other service charges, commissions, and
fees. Trust department income increased $223 thousand to $1.4 million due
primarily to an increase in assets under management. Other service charges,
commissions, and fees, led by a $148 thousand increase in custodial safekeeping
fees, increased $298 thousand to $4.2 million. Net gains on the sale of
investment securities, which were $0 in 1997, totaled $60 thousand in 1998.
Other noninterest income for 1998 was $2.0 million, a decrease of $144 thousand.
NONINTEREST EXPENSE
Noninterest expense was $32.6 million for 1998, an increase of $2.0 million or
6.4% over 1997. The increase is primarily the result of a $1.6 million or 10.2%
increase in salaries and employee benefits. Included in the increase is $1.4
million in noncash compensation related to the Company's stock option plan.
Excluding the noncash compensation for 1998, salaries and employee benefits
increased $232 thousand or 1.4%. See footnotes 10 and 21 to the consolidated
financial statements for additional information on the noncash compensation
expense. As of December 31, 1998, the Company had 439 full time equivalent
employees, a decrease of 15 from the prior year end.
The Company estimates additional future noncash compensation expense related to
the Company's stock option plan as detailed in the table below. The amounts are
net of tax and unadjusted for future forfeitures.
(In thousands) Amount
- -------------- ------
1999 $ 700
2000 700
2001 683
2002 557
2003 314
2004 153
-----
Total $ 3,107
=========
Occupancy expense increased $130 thousand or 6.7% to $2.1 million primarily due
to certain subsidiary banks that have constructed new building sites in new
markets. Equipment expenses increased $113 thousand or 4.1% to $2.8 million
primarily due to the acquisition of a new mainframe computer at the Company's
data processing subsidiary. Increases in other noninterest expenses of $301
thousand were partially offset by decreases in data processing expense and bank
franchise tax in the amounts of $148 thousand and $65 thousand, respectively.
INCOME TAX
Income tax expense for 1998 was $5.3 million, a decrease of $535 thousand from
$5.8 million in 1997. The effective tax rates were 27.1% and 29.2% for the years
ended 1998 and 1997, respectively. The reduction in the effective tax rate for
1998 is primarily due to an increase in tax exempt income and the realization of
investment tax credits through participation in low income housing projects.
FINANCIAL CONDITION
On December 31, 1998, assets were $992 million, a decrease of $22 million or
2.2% from year end 1997. The decrease in assets is primarily due to the
relationship between the Company's principal subsidiary, Farmers Bank & Capital
Trust Co., and the Commonwealth of Kentucky. Farmers Bank is the depository for
the Commonwealth of Kentucky. As such, large fluctuations in deposits are likely
to occur on a daily basis. On December 31, 1997, Farmers Bank received a
significant deposit from the Commonwealth which pushed total assets over $1
billion. On an average basis, assets increased $49 million or 5.4% to $955
million for 1998. Earning assets, primarily loans and investment securities,
averaged $865 million, up $42 million or 5.1%.
LOANS
As of December 31, 1998, loans, net of unearned income, totaled $605 million, an
increase of $19 million or 3.2% from $586 million in the prior year. Installment
loans decreased $2.7 million or 3.1%. Real estate mortgage loans increased $17.3
million or 5.2% and lease financing increased $3.2 million or 10.1%. Commercial
and real estate construction loans increased $719 thousand or 1.0%.
The composition of the loan portfolio is summarized in the table below.
Year Ended December 31, (In thousands) 1998 % 1997 % 1996 % 1995 % 1994 %
- -------------------------------------- ---- - ---- - ---- - ---- - ---- -
Commercial, financial, and agriculture $116,625 19.0% $114,377 19.2% $120,256 21.2% $114,412 20.6% $115,068 21.1%
Real estate - construction 24,77 4.0 26,299 4.4 27,098 4.8 26,380 4.8 28,755 5.3
Real estate - mortgage 351,879 57.4 334,612 6.3 305,229 53.8 292,913 52.8 279,264 51.3
Installment 85,156 13.9 87,835 14.8 85,720 15.1 99,571 17.9 107,450 19.7
Lease financing 34,955 5.7 31,759 5.3 29,144 5.1 21,666 3.9 14,029 2.6
------ --- ------ --- ------ --- ------ --- ------ ---
Total $613,385 100.0% $594,882 100.0% $567,447 100.0% $554,942 100.0% $544,566 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
The following table indicates the amount of loans (excluding real estate
mortgages, consumer loans, and lease financing) outstanding at December 31,
1998, which, based on remaining scheduled repayments of principal, are due in
the periods indicated.
LOAN MATURITIES
Within After One But After
(In thousands) One Year Within Five Years Five Years Total
- -------------- -------- ----------------- ---------- -----
Commercial, financial, and agricultural $91,885 $22,238 $2,502 $116,625
Real estate - construction 24,101 197 472 24,770
------ --- --- ------
Total $115,986 $22,435 $2,974 $141,395
======== ======= ====== ========
The table below shows the amount of loans (excluding real estate mortgages,
consumer loans, and lease financing) outstanding at December 31, 1998, which are
due after one year classified according to sensitivity to changes in interest
rates.
INTEREST SENSITIVITY
Fixed Variable
(In thousands) Rate Rate
- -------------- ---- ----
Due after one but within five years $17,450 $4,985
Due after five years 1,935 1,039
----- -----
Total $19,385 $6,024
======= ======
ASSET QUALITY
The Company maintains policies and procedures to ensure that the granting of
credit is done in a sound and consistent manner. This includes policies on a
Company wide basis that require certain minimum standards to be maintained.
However, the policies also permit the individual subsidiary companies authority
to adopt standards that are no less stringent than those included in the Company
wide policies. Credit decisions are made at the subsidiary bank level under the
guidelines established by policy. The Company's internal audit department
performs a loan review at each subsidiary bank during the year. This loan review
evaluates loan administration, credit quality, documentation, compliance with
Company loan standards, and the adequacy of the allowance for loan losses.
The provision for loan losses represents charges made to earnings to maintain an
allowance for loan losses at an adequate level based on credit losses
specifically identified in the loan portfolio, as well as management's best
estimate of probable loan losses inherent in the remainder of the portfolio at
the balance sheet date. Many factors are considered when establishing an
adequate allowance. Those factors include, but are not limited to the following:
an assessment of the financial condition of individual borrowers, a
determination of the value and adequacy of underlying collateral, a review of
historical loss experience, the condition of the local economy, an analysis of
the levels and trends of the loan composition, and a review of delinquent and
classified loans. Actual losses could differ significantly from the amounts
estimated by management.
The provision for loan losses decreased $696 thousand in 1998 compared to 1997.
The Company had net charge offs of $1.2 million, a decrease of $257 thousand
from $1.5 million in 1997. The allowance for loan losses was 1.50% of net loans,
a decrease of 6 basis points from year end 1997. Management continues to
emphasize collection efforts and evaluation of risks within the portfolio. The
results of this effort can be seen in the $2.0 million decrease in nonperforming
assets for 1998 compared to 1997. The composition of the Company's loan
portfolio continues to be diverse with no significant concentration of credit to
any particular industry or individual.
The table below summarizes the loan loss experience for the past five years.
Year Ended December 31, (In thousands) 1998 1997 1996 1995 1994
- -------------------------------------- ---- ---- ---- ---- ----
BALANCE OF ALLOWANCE FOR LOAN LOSSES AT
BEGINNING OF PERIOD $9,114 $ 8,741 $ 8,472 $ 8,889 $ 8,547
Loans charged off:
Commercial, financial, and agricultural 716 720 1,609 2,390 741
Real estate 386 465 920 118 416
Installment loans to individuals 1,061 1,133 1,862 2,376 1,467
Lease financing 109 433 18
--- --- --
Total loans charged off 2,272 2,751 4,409 4,884 2,624
Recoveries of loans previously charged off:
Commercial, financial, and agricultural 383 437 144 192 193
Real estate 345 527 38 146 230
Installment loans to individuals 341 330 334 402 418
Lease financing 3
----- ----- --- --- ---
Total recoveries 1,072 1,294 516 740 841
----- ----- --- --- ---
Net loans charged off 1,200 1,457 3,893 4,144 1,783
Additions to allowance charged
to expense 1,134 1,830 4,162 3,727 2,125
----- ----- ----- ----- -----
Balance at end of period $9,048 $9,114 $8,741 $ 8,472 $ 8,889
====== ====== ====== ======== ========
Average loans
net of unearned income $589,714 $566,033 $546,040 $540,632 $511,492
Ratio of net charge offs
during period to average loans, net
of unearned income .20% .26% .71% .77% .35%
The following table presents an estimate of the allocation of the allowance for
loan losses by type for the date indicated. Although specific allocations exist,
the entire allowance is available to absorb losses in any particular category.
ALLOWANCE FOR LOAN LOSSES
Year Ended December 31, (In thousands) 1998 1997 1996 1995 1994
- -------------------------------------- ---- ---- ---- ---- ----
Commercial, financial, and agricultural $2,536 $2,942 $3,806 $4,138 $6,427
Real estate 4,637 4,324 2,974 1,928 1,027
Installment loans to individuals 1,450 1,417 1,304 2,176 1,264
Lease financing 425 431 657 230 171
------ ------ ------ ------ ------
Total $9,048 $9,114 $8,741 $8,472 $8,889
====== ====== ====== ====== ======
NONPERFORMING ASSETS
Nonperforming assets for the Company include nonperforming loans, other real
estate owned, and other foreclosed assets. Nonperforming loans consist of
nonaccrual loans, loans past due ninety days or more on which interest is still
accruing, and restructured loans. Generally, the accrual of interest on loans is
discontinued when it is determined that the collection of interest or principal
is doubtful, or when a default of interest or principal has existed 90 days or
more, unless such loan is well secured and in the process of collection.
Total nonperforming loans decreased $3.7 million or 55.7% to $2.9 million at
year end 1998. The reductions occurred in all areas of nonperforming loans, with
the largest decrease, $1.9 million, in nonaccrual loans. Nonperforming loans
represent .48% of net loans at year end 1998, compared to 1.13% for 1997. The
$3.7 million reduction in nonperforming loans was partially offset by a $1.7
million increase in other repossessed and foreclosed assets. Information
regarding nonperforming loans and assets is presented in the table below.
Year Ended December 31, (In thousands) 1998 1997 1996 1995 1994
- -------------------------------------- ---- ---- ---- ---- ----
Loans accounted for on nonaccrual basis $1,286 $3,137 $2,938 $2,897 $ 3,913
Loans past due 90 days or more 1,645 2,196 1,822 1,713 1,056
Restructured loans 1,285 1,814 1,571 3,538
----- ----- ----- ----- -----
Total nonperforming loans 2,931 6,618 6,574 6,181 8,507
Other real estate owned 1,671 29 769 374
Other foreclosed assets 69 47 7 12
----- ----- ----- ----- -----
Total nonperforming assets $4,671 $6,647 $6,621 $6,957 $ 8,893
====== ====== ====== ====== =======
TEMPORARY INVESTMENTS
Federal funds sold and securities purchased under agreements to resell are the
primary components of temporary investments. These funds help in the management
of liquidity and interest rate sensitivity. In 1998, temporary investments
averaged $54.3 million, an increase of $6.6 million, or 13.7% from their average
in 1997. Temporary investment funds are reallocated as loan demand presents the
opportunity.
INVESTMENT SECURITIES
The majority of the investment securities portfolio is comprised of U.S.
Treasury securities, Federal agency securities, tax-exempt securities, and
mortgage-backed securities. Total investment securities were $263 million on
December 31, 1998, an increase of $48 million, or 22.4% from year end 1997.
The funds made available from maturing or called bonds have been redirected to
fund new loan growth as needed. Remaining funds have been primarily used to
increase holdings of highly rated corporate debt by $14.7 million, tax-free
obligations by $14.0 million, and US Government agency securities by $14.4
million. The purchase of nontaxable obligations of states and political
subdivisions is the primary means of managing the Company's tax position. The
alternative minimum tax is not expected to impact the Company's ability to
acquire tax-free obligations in the near future as they become available at an
attractive yield.
Available for sale securities and held to maturity securities were $191 million
and $71 million at year end 1998 and 1997, respectively. Total investment
securities averaged $221 million, an increase of $11.5 million, or 5.5% from
year end 1997. The Company realized $60 thousand in net gains on the sale of
available for sale investment securities during 1998. The unrealized gain, net
of tax effect, on available for sale securities, was $369 thousand on December
31, 1998.
The following table summarizes the carrying values of investment securities on
December 31, 1998, 1997, and 1996. The investment securities are divided into
available for sale and held to maturity securities. Available for sale
securities are carried at the estimated fair value and held to maturity
securities are carried at amortized cost.
December 31, 1998 1997 1996
Available Held to Available Held to Available Held to
(In thousands) for sale maturity for sale maturity for sale maturity
- -------------- -------- -------- -------- -------- -------- --------
U.S. Treasury securities $22,379 $25,789 $1,000 $ 27,453 $ 2,000
Obligations of U.S.
Government agencies 86,998 $2,600 59,053 16,149 62,744 28,581
Obligations of states and political
subdivisions 17,807 65,891 69,662 66,348
Mortgage-backed securities 45,520 2,878 30,543 8,875 15,329 14,680
Corporate debt 14,915 184 842
Equity securities 3,868 3,507 2,923
-------- ------- -------- ------- -------- --------
Total $191,487 $71,369 $119,076 $95,686 $109,291 $111,609
======== ======= ======== ======= ======== ========
The following table presents an analysis of the maturity distribution and tax
equivalent weighted average interest rates of investment securities at December
31, 1998. Mortgage-backed securities are presented based on estimated repayment
schedules as of year end. For purposes of this analysis, available for sale
securities are stated at fair value and held to maturity securities are stated
at amortized cost. Equity securities in the available for sale portfolio consist
primarily of Federal Home Loan Bank stock, which has no stated maturity date.
AVAILABLE FOR SALE
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
(In thousands) Amount Rate Amount Rate Amount Rate Amount Rate
-------------- ------ ---- ------ ---- ------ ---- ------ ----
U.S. Treasury securities $19,065 5.60% $3,314 5.62%
Obligations of U.S.
Government agencies 38,837 5.42 37,958 5.75 $10,203 6.14%
Obligations of states and
political subdivisions 107 6.14 1,339 5.95 12,639 6.41 $3,722 6.42%
Mortgage-backed securities 448 6.29 1,346 6.39 42,386 6.03 1,340 6.81
Corporate debt 1,019 5.36 13,896 5.95
------- ---- ------- ---- ------- ---- ------ ----
Total $59,476 5.49% $57,853 5.81% $65,228 6.12% $5,062 6.52%
======= ==== ======= ==== ======= ==== ====== ====
HELD TO MATURITY
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
(In thousands) Amount Rate Amount Rate Amount Rate Amount Rate
-------------- ------ ---- ------ ---- ------ ---- ------ ----
Obligations of U.S.
Government agencies $2,600 5.66%
Obligations of states and
political subdivisions $6,721 7.71% 33,143 6.68 $24,265 7.12% $1,762 7.69%
Mortgage-backed securities 459 6.86 683 6.56 1,736 7.18
------- ---- ------- ---- ------- ---- ------ ----
Total $7,180 7.66% $36,426 6.60% $26,001 7.13% $1,762 7.69%
====== ==== ======= ==== ======= ==== ====== ====
The calculation of the weighted average interest rates for each category is
based on the weighted average costs of the securities. The weighted average tax
rates on exempt states and political subdivisions are computed on a tax
equivalent basis using a 34% tax rate.
DEPOSITS
The Company's primary source of funding for its lending and investment
activities results from its customer deposits, which consists of noninterest and
interest bearing demand, savings, and time deposits. On December 31, 1998,
deposits totaled $830 million, a decrease of $5.0 million or .6% from year end
1997. Deposits averaged $788 million in 1998, an increase of $34.8 million or
4.6%.
During 1998 total average interest bearing deposits increased $23 million or
3.6% to $659 million while average noninterest bearing deposits increased $11.8
million, or 10.1% to $129 million.
Increases in average interest bearing deposits were made in each category of the
deposit portfolio. Interest bearing demand deposits increased $7.5 million or
4.3% to $180 million. Savings deposits increased $8.5 million or 6.0%, and time
deposits increased $7.0 million or 2.2%
A summary of average balances and rates paid on deposits follows.
1998 1997 1996
Average Average Average Average Average Average
(In thousands) Balance Rate Balance Rate Balance Rate
- -------------- ------- ---- ------- ---- ------- ----
Noninterest bearing demand $129,152 0.00% $117,341 0.00% $112,199 0.00%
Interest bearing demand 180,265 2.41 172,803 2.44 165,551 2.42
Savings 150,499 3.24 141,961 3.15 145,134 3.20
Time 328,351 5.46 321,376 5.36 330,294 5.61
------- ------- -------
Total $788,267 $753,481 $753,178
======== ======== ========
Maturities of time deposits of $100,000 or more outstanding at December 31, 1998
are summarized as follows.
(In thousands) Amount
-------------- ------
3 months or less $13,588
Over 3 through 6 months 10,662
Over 6 through 12 months 20,591
Over 12 months 18,613
------
Total $63,454
=======
SHORT-TERM BORROWINGS
Short-term borrowings are made up primarily of securities sold under agreements
to repurchase with balances of $26,324,000, $48,265,000, and $16,594,000 in
1998, 1997, and 1996, respectively. Such borrowings are generally on an
overnight basis. Other short-term borrowing consists primarily of demand notes
issued to the U.S. Treasury under the treasury tax and loan note option account.
A summary of short-term borrowings is as follows.
(In thousands) 1998 1997 1996
-------------- ---- ---- ----
Amount outstanding at year end $26,784 $50,602 $16,594
Maximum outstanding at any month end 50,679 50,602 59,452
Average outstanding 35,807 28,117 25,706
Weighted average rate during the year 5.05% 4.75% 5.11%
EFFECTS OF INFLATION
The majority of the Company's assets and liabilities are monetary in nature.
Therefore, the Company differs greatly from most commercial and industrial
companies that have significant investments in nonmonetary assets, such as fixed
assets and inventories. However, inflation does have an important impact on the
growth of assets in the banking industry and on the resulting need to increase
equity capital at higher than normal rates in order to maintain an appropriate
equity to assets ratio. Inflation also affects other expenses, which tend to
rise during periods of general inflation.
Management believes the most significant impact on financial and operating
results is the Company's ability to react to changes in interest rates.
Management seeks to maintain an essentially balanced position between interest
sensitive assets and liabilities in order to protect against the effects of wide
interest rate fluctuations.
LIQUIDITY
The liquidity of the Parent Company is primarily affected by the receipt of
dividends from its subsidiary banks (see footnote 16 in the notes to the
consolidated financial statements) and cash balances maintained. Management
expects that in the aggregate, its subsidiary banks will continue to have the
ability to dividend adequate funds to the Parent Company.
The Company's objective as it relates to liquidity is to ensure 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. Those sources of funds 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
available for sale investment securities. At December 31, 1998, such assets
totaled $283 million.
For the year ended December 31, 1998, cash and due from banks totaled $38
million. This represents a decrease of $37 million compared with a $24 million
increase during the previous year period. The decrease in cash and due from
banks in 1998 and the increase in 1997 results primarily from a significant cash
deposit received on December 31, 1997 from the Commonwealth of Kentucky. This
deposit created an unusually high balance in cash at year end 1997. Net cash
provided by operating activities decreased $2.4 million in the comparison. Net
cash used in investing activities increased $44 million, primarily from the
result of increased purchases of available for sale investment securities. Net
cash used in financing activities totaled $37 million for the year 1998.
CAPITAL RESOURCES
Shareholders' equity was $124 million on December 31, 1998, increasing $6.8
million, or 5.8% from year end 1997. During 1998, the Company announced that it
would purchase up to 400,000 shares of its outstanding common stock as market
conditions permit. During 1998 the Company purchased 53,000 shares of its
outstanding common stock for a total cost of $1.9 million. Dividends of $7.6
million were declared during the year. This includes a 16.7% increase in the
quarterly dividend rate in the fourth quarter of 1998 from $.24 per share to
$.28 per share. The Company issued 11 thousand shares of common stock during
1998 pursuant to its nonqualified employee stock option plan.
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 December 31, 1998, 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 19.18% 4.00% 6.00%
Total risk based 20.44 8.00 10.00
Leverage 12.80 4.00 5.00
The capital ratios of each subsidiary bank were in excess of the applicable
minimum regulatory capital ratio requirements at December 31, 1998.
The table below is an analysis of dividend payout ratios and equity to asset
ratios for the previous five years.
December 31, 1998 1997 1996 1995 1994
Percentage of dividends declared
to net income 53.02% 45.90 45.21% 50.24% 46.40%
Percentage of average shareholders'
equity to average total assets 12.51 12.46 11.94 11.81 11.57
SHAREHOLDER INFORMATION
As of January 1, 1999, there were 876 shareholders of record. This figure does
not include individual participants in security position listings.
STOCK PRICES
Farmers Capital Bank Corporation's stock is traded on the National Association
of Security Dealers Automated Quotation System (NASDAQ) SmallCap Market tier of
The NASDAQ Stock Market, with sales prices reported under the symbol: FFKT. The
table below is an analysis of the stock prices and dividends declared for 1998
and 1997.
STOCK PRICES
Dividends
High Low Declared
---- --- --------
1998
Fourth Quarter $37.500 $29.000 $0.28
Third Quarter 52.000 31.000 0.24
Second Quarter 50.500 35.125 0.24
First Quarter 35.500 28.500 0.24
1997
Fourth Quarter $34.750 $25.750 $0.24
Third Quarter 26.500 20.250 0.205
Second Quarter 21.000 19.750 0.205
First Quarter 21.000 20.000 0.205
Dividends declared per share increased $.145 or 17.0% and $.11 or 14.8% for the
years 1998 and 1997, respectively.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
computer systems that use two digits rather than four to define the applicable
year. As a result of methods used by earlier programmers, many computer programs
and other equipment using embedded technology, such as microchips, are unable to
distinguish the year 2000 from the year 1900. If left uncorrected this problem
could result in a major system failure, miscalculations, and other disruptions
of operations. A number of computer systems which are affected by the Year 2000
are utilized by the Company to operate its day-to-day business. Most of these
systems use software developed by and licensed from third party software
vendors.
FCB Services, the Company's data processing subsidiary, provides essential
support for virtually all of the Company's subsidiaries as well as providing
data processing services to unrelated third party banks. Therefore, it is vital
that the Year 2000 issues are successfully resolved in a timely matter. Failure
to appropriately examine and correct systems that are critical to the Company's
operations could have a material adverse effect on its operations and financial
performance. The Company's plan for achieving compliance is not only focused on
its own data processing systems, but also on the compliance of its customers. In
particular, commercial loan customers that are not Year 2000 compliant could
become a repayment risk. Therefore, the Company is informing its significant
commercial loan customers of the need to become Year 2000 compliant. The
Company's initial assessment of commercial loan customers indicates no material
impact to the Company. The Company will continue to monitor this risk on an
ongoing basis.
The Company has formed an oversight committee to coordinate the Year 2000
compliance process. This process has been divided into five phases as prescribed
by regulatory guidelines. These phases include awareness, assessment,
renovation, validation, and implementation. The awareness, assessment, and
renovation phases generally include defining the Year 2000 problem and gaining
executive level support for the resources necessary to perform compliance tasks;
establishing a team to develop an overall strategy; assessing the size and
complexity of the problem and detailing the magnitude of the effort necessary to
address the issues, including noninformation technology systems that are
dependent on embedded microchips; and addressing the need for computer code
enhancements, hardware and software upgrades, system replacements, vendor
certification, and other associated changes. These first three phases are
substantially complete. The primary results of the first three phases are as
follows: procedures were established to verify that all new purchases are Year
2000 compliant; the assessment of mission critical applications was completed in
September 1997; and a new Year 2000 compliant mainframe computer was placed into
service in May 1998. The validation and implementation phases consist primarily
of testing the changes made to any hardware or software component and to the
certification of Year 2000 compliance. In addition to testing upgraded
components, connections with other systems must be verified, and all changes
should be accepted by internal and external users. As with other phases, the
Company will be in ongoing discussions with its vendors and customers regarding
the success of their validation efforts. However, the Company cannot control the
success of those efforts. The validation and implementation phases of the
Company's plan are in various stages of completion. Testing of mission critical
systems is substantially complete and has resulted in satisfactory results.
Additional routine testing of mission critical systems is scheduled for
completion by the end of March 1999. Management currently believes that any
remaining testing of mission critical systems will also result in satisfactory
results. To date, a significant number of noncritical systems have also been
tested and results have been satisfactory. The Company currently plans to have
substantially all of its noncritical systems tested by the end of March 1999,
with any remaining testing scheduled for completion by the end of June 1999.
Although mission critical testing is nearing completion, the Company will
continue to monitor and evaluate these systems throughout the remainder of 1999
and into the year 2000 and take appropriate action in the given circumstances.
During 1998, the Company acquired, installed, and tested a new Year 2000
compliant mainframe. Also, a Year 2000 compliant version of the data processing
software was installed and is currently functioning appropriately. However, the
Company continues to maintain its business continuation plans, for which there
are several options in place for partial failure. These plans generally include,
but are not limited to, replacing electronic applications with manual processes.
For a system wide failure, the Company maintains a hot site agreement with
SunGard Recovery Services, Inc., a Pennsylvania Corporation for disaster and
recovery services. This agreement, which has been in place since 1990 and tested
twice a year, provides replacement mainframe and software for the Company to
process with in Philadelphia, Pennsylvania.
The Company believes that expenditures required to bring its systems into
compliance will not have a material adverse effect on the Company's financial
position. To date, substantially all of the expenditures have been absorbed in
routine annual maintenance contracts and have not been incremental costs to the
Company. This includes the Company's acquisition and installation of the new
mainframe computer for approximately $1.5 million in 1998 primarily via a
capital lease, which is being financed and depreciated over a five year period.
The primary reason for acquiring the new mainframe was to replace an older, less
effective mainframe and to increase the Company's data processing capacity and
to take advantage of newer, state of the art technology. The mainframe
acquisition and related costs were anticipated by the Company, and were not
incurred specifically to address Year 2000 compliance. Other related costs have
been negligible. The Company does not have a system in place for tracking
payroll and related costs for the time that internal employees spend on the Year
2000 project. The Company believes that future expenditures relating
specifically to Year 2000 compliance will not be material. However, the Year
2000 problem is pervasive and complex and can potentially affect any computer
process. Therefore, no assurance can be given that Year 2000 compliance can be
achieved without additional unanticipated expenditures and uncertainties that
might affect future operating results. The Company's Year 2000 efforts are
ongoing and its overall plan, including contingency planning, will continue to
evolve as new information becomes available.
EFFECT OF IMPLEMENTING RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 132, EMPLOYERS'
DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. This Statement
revises employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. It
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures required in SFAS No. 87,
SFAS No. 88, and SFAS No. 106.
The Company adopted this Statement effective January 1, 1998. Since this
Statement affects disclosure only, its adoption did not have a material effect
on the consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This Statement requires companies to
recognize derivatives on the balance sheet and measure them at fair value. Gains
or losses resulting in the changes in fair value of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The key criteria for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. If the derivative is highly effective, but not perfectly
effective and does not exactly offset the changes in fair value or cash flows of
the hedged item, the ineffective portion must be recognized in income at the
same time the change in fair value of the derivative is recognized on the
balance sheet. This Statement amends SFAS No. 52 and SFAS No. 107, and
supersedes SFAS No. 80, SFAS No. 105, and SFAS No. 119.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application should be as of the beginning of an
entity's fiscal quarter. Early application of this Statement is permitted only
as of the beginning of any fiscal quarter that begins after issuance of this
Statement. The Company has not determined if it will adopt this Statement before
the mandatory date. The Company does not expect the implementation of this
Statement to have a material effect on the consolidated financial statements.
In October 1998, the FASB issued SFAS No. 134, ACCOUNTING FOR MORTGAGE-BACKED
SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY
A MORTGAGE BANKING ENTERPRISE. This Statement changes the way mortgage banking
enterprises (and enterprises that conduct operations that are substantially
similar to the primary operations of a mortgage banking enterprise) account for
certain securities and other interests they retain after securitizing mortgage
loans that were held for sale. Prior to SFAS No. 134, mortgage banking
enterprises were required to classify all mortgage-backed securities retained
after the securitization of mortgage loans held for sale as trading. This
classification resulted in recognizing unrealized gains and losses currently in
earnings. SFAS No. 134 now requires mortgage banking enterprises to classify
mortgage-backed securities retained after the securitization of mortgage loans
held for sale based on its ability and intent to sell or hold those investments.
This treatment conforms the accounting treatment for securities retained after
securitization of mortgage loans by mortgage banking enterprises to the
accounting treatment for securities retained after the securitization of other
types of assets by a nonmortgage banking enterprise. This Statement amends SFAS
No. 65, SFAS No. 115, SFAS No. 124, and SFAS No. 133.
This Statement is effective for the first fiscal quarter beginning after
December 15, 1998. Early application is permitted as of the issuance of the
Statement. The Company does not expect the implementation of this Statement to
have a material impact on the consolidated financial statements.
1997 COMPARED WITH 1996
Net income was $14.1 million in 1997 compared to $12.7 million in 1996, an
increase of $1.4 million. Diluted net income per share increased from $1.65 to
$1.86. The increase in net income was primarily due to the reduction of the
provision for loan losses of the Company's bank subsidiaries and the reduction
of the overhead expenses of the Company's former consumer finance subsidiary in
the amount of $1.5 million and $771 thousand, net of tax. The return on average
assets and average equity increased from 1.41% to 1.56% and from 11.80% to
12.50%, respectively.
Total interest income on a tax equivalent basis was $69.1 million, unchanged
from 1996. An $8.0 million increase in average earning asset was offset by a 9
basis point decrease in the average rate earned on earning assets.
Total interest expense was $27.5 million, a decrease of $1.3 million, or 4.4%.
The decrease was primarily due to decreases in the average balance of time
deposits and the rate paid on time deposits. The average balance of time
deposits decreased 2.7% and the average rate paid decreased 25 basis points to
5.36%.
Net interest income on a tax equivalent basis increased $1.2 million or 3.0%.
Total interest income decreased $21 thousand while total interest expense
decreased $1.3 million. The spread between rates earned and paid was 4.28%, a
1.9% increase from 1996, while the net interest margin increased 2.0% from 4.96%
to 5.06%.
Noninterest income decreased $2.5 million to $12.5 million in 1997. The decrease
is due primarily to the $3.2 million gain on the sale of loans of the Company's
consumer finance subsidiary recorded in 1996. Other service charges,
commissions, and fees increased $657 thousand in 1997 compared to 1996.
Noninterest expense decreased $1.1 million or 3.5%. The decrease was primarily
due to a $1.1 million or 6.3% decrease in salaries and employee benefits. A
significant portion of this decrease is a result of the sale of the Company's
consumer finance subsidiary in 1996.
Income tax expense was $5.8 million in 1997, up $644 thousand from 1996, which
correlates to the increase in income before taxes. The effective tax rate for
1997 was 29.2% compared to 29.0% in 1996.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in market prices
and rates. The Company's market risk is comprised primarily of interest rate
risk created by its core banking activities of extending loans and receiving
deposits. The Company's success is largely dependent upon its ability to manage
this risk. Interest rate risk is defined as the exposure of the Company's net
interest income to adverse movements in interest rates. Although the Company
manages other risks, such as credit and liquidity risk, management considers
interest rate risk to be its most significant risk, which could potentially have
the largest and a material effect on the Company's financial condition and
results of operations. A sudden and substantial change in interest rates may
adversely impact the Company's earnings to the extent that the interest rates
earned on assets and paid on liabilities do not change at the same speed, to the
same extent, or on the same basis. Other events that could have an adverse
impact on the Company's performance include changes in general economic and
financial conditions, general movements in market interest rates, and changes in
consumer preferences. The Company's primary purpose in managing interest rate
risk is to effectively invest the Company's capital and to manage and preserve
the value created by its core banking business.
The Company has established a Corporate Asset and Liability Management Committee
(ALCO) to provide guidance and support to each of the ALCO Committees of the
subsidiary banks. The Committee is also responsible for monitoring risks on a
Company wide basis. The Committee has established minimum standards in its asset
and liability management policy that each subsidiary bank must adopt. However,
the subsidiary banks are permitted to deviate from these standards so long as
the deviation is no less stringent than that of the Corporate policy.
The table below provides information about the Company's financial instruments
that are sensitive to changes in interest rates. For each balance sheet item
listed below, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. Mortgage-backed securities
are presented based on estimated repayment schedules.
PRINCIPAL CASH FLOWS AND RELATED WEIGHTED AVERAGE INTEREST RATES
Fair
December 31, (Dollars in thousands) 1999 2000 2001 2002 2003 Thereafter Total Value
- ----------------------------------- ---- ---- ---- ---- ---- ---------- ----- -----
RATE SENSITIVE ASSETS
Interest bearing due from banks $1,914 $1,914 $1,914
Average interest rate 4.95% 4.95%
Federal funds sold and securities
purchased under agreements to
resell 51,535 51,535 51,535
Average interest rate 4.63 4.63
Investment debt securities
Fixed rate $67,565 $22,941 $28,890 $18,813 $22,635 $102,012 $262,856 $264,654
Average interest rate 5.31% 5.10% 5.27% 5.35% 5.56% 5.64% 5.44%
Loans, net of unearned income
Fixed rate $219,823 $50,479 $47,725 $25,753 $24,293 $17,753 $385,826 $387,578
Average interest rate 9.04% 9.35% 9.07% 8.98% 8.54% 7.96% 9.00%
Variable rate 161,744 15,678 14,077 13,328 13,587 443 218,857 218,857
Average interest rate 8.61 8.49 8.25 8.10 8.33 8.43 8.53
RATE SENSITIVE LIABILITIES
Noninterest bearing checking $123,741 $123,741 $123,741
Savings and interest bearing checking 378,017 378,017 378,017
Average interest rate 2.00% 2.00%
Time deposits 212,147 $79,694 $22,118 $3,393 $6,140 $4,751 328,243 331,589
Average interest rate 5.22 5.60% 5.84% 5.65% 5.74% 5.84% 5.35
Fixed interest rate borrowings 17,063 531 523 537 281 1,192 20,127 20,141
Average interest rate 4.47 5.87 5.83 5.79 7.11 7.75 4.81
Variable interest rate borrowings 10,123 10,123 10,123
Average interest rate 3.28 3.28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Farmers Capital Bank Corporation:
We have audited the accompanying consolidated balance sheets of Farmers Capital
Bank Corporation and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, changes in
shareholders' equity, and cash flows for each of the years in the two-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The accompanying
consolidated financial statements of Farmers Capital Bank Corporation and
Subsidiaries for the year ended December 31, 1996 were audited by other auditors
whose report thereon dated January 16, 1997, expressed an unqualified opinion on
those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Farmers Capital Bank
Corporation and Subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the two-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Louisville, Kentucky
January 29, 1999
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Farmers Capital Bank Corporation:
We have audited the accompanying consolidated balance sheet of Farmers Capital
Bank Corporation and Subsidiaries as of December 31, 1996 and the related
consolidated statements of income, shareholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Farmers Capital
Bank Corporation and Subsidiaries as of December 31, 1996 and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
/s/Coopers & Lybrand L.L.P.
Louisville, Kentucky
January 16, 1997
CONSOLIDATED BALANCE SHEETS
December 31, (In thousands, except share data) 1998 1997
- ---------------------------------------------- ---- ----
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 38,385 $ 75,830
Interest bearing deposits in other banks 1,914 1,300
Federal funds sold and securities purchased under
agreements to resell 51,535 109,610
------ -------
Total cash and cash equivalents 91,834 186,740
Investment securities:
Available for sale, amortized cost of $190,928 (1998) and $118,926 (1997) 191,487 119,076
Held to maturity, market value of $73,167 (1998) and $96,541 (1997) 71,369 95,686
------ ------
Total investment securities 262,856 214,762
Loans, net of unearned income 604,683 585,940
Allowance for loan losses (9,048) (9,114)
------- ------
Loans, net 595,635 576,826
Premises and equipment, net 24,861 21,214
Other assets 17,152 14,641
-------- ----------
Total assets $992,338 $1,014,183
======== ==========
LIABILITIES
Deposits:
Noninterest bearing $123,741 $151,600
Interest bearing 706,260 683,376
------- -------
Total deposits 830,001 834,976
Securities sold under agreements to repurchase 26,324 48,265
Other borrowed funds 3,926 5,390
Dividends payable 2,113 1,815
Other liabilities 6,135 6,693
------- ------
Total liabilities 868,499 897,139
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock, par value $.125 per share; 9,608,000 shares authorized;
7,520,465 and 7,562,440 shares issued and outstanding
at December 31, 1998 and 1997, respectively 940 945
Capital surplus 10,520 8,894
Retained earnings 112,010 107,105
Accumulated other comprehensive income 369 100
------- -------
Total shareholders' equity 123,839 117,044
------- -------
Total liabilities and shareholders' equity $992,338 $1,014,183
======== ==========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
For the years ended December 31, 1998 1997 1996
- -------------------------------- ---- ---- ----
INTEREST INCOME
Interest and fees on loans $54,556 $ 52,991 $52,778
Interest on investment securities:
Taxable 8,598 8,635 9,121
Nontaxable 3,585 3,142 2,872
Interest on deposits in other banks 154 114 61
Interest on federal funds sold and securities
purchased under agreements to resell 2,788 2,478 2,653
------ ------ ------
Total interest income 69,681 67,360 67,485
INTEREST EXPENSE
Interest on deposits 27,138 25,913 27,170
Interest on other borrowed funds 2,009 1,537 1,533
------ ------ ------
Total interest expense 29,147 27,450 28,703
------ ------ ------
Net interest income 40,534 39,910 38,782
Provision for loan losses 1,134 1,830 4,162
------ ------ ------
Net interest income after provision
for loan losses 39,400 38,080 34,620
NONINTEREST INCOME
Service charges and fees on deposits 5,154 5,325 5,258
Other service charges, commissions, and fees 4,221 3,923 3,247
Data processing income 1,494 1,458 1,373
Trust income 1,360 1,137 1,161
Investment securities gains, net 60 10
Gain on sale of Money One loans 3,206
Other 491 671 734
------ ------ ------
Total noninterest income 12,780 12,514 14,989
NONINTEREST EXPENSE
Salaries and employee benefits 17,813 16,168 17,246
Occupancy expenses, net 2,080 1,950 1,995
Equipment expenses 2,845 2,732 2,603
Data processing expense 908 1,056 958
Bank franchise tax 1,005 1,070 1,045
Other 7,995 7,693 7,928
------ ------ ------
Total noninterest expense 32,646 30,669 31,775
------ ------ ------
Income before income taxes 19,534 19,925 17,834
Income tax expense 5,287 5,822 5,178
------ ------ ------
Net income $14,247 $14,103 $12,656
======= ======= =======
NET INCOME PER COMMON SHARE
Basic $1.89 $1.86 $1.65
Diluted 1.86 1.86 1.65
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 7,555 7,572 7,684
Diluted 7,646 7,572 7,684
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
For the years ended December 31, 1998 1997 1996
- -------------------------------- ---- ---- ----
NET INCOME $ 14,247 $ 14,103 $ 12,656
Other comprehensive income:
Unrealized holding gain on available for sale
securities arising during the period, net of tax
of $172, $238, and $239, respectively 334 462 464
Reclassification adjustment for prior period
unrealized gain recognized during current period,
net of tax of $33 in 1998 (65)
-------- ------- --------
Other comprehensive income 269 462 464
-------- ------- --------
Comprehensive income $ 14,516 $14,565 $ 13,120
======== ======= ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except per share data)
Accumulated
Common Other Total
For the years ended Stock Capital Retained Comprehensive Shareholders
December 31, 1998, 1997, and 1996 Shares Amount Surplus Earnings Income Equity
- --------------------------------- ------ ------ ------- -------- ------ ------
Balance at January 1, 1996 7,733 $ 967 $ 9,094 $ 95,694 $ (826) $ 104,929
Net income 12,656 12,656
Other comprehensive income 464 464
Cash dividends declared, $.745 per share (5,722) (5,722)
Purchase of common stock (139) (18) (163) (2,550) (2,731)
----- --- ----- ------- ---- -------
Balance at December 31, 1996 7,594 949 8,931 100,078 (362) 109,596
Net income 14,103 14,103
Other comprehensive income 462 462
Cash dividends declared, $.855 per share (6,473) (6,473)
Purchase of common stock (32) (4) (37) (603) (644)
----- --- ----- ------- ---- -------
Balance at December 31, 1997 7,562 945 8,894 107,105 100 117,044
Net income 14,247 14,247
Other comprehensive income 269 269
Cash dividends declared, $1.00 per share (7,554) (7,554)
Purchase of common stock (53) (6) (62) (1,788) (1,856)
Stock options exercised, including
related tax benefits 11 1 275 276
Noncash compensation expense attributed
to stock option grants 1,413 1,413
----- --- ----- ------- ---- -------
Balance at December 31, 1998 7,520 $940 $10,520 $112,010 $369 $ 123,839
===== ==== ======= ======== ==== ==========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, (In thousands) 1998 1997 1996
- ----------------------------------------------- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $14,247 $14,103 $ 12,656
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,757 2,587 2,477
Net amortization of investment security
premiums and discounts:
Available for sale (135) (84) (388)
Held to maturity 68 77 111
Provision for loan losses 1,134 1,830 4,162
Noncash compensation expense 1,413
Mortgage loans originated for sale (18,351) (9,080) (8,017)
Proceeds from sale of mortgage loans 15,104 9,017 7,955
Deferred income tax expense (benefit) (131) 633 512
Gain on sale of mortgage loans (7) (19) (18)
Gain on sale of Money One loans (3,206)
Loss (gain) on sale of fixed assets 11 (8) (150)
Gain on sale of available for sale investment securities (60)
Gain on call of held to maturity investment securities (10)
(Increase) decrease in accrued interest receivable (405) 324 (240)
(Increase) decrease in other assets (3,007) (3,523) 491
Increase (decrease) in accrued interest payable 29 (248) (166)
(Decrease) increase in other liabilities (177) (749) 1,449
------ ------ ------
Net cash provided by operating activities 12,490 14,860 17,618
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities:
Available for sale 135,899 118,918 132,172
Held to maturity 30,899 33,767 39,175
Proceeds from sale of available for sale investment securities 25,673
Purchases of investment securities:
Available for sale (233,379) (127,920) (134,440)
Held to maturity (6,650) (17,921) (29,894)
Loans originated for investment, net of principal collected (16,689) (29,066) (31,123)
Purchases of premises and equipment (5,911) (4,094) (1,594)
Proceeds from sale of equipment 22 154 399
Proceeds from sale of Money One loans 15,447
------ ------ ------
Net cash used in investing activities (70,136) (26,162) (9,858)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits (4,975) 48,666 31,449
Dividends paid (7,256) (6,216) (5,557)
Purchase of common stock (1,856) (644) (2,731)
Stock options exercised 232
Net (decrease )increase in other borrowed funds (23,405) 33,490 (18,359)
------ ------ ------
Net cash (used in) provided by financing activities (37,260) 75,296 4,802
------ ------ ------
Net (decrease) increase in cash and cash equivalents (94,906) 63,994 12,562
Cash and cash equivalents at beginning of year 186,740 122,746 110,184
------- -------- --------
Cash and cash equivalents at end of year $91,834 $186,740 $122,746
======= ======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest $29,118 $27,698 $ 28,869
Income taxes 5,185 5,649 4,210
Cash dividend declared and unpaid 2,113 1,815 1,558
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The accounting and reporting policies of Farmers Capital Bank Corporation and
Subsidiaries conform to generally accepted accounting principles and general
practices applicable to the banking industry. The more significant accounting
policies are summarized below:
Basis of Presentation and Organization
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 Co. 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 at 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.
Reclassifications
Certain amounts in the accompanying consolidated financial statements presented
for prior years have been reclassified to conform with the 1998 presentation.
These reclassifications do not affect net income or shareholders' equity as
previously reported.
Segment Information
The Company provides a broad range of financial services to individuals,
corporations, and others through its 23 banking locations throughout Central
Kentucky. These services primarily include the activities of lending and
leasing, receiving deposits, providing cash management services, safe deposit
box rental, and trust activities. Operations are managed and financial
performance is evaluated at the subsidiary bank level. The Company's chief
decision maker monitors the results of the various banking products and services
of its subsidiaries. Accordingly, all of the Company's banking operations are
considered by management to be aggregated in one reportable operating segment.
Cash and Cash Equivalent
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, interest bearing demand deposits in other banks,
federal funds sold and securities purchased under agreements to resell.
Generally, federal funds sold and securities purchased under agreements to
resell are purchased and sold for one-day periods.
Investment Securities
Investments in debt and equity securities are classified into three categories.
Securities that management has the positive intent and ability to hold until
maturity are classified as held to maturity. Securities that are bought and held
specifically for the purpose of selling them in the near term are classified as
trading securities. All other securities are classified as available for sale.
Securities are designated as available for sale if management intends to use
such securities in its asset/liability management strategy and therefore such
securities may be sold in response to changes in interest rates and prepayment
risk. Securities classified as trading and available for sale are carried at
market value. Unrealized holding gains and losses for trading securities are
included in current income. Unrealized holding gains and losses for available
for sale securities are reported net of income taxes in other comprehensive
income until realized. Investments classified as held to maturity are carried at
amortized cost. Realized gains and losses on any sales of securities are
computed on the basis of specific identification of the adjusted cost of each
security and are included in noninterest income.
Loans and Interest Income
Loans are stated at the principal amount outstanding. Interest income on loans
is recognized using the interest method based on loan principal amounts
outstanding during the period, except interest on some consumer installment
loans which is recognized on the sum-of-the-months digits method, and does not
differ materially from the interest method. Fees and incremental direct costs
associated with loan origination are deferred and amortized as yield adjustments
over the respective loan terms. Generally, the accrual of interest on loans,
including impaired loans, is discontinued when it is determined that the
collection of interest or principal is doubtful, or when a default of interest
or principal has existed for 90 days or more, unless such loan is well secured
and in the process of collection. Cash payments received on nonaccrual loans
generally are applied to principal, and interest income is only recorded once
principal recovery is assured.
The Company accounts for impaired loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN, as amended by SFAS No. 118, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN INCOME RECOGNITION. SFAS No. 114, as amended, requires that
impaired loans be measured at the present value of expected future cash flows,
discounted at the loan's effective interest rate, at the loan's observable
market price, or at the fair value of the collateral if the loan is collateral
dependent. Generally, impaired loans are also in nonaccrual status. In certain
circumstances, however, the Company may continue to accrue interest on an
impaired loan. Cash receipts on impaired loans are applied to the recorded
investment in the loan, including any accrued interest receivable. The Company
does not apply SFAS No. 114 and SFAS No. 118 to loans which are part of a large
group of smaller-balance homogeneous loans, such as residential mortgage and
consumer loans. Such loans are collectively evaluated for impairment.
Loans Held for Sale
The Company's operations include a limited amount of mortgage banking. Mortgage
banking activities include the origination of residential mortgage loans for
sale to various investors. Mortgage loans originated and intended for sale in
the secondary market, principally under programs with the Federal Home Loan
Mortgage Corporation and the Federal National Mortgage Association, are carried
at the lower of cost or market value and included in net loans on the balance
sheet. The carrying amount on these loans were $3.8 million, or less than 1% of
net loans at December 31, 1998. Mortgage banking revenues, including origination
fees, servicing fees, net gains or losses on sales of mortgages, and other fee
income amount to less than 1% of the Company's total revenue for the years ended
December 31, 1998, 1997, and 1996.
Provision for Loan Losses
The provision for loan losses represents charges made to earnings to maintain an
allowance for loan losses at an adequate level based on credit losses
specifically identified in the loan portfolio, as well as management's best
estimate of probable loan losses inherent in the remainder of the portfolio at
the balance sheet date. Many factors are considered when establishing an
adequate allowance. Those factors include, but are not limited to the following:
an assessment of the financial condition of individual borrowers, a
determination of the value and adequacy of underlying collateral, a review of
historical loss experience, the condition of the local economy, an analysis of
the levels and trends of the loan composition, and a review of delinquent and
classified loans. Actual losses could differ significantly from the amounts
estimated by management.
Other Real Estate
Other real estate owned and held for sale included with other assets in the
accompanying consolidated balance sheets includes properties acquired by the
Company through actual loan foreclosures. Other real estate owned is carried at
the lower of cost or fair value less estimated costs to sell. Fair value is the
amount that the Company could reasonably expect to receive in a current sale
between a willing buyer and a willing seller, other than in a forced or
liquidation sale. Fair value of assets is measured by the market value based on
comparable sales.
Income Taxes
Deferred income tax assets and liabilities result from temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements that will result in taxable or deductible amounts in
future years. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in years in which those temporary
differences are expected to be recovered or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Premises and Equipment
Premises, equipment, and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation is computed primarily on
the straight-line method over the estimated useful lives for furniture,
equipment, and buildings. Leasehold improvements are amortized over the shorter
of the estimated useful lives or terms of the related leases on the
straight-line method. Maintenance, repairs, and minor improvements are charged
to operating expenses as incurred and major improvements are capitalized. The
cost of assets sold or retired and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is included in income.
Net Income Per Common Share
The Company calculates earnings per share in accordance with SFAS No. 128,
Earnings Per Share, which requires the computation and disclosure of basic and
diluted net income per common share. Basic net income per common share is
determined by dividing net income by the weighted average number of shares of
common stock outstanding. Diluted net income per common share is determined by
dividing net income by the weighted average number of shares of common stock
outstanding plus the weighted average number of shares that would be issued upon
exercise of dilutive stock options assuming proceeds are used to repurchase
shares pursuant to the treasury stock method.
Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income is defined as the
change in equity (net assets) of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. For the
Company, this includes net income and net unrealized gains and losses on
available for sale investment securities. This Statement requires only
additional disclosures in the consolidated financial statements; it does not
affect the Company's financial position or results of operations. Prior to the
adoption of SFAS No. 130, net unrealized gains and losses were reported as a
separate component of shareholders' equity. Prior year financial statements have
been reclassified to conform to the requirements of SFAS No. 130. The
implementation of SFAS No. 130 did not have a material impact on the Company's
consolidated financial statements.
2. INVESTMENT SECURITIES
The following summarizes the amortized cost and estimated fair values of the
securities portfolio at December 31, 1998. The summary is divided into available
for sale and held to maturity securities.
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1998 (In thousands) Cost Gains Losses Value
- -------------------------------- ---- ----- ------ -----
AVAILABLE FOR SALE
U.S. Treasury securities $22,277 $102 $22,379
Obligations of U.S. Government agencies 86,927 181 $110 86,998
Obligations of states and political subdivisions 17,624 217 34 17,807
Mortgage-backed securities 45,340 231 51 45,520
Corporate debt 14,892 90 67 14,915
Equity securities 3,868 3,868
------- --- --- -------
Total securities - available for sale $190,928 $821 $262 $191,487
======== ==== ==== ========
HELD TO MATURITY
Obligations of U.S. Government agencies $2,600 $1 $9 $2,592
Obligations of states and political subdivisions 65,891 1,758 9 67,640
Mortgage-backed securities 2,878 60 3 2,935
------- --- --- -------
Total securities - held to maturity $71,369 $1,819 $21 $73,167
======= ====== === =======
The following summarizes the amortized cost and estimated fair values of the
securities portfolio at December 31, 1997.
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1997 (In thousands) Cost Gains Losses Value
- -------------------------------- ---- ----- ------ -----
AVAILABLE FOR SALE
U.S. Treasury securities $25,773 $37 $21 $25,789
Obligations of U.S. Government agencies 59,033 84 64 59,053
Mortgage-backed securities 30,409 153 19 30,543
Corporate debt 204 20 184
Equity securities 3,507 3,507
------- --- --- -------
Total securities - available for sale $118,926 $274 $124 $119,076
======== ==== ==== ========
HELD TO MATURITY
U.S. Treasury securities $1,000 $1 $999
Obligations of U.S. Government agencies 16,149 $16 63 16,102
Obligations of states and political subdivisions 69,662 982 141 70,503
Mortgage-backed securities 8,875 86 24 8,937
------- --- --- -------
Total securities - held to maturity $95,686 $1,084 $229 $96,541
======= ====== ==== =======
The amortized cost and estimated fair value of the securities portfolio at
December 31, 1998, by contractual maturity, are shown below. The summary is
divided into available for sale and held to maturity securities. Mortgage-backed
securities are presented based on estimated repayment schedules as of December
31, 1998. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Equity securities in the available for sale portfolio
consist primarily of Federal Home Loan Bank ("FHLB") stock, which has no stated
maturity.
Available for Sale Held to Maturity
Amortized Estimated Amortized Estimated
December 31, 1998 (In thousands) Cost Fair Value Cost Fair Value
- -------------------------------- ---- ---------- ---- ----------
Due in one year or less $59,487 $59,476 $7,180 $7,260
Due after one year through five years 57,701 57,853 36,426 37,175
Due after five years through ten years 64,828 65,228 26,001 26,878
Due after ten years 5,044 5,062 1,762 1,854
-------- -------- ------- -------
Total $187,060 $187,619 $71,369 $73,167
======== ======== ======= =======
Gross gains of $100,000, $0, and $10,000 for 1998, 1997, and 1996, respectively,
were realized on the sale and call of investment securities. Gross losses of
$40,000 were realized during 1998.
Investment securities with a book value of $154,528,000 and $129,231,000 at
December 31, 1998 and 1997 were pledged to secure public and trust deposits,
repurchase agreements, and for other purposes.
3. LOANS
Major classifications of loans are summarized as follows.
December 31, (In thousands) 1998 1997
- --------------------------- ---- ----
Commercial, financial, and agricultural $116,625 $114,377
Real estate - construction 24,770 26,299
Real estate - mortgage 351,879 334,612
Installment loans 85,156 87,835
Lease financing 34,955 31,759
------ ------
Total loans 613,385 594,882
Less unearned income (8,702) (8,942)
------- -------
Total loans, net of unearned income $604,683 $585,940
======== ========
Loans to directors, executive officers, principal shareholders, including loans
to affiliated companies of which directors, executive officers and principal
shareholders are principal owners, and loans to members of the immediate family
of such persons, were approximately $16,011,000 and $16,245,000 at December 31,
1998 and 1997, respectively. An analysis of the activity with respect to these
loans follows.
(In thousands) Amount
Balance, December 31, 1997 $16,245
Additions, including loans now meeting
disclosure requirements 8,223
Amounts collected, including loans no longer
meeting disclosure requirements 8,457
------
Balance, December 31, 1998 $16,011
=======
4. ALLOWANCE FOR LOAN LOSSES
The Company's recorded investment in impaired loans, as defined in SFAS No. 114,
was $348,000 at December 31, 1998 and $2,813,000 at December 31, 1997. Of those
amounts, $0 and $2,186,000, respectively, represent loans for which an allowance
for loan losses, in the amounts of $0 and $895,000, has been established under
SFAS No. 114. For the years ended December 31, 1998 and 1997, the recorded
investment in impaired loans averaged $1,601,000 and $3,705,000, respectively.
Interest income recognized on impaired loans totaled $103,000, $226,000, and
$151,000 for the years 1998, 1997, and 1996, respectively.
The Company's charge off policy for impaired loans does not differ from the
charge off policy for loans outside the definition of SFAS No. 114. Loans that
are delinquent in excess of 120 days are charged off unless the borrower
continues to maintain a satisfactory financial standing and/or the collateral
securing the debt is of such value that any loss appears to be unlikely.
An analysis of the allowance for loan losses follows.
Year Ended December 31, 1998 1997 1996
Regular SFAS 114 Total Regular SFAS 114 Total Regular SFAS 114 Total
(In thousands) Allowance Allowance Allowance Allowance Allowance Allowance Allowance Allowance Allowance
- -------------- --------- ------------------- --------- ------------------- -----------------------------
Balance, beginning of year $8,219 $895 $9,114 $7,819 $922 $8,741 $7,687 $785 $8,472
Provisions for loan losses 1,769 (635) 1,134 1,713 117 1,830 3,044 1,118 4,162
Recoveries 791 281 1,072 1,138 156 1,294 516 516
Loans charged off (1,731) (541) (2,272) (2,451) (300) (2,751) (3,428) (981) (4,409)
------ ---- ------ ------ ---- ------ ------ ---- ------
Balance, end of year $9,048 $0 $9,048 $8,219 $895 $9,114 $7,819 $922 $8,741
====== == ====== ====== ==== ====== ====== ==== ======
5. PREMISES AND EQUIPMENT
Premises and equipment consist of the following.
December 31, (In thousands) 1998 1997
Land, buildings, and leasehold improvements $29,703 $26,609
Furniture and equipment 12,999 10,591
------ ------
Total premises and equipment 42,702 37,200
Less accumulated depreciation and amortization 17,841 15,986
------ ------
Premises and equipment, net $24,861 $21,214
======= =======
Depreciation and amortization of premises and equipment was $2,230,000,
$2,054,000, and $1,941,000 in 1998, 1997, and 1996, respectively.
6. DEPOSIT LIABILITIES
Time deposits of $100,000 or more at December 31, 1998 and 1997 were $63,454,000
and $59,526,000, respectively.
At December 31, 1998, the scheduled maturities of time deposits were as follows.
(In thousands) Amount
-------------- ------
1999 $212,147
2000 79,694
2001 22,118
2002 3,393
2003 and thereafter 10,891
-------
Total $328,243
========
7. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED FUNDS
Securities sold under agreements to repurchase represent borrowings by the
Company which generally mature one business day following the date of the
transaction. Information pertaining to such borrowings are as follows.
December 31, (Dollars in thousands) 1998 1997
- ----------------------------------- ---- ----
Average balance during the year $34,788 $27,424
Average interest rate during the year 5.06% 4.77%
Maximum month end balance during the year $49,900 $48,265
Other borrowed funds consist primarily of advances to one of the Company's
subsidiary banks from the Federal Home Loan Bank of Cincinnati. Such borrowings
were $2,332,000 and $2,558,000 at December 31, 1998 and 1997, respectively. The
subsidiary bank pledges FHLB stock and extends a blanket pledge of certain 1-4
family first mortgage loans as collateral for these advances. The aggregate
balance of the pledged loans must equal 150% of the outstanding advances.
Maturities of long term borrowings at December 31, 1998 are as follows.
(In thousands) Amount
- -------------- ------
1999 $423
2000 511
2001 523
2002 536
2003 281
Thereafter 1,192
-----
Total $3,466
======
8. INCOME TAXES
The components of income tax expense are as follows.
December 31, (In thousands) 1998 1997 1996
- --------------------------- ---- ---- ----
Currently payable $5,418 $5,189 $4,666
Deferred income tax expense (benefit) (131) 633 512
----- ----- -----
Total applicable to operations 5,287 5,822 5,178
Charged to components of shareholders equity:
Net unrealized securities gains 139 238 245
----- ----- -----
Total income taxes $5,426 $6,060 $5,423
====== ====== ======
An analysis of the difference between the effective income tax rates and the
statutory federal income tax rate follows.
December 31, (In thousands) 1998 1997 1996
- --------------------------- ---- ---- ----
Federal statutory rate 35.0% 35.0% 35.0%
Changes from statutory rates resulting from:
Tax exempt interest (7.7) (6.7) (6.8)
Nondeductible interest to carry municipal obligations .9 .8 .8
Amortization of intangibles .9 .9 1.0
Low income housing tax credits (1.0) (.5)
Other, net (1.0) (.3) (1.0)
---- --- ----
Effective tax rate 27.1% 29.2% 29.0%
==== ==== ====
The tax effects of the significant temporary differences which comprise deferred
tax assets and liabilities at December 31, 1998 and
1997 follows.
December 31, (In thousands) 1998 1997
- --------------------------- ---- ----
ASSETS
Loan loss reserve $3,167 $3,190
Deferred directors' fees 204 184
Postretirement benefit obligations 517 435
Stock options 450
Self-funded insurance 47 34
----- -----
Total deferred tax assets 4,385 3,843
LIABILITIES
Depreciation 1,521 1,596
Investment securities 370 139
Deferred loan fees 1,011 768
Lease financing operations 1,612 1,437
Other 137 161
----- -----
Total deferred tax liabilities 4,651 4,101
----- -----
Net deferred tax liability $ (266) $ (258)
====== ======
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, management believes it
is more likely than not the Company will realize the benefits of these
deductible differences at December 31, 1998.
9. RETIREMENT PLANS
The Company maintains a defined contribution-money purchase pension plan which
covers substantially all employees. The Company's contributions under the plan
are based upon a percentage of covered employees' salaries.
The Company has established a stock bonus/employee stock ownership plan for the
benefit of substantially all employees of the Company. The Company's
contributions under the plan are based upon a percentage of covered employees'
salaries, and are paid at the discretion of the Board of Directors of the
Company. The Company contributes cash to the plan and Company shares are
purchased with the cash in the open market. Cash contributed to the plan was $0,
$0, and $102,000, respectively for the years ended December 31, 1998, 1997, and
1996. No stock was contributed to the plan for the years ended December 31,
1998, 1997, and 1996, respectively.
The Company has also established a profit-sharing plan which covers
substantially all employees. The Company will match all eligible employee
contributions up to 4% of the participant's compensation. The Company may, at
the discretion of the Board, contribute an additional amount based upon a
percentage of covered employees' salaries.
The total retirement plan expense for 1998, 1997, and 1996 was $893,000,
$847,000, and $897,000, respectively.
10. COMMON STOCK OPTIONS
In 1997, the Company's Board of Directors approved a nonqualified stock option
plan which provides for granting of stock options to key employees and officers
of the Company. The plan was subsequently ratified by the Company's shareholders
at its annual shareholders' meeting held on May 12, 1998, the measurement date
of the plan. The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its plan. Accordingly, since options
were granted during 1997 at the fair market value of the Company's stock on the
grant date, and the measurement date occurred during 1998, the Company
recognizes noncash compensation expense based on the intrinsic value of the
stock options measured on the date of shareholder ratification of the plan. The
amount of such expense recorded in 1998, net of tax, was $918,000. At December
31, 1998, the schedule of approximate noncash compensation expense related to
the Company's stock option plan, net of tax and unadjusted for future
forfeitures, is shown in the table below.
( In thousands) Amount
- --------------- ------
1999 $700
2000 700
2001 683
2002 557
2003 314
2004 153
-----
Total $3,107
======
Had compensation expense been determined under the fair value method described
in SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company's net
income and income per common share would have been as shown in the table below.
As the plan's measurement date was in 1998, the 1997 proforma net income and net
income per common share amounts in the table below include compensation expense
calculated using the intrinsic value of the stock options at December 31, 1997.
December 31, (In thousands, except per share data) 1998 1997
NET INCOME
As reported $14,247 $14,103
Proforma 14,189 13,991
NET INCOME PER COMMON SHARE
Basic, as reported 1.89 1.86
Basic, proforma 1.88 1.85
Diluted, as reported 1.86 1.86
Diluted, proforma 1.86 1.85
The plan provides for the granting of options to purchase up to 450,000 shares
of the Company's common stock at a price equal to 100% of the fair market value
of the Company's common stock on the date the option is granted. The term of the
options expire after ten years from the date on which the options are granted.
Options granted under the plan vest ratably over various time periods ranging
from four to seven years. All options granted must be held for a minimum of one
year before they can be exercised.
The fair value of the options granted are estimated as of the measurement date
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997: dividend yield of 3.18%; expected
volatility of 23.4%; risk free interest rate of 5.75%; and expected life of
seven years. There were no options granted during 1998. There were 41,382 shares
forfeited during 1998. These shares are available for the granting of additional
stock options under the plan.
A summary of the status of the Company's stock option plan as of December 31,
1998 and 1997 is presented below.
1998 1997
Weighted Weighted
Average Average
Shares Price Shares Price
------ ----- ------ -----
Outstanding at January 1 450,000 $24.50
Granted 450,000 $24.50
Forfeited (41,382) 24.50
Exercised (14,482) 24.50
------- ----- ------- -----
Outstanding at December 31 394,136 24.50 450,000 $24.50
======= ===== ======= ======
Exercise price of outstanding options $24.50 $24.50
Exercisable at December 31 63,356
Weighted average contractual life of
outstanding options at December 31 (in years) 8.75 9.75
The weighted average fair value of options granted was $16.11 per share at May
12, 1998, the measurement date, and the intrinsic value of options granted was
$7.50 per share at December 31, 1997.
11. POSTRETIREMENT BENEFITS
The Company provides lifetime medical and dental benefits for certain eligible
retired employees. Only employees meeting the eligibility requirements as of
December 31, 1989 will be eligible for such benefits upon retirement. The entire
cost of these benefits is paid for by the Company. The plan is unfunded.
The following schedules set forth a reconciliation of the changes in the plan's
benefit obligation and funded status for the period's ending December 31, 1998
and 1997.
(In thousands) 1998 1997
- -------------- ---- ----
RECONCILIATION OF BENEFIT OBLIGATION
Obligation at beginning of year $2,977 $3,443
Service cost 2 9
Interest cost 202 250
Actuarial (gain) loss 252 (634)
Benefit payments (65) (91)
----- -----
Obligation at end of year $3,368 $2,977
FUNDED STATUS
Funded status at beginning of year $(3,368) $(2,977)
Unrecognized transition obligation 1,421 1,522
Unrecognized prior service cost 424 467
Unrecognized gain (25) (277)
----- -----
Net amount recognized at end of year $(1,548) $(1,265)
======= =======
The following table provides disclosure of the net periodic benefit cost as of
December 31.
(In thousands) 1998 1997
- -------------- ---- ----
Service cost $2 $9
Interest cost 202 250
Amortization of transition obligation 102 102
Amortization of prior service cost 42 42
Amortization of net loss 1
--- ---
Net periodic benefit cost $348 $404
==== ====
Major assumptions:
Discount rate 6.75% 7.00%
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. For measurement purposes, an 8% annual rate
of increase in the per capita cost of covered health care benefits was assumed.
The rate was assumed to decrease gradually to 5% by 2003 and remain at that
level thereafter. A 1% change in the assumed health care cost trend rates would
have the following effects.
(In thousands) 1% Increase 1% Decrease
- -------------- ----------- -----------
Effect on total of service and interest cost
components of net periodic postretirement
health care benefit cost $24 $(20)
12. LEASES
The Company leases certain of its branch sites and certain banking equipment
under operating leases. All of the branch site leases have renewal options of
varying lengths and terms. The aggregate minimum rental commitments under these
leases are not material.
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers. The
financial instruments include commitments to extend credit and standby letters
of credit.
These financial instruments involve to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
balance sheets. The contract amounts of these instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. Total commitments to extend
credit were $93,686,000 and $89,147,000 at December 31, 1998 and 1997,
respectively. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company upon extension of credit, is based on management's credit evaluation
of the counterparty. Collateral held varies, but may include accounts
receivable, marketable securities, inventory, premises and equipment,
residential real estate, and income producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements. The
credit risk involved in issuing letters of credit is essentially the same as
that received when extending credit to customers. The Company had approximately
$7,111,000 and $6,902,000 in irrevocable letters of credit outstanding at
December 31, 1998 and 1997, respectively.
14. CONCENTRATION OF CREDIT RISK
The Company's bank subsidiaries actively engage in lending, primarily in home
counties and adjacent areas. Collateral is received to support these loans when
deemed necessary. The more significant categories of collateral include cash on
deposit with the Company's banks, marketable securities, income producing
property, home mortgages, and consumer durables. Loans outstanding, commitments
to make loans, and letters of credit range across a large number of industries
and individuals. The obligations are significantly diverse and reflect no
material concentration in one or more areas.
15. CONTINGENCIES
As of December 31, 1998, 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 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.
16. REGULATORY MATTERS
Payment of dividends by the Company's subsidiary banks is subject to certain
regulatory restrictions as set forth in national and state banking laws and
regulations. At December 31, 1998, combined retained earnings of the subsidiary
banks were approximately $47,210,000 of which $9,101,000 was available for the
payment of dividends in 1999 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.
Included in cash and due from banks are certain noninterest bearing deposits
that are held at the Federal Reserve Bank and correspondent banks in accordance
with regulatory reserve requirements specified by the Federal Reserve Board of
Governors. The balance requirement was $7,091,000 at December 31, 1998 and
$11,937,000 at December 31, 1997.
The Company's banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements will initiate certain mandatory and additional discretionary
actions by regulators that, if undertaken, could have a direct material effect
on the Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the banks must meet specific
capital guidelines that involve quantitative measures of the banks' assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The banks' capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the banks to maintain minimum amounts and ratios (set forth in the
tables below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital to average assets (as
defined). Each of the Company's subsidiary banks meet all capital adequacy
requirements to which they are subject as of December 31, 1998.
As of December 31, 1998, the most recent notification from the FDIC categorized
the banks as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the banks must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the tables. There are no conditions or events since that
notification that management believes have changed the institutions' category.
The banks' actual capital amounts and ratios are also presented in the following
tables.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
December 31, 1998 (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------- ------ ----- ------ ----- ------ -----
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS)
Consolidated $122,132 19.18% $25,465 4.00% $38,198 6.00%
Farmers Bank & Capital Trust Co. 41,025 15.67 10,471 4.00 15,707 6.00
Farmers Bank and Trust Company 11,233 12.89 3,486 4.00 5,229 6.00
Lawrenceburg National Bank 8,944 13.39 2,672 4.00 4,008 6.00
First Citizens Bank 10,952 13.17 3,326 4.00 4,989 6.00
United Bank & Trust Co. 10,381 13.38 3,104 4.00 4,656 6.00
Kentucky Banking Centers, Inc. 7,530 11.70 2,574 4.00 3,861 6.00
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS)
Consolidated $130,103 20.44% $50,931 8.00 $63,663 10.00%
Farmers Bank & Capital Trust Co. 44,304 16.92 20,942 8.00 26,178 10.00
Farmers Bank and Trust Company 12,325 14.14 6,972 8.00 8,715 10.00
Lawrenceburg National Bank 9,780 14.64 5,344 8.00 6,680 10.00
First Citizens Bank 11,992 14.42 6,652 8.00 8,315 10.00
United Bank & Trust Co. 11,351 14.63 6,208 8.00 7,760 10.00
Kentucky Banking Centers, Inc. 8,335 12.95 5,149 8.00 6,436 10.00
TIER 1 CAPITAL (TO AVERAGE ASSETS)
Consolidated $122,132 12.80% $38,152 4.00% $47,690 5.00%
Farmers Bank & Capital Trust Co. 41,025 9.67 16,975 4.00 21,218 5.00
Farmers Bank and Trust Company 11,233 8.90 5,048 4.00 6,310 5.00
Lawrenceburg National Bank 8,944 9.00 3,975 4.00 4,969 5.00
First Citizens Bank 10,952 9.17 4,776 4.00 5,970 5.00
United Bank & Trust Co. 10,381 9.05 4,590 4.00 5,737 5.00
Kentucky Banking Centers, Inc. 7,530 8.82 3,415 4.00 4,268 5.00
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
December 31, 1997 (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------- ------ ----- ------ ----- ------ -----
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS)
Consolidated $115,102 18.73% $24,587 4.00% $36,880 6.00%
Farmers Bank & Capital Trust Co. 34,508 12.46 11,060 4.00 16,590 6.00
Farmers Bank and Trust Company 10,726 13.54 3,156 4.00 4,733 6.00
Lawrenceburg National Bank 8,380 12.98 2,577 4.00 3,865 6.00
First Citizens Bank 9,513 13.00 2,923 4.00 4,384 6.00
United Bank & Trust Co. 8,959 13.30 2,689 4.00 4,033 6.00
Kentucky Banking Centers, Inc. 6,688 11.67 2,289 4.00 3,434 6.00
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS)
Consolidated $122,803 19.98% $49,174 8.00% $61,467 10.00%
Farmers Bank & Capital Trust Co. 37,971 13.71 22,120 8.00 27,650 10.00
Farmers Bank and Trust Company 11,716 14.79 6,311 8.00 7,889 10.00
Lawrenceburg National Bank 9,187 14.23 5,154 8.00 6,442 10.00
First Citizens Bank 10,428 14.25 5,846 8.00 7,307 10.00
United Bank & Trust Co. 9,801 14.55 5,378 8.00 6,722 10.00
Kentucky Banking Centers, Inc. 7,405 12.92 4,578 8.00 5,723 10.00
TIER 1 CAPITAL (TO AVERAGE ASSETS)
Consolidated $115,102 12.73% $36,163 4.00% $45,204 5.00%
Farmers Bank & Capital Trust Co. 34,508 8.52 16,201 4.00 20,252 5.00
Farmers Bank and Trust Company 10,726 9.01 4,759 4.00 5,949 5.00
Lawrenceburg National Bank 8,380 8.89 3,770 4.00 4,713 5.00
First Citizens Bank 9,513 8.31 4,581 4.00 5,726 5.00
United Bank & Trust Co. 8,959 8.94 4,009 4.00 5,011 5.00
Kentucky Banking Centers, Inc. 6,688 8.84 3,027 4.00 3,783 5.00
17. STOCK SPLIT
On January 26, 1998, the Company's Board of Directors approved a two-for-one
stock split of its common stock. The stock split was effective July 1, 1998 for
holders of record on June 1, 1998. The stock split increased the Company's
outstanding common shares from 3,777,620 to 7,555,240 shares on July 1, 1998.
Additionally, all references in the Consolidated Financial Statements, Footnotes
and Supplementary data to the number of shares, per-share amounts, and market
prices of the Company's common stock have been restated to give retroactive
recognition to the stock split.
18. NET INCOME PER COMMON SHARE
The following table reflects the numerators (net income) and denominators
(average shares outstanding) for the basic and diluted net income per common
share computations.
December 31, (In thousands, except per share data) 1998 1997 1996
Net income, basic and diluted $14,247 $14,103 $12,656
======= ======= =======
Average shares outstanding 7,555 7,572 7,684
Effect of diluted stock options 91
----- ----- -----
Average diluted shares outstanding 7,646 7,572 7,684
===== ===== =====
Net income per common share, basic $1.89 $1.86 $1.65
Net income per common share, diluted 1.86 1.86 1.65
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS. This Statement requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet for which it is practicable to estimate that value. The estimated
fair value amounts have been determined by the Company using available market
information and present value or other valuation techniques. These derived fair
values are subjective in nature, involve uncertainties and matters of
significant judgement and, therefore, cannot be determined with precision. SFAS
No. 107 excludes certain financial instruments and all nonfinancial instruments
from the disclosure requirements. Accordingly, the aggregate fair value amounts
presented are not intended to represent the underlying value of the Company.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Cash and Cash Equivalents
The carrying amount is a reasonable estimate of fair value.
Investment Securities
For marketable equity securities, fair values are based on quoted market prices
or dealer quotes. For other securities, fair value equals quoted market price,
if available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
Loans Receivable
The fair value of loans is estimated by discounting the future cash flows using
current discount rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed maturity certificates of deposit is estimated by discounting the future
cash flows using the rates currently offered for certificates of deposit with
similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit
Pricing of these financial instruments is based on the credit quality and
relationship, fees, interest rates, probability of funding, compensating
balance, and other covenants or requirements. Loan commitments generally have
fixed expiration dates, variable interest rates and contain termination and
other clauses which provide for relief from funding in the event there is a
significant deterioration in the credit quality of the customer. Many loan
commitments are expected to, and typically do, expire without being drawn upon.
The rates and terms of the Company's commitments to lend and standby letters of
credit are competitive with others in the various markets in which the Company
operates. There are no unamortized fees relating to these financial instruments,
as such the carrying value and fair value are both zero.
Securities Sold Under Agreements to Repurchase and Other Borrowed Funds
The fair value of securities sold under agreements to repurchase and other
borrowed funds is estimated using rates currently available for debt with
similar terms and remaining maturities.
The estimated fair values of the Company's financial instruments are as follows.
December 31, 1998 1997
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- -------------- ------ ----- ------ -----
ASSETS
Cash and cash equivalents $91,834 $91,834 $186,740 $186,740
Investments securities:
Available for sale 191,487 191,487 119,076 119,076
Held to maturity 71,369 73,167 95,686 96,541
Loans, net 595,635 597,387 576,826 575,306
LIABILITIES
Deposits 830,001 833,347 834,976 835,264
Securities sold under agreements
to repurchase and other borrowed funds 30,250 30,264 53,655 53,740
20. PARENT COMPANY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
December 31, (In thousands) 1998 1997
- --------------------------- ---- ----
ASSETS
Cash on deposit with subsidiaries $33,502 $37,720
Interest bearing deposits in other banks 100
Investment in subsidiaries 92,856 80,822
Other assets 673 1,714
------- -------
Total assets $127,131 $120,256
======== ========
LIABILITIES
Dividends payable $2,113 $1,815
Other liabilities 1,179 1,397
----- -----
Total liabilities 3,292 3,212
SHAREHOLDERS' EQUITY
Common stock 940 945
Capital surplus 10,520 8,894
Retained earnings 112,010 107,105
Accumulated other comprehensive income 369 100
------- -------
Total shareholders' equity 123,839 117,044
------- -------
Total liabilities and shareholders' equity $127,131 $120,256
======== ========
20. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF INCOME
December 31, (In thousands) 1998 1997 1996
- --------------------------- ---- ---- ----
INCOME
Dividends from subsidiaries $5,274 $16,922 $12,847
Interest income 54 120 98
Other income 946 1,055 689
----- ------ ------
Total income 6,274 18,097 13,634
EXPENSE
Other expense 2,424 2,112 2,149
----- ------ ------
Total expense 2,424 2,112 2,149
----- ------ ------
Income before income tax benefit and equity in undistributed
income of subsidiaries 3,850 15,985 11,485
Income tax benefit 637 232 509
----- ------ ------
Income before equity in undistributed income of subsidiaries 4,487 16,217 11,994
Equity in undistributed income of subsidiaries 9,760 (2,114) 662
------ ------- -------
Net income $14,247 $14,103 $12,656
======= ======= =======
20. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
December 31, (In thousands) 1998 1997 1996
- --------------------------- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $14,247 $14,103 $12,656
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries (9,760) 2,114 (662)
Noncash compensation expense 410
Change in other assets and liabilities, net (135) 166 (107)
----- ------ ------
Net cash provided by operating activities 4,762 16,383 11,887
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (7,256) (6,216) (5,557)
Purchase of common stock (1,856) (644) (2,731)
Stock options exercised 232
----- ----- -----
Net cash used in financing activities (8,880) (6,860) (8,288)
----- ----- -----
Net (decrease) increase in cash and cash equivalents (4,118) 9,523 3,599
Cash and cash equivalents at beginning of year 37,720 28,197 24,598
------ ------ ------
Cash and cash equivalents at end of year $33,602 $37,720 $28,197
======= ======= =======
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for income taxes $5,185 $5,649 $4,210
Cash dividend declared and unpaid 2,113 1,815 1,558
21. QUARTERLY FINANCIAL DATA
Unaudited (In thousands, except per share data)
Quarters Ended 1998 1 March 31 June 30 Sept. 30 Dec. 31
- --------------------- -------- ------- -------- -------
Interest income $17,028 $17,294 $17,552 $17,807
Interest expense 7,172 7,265 7,456 7,254
----- ------ ------ ------
Net interest income 9,856 10,029 10,096 10,553
Provision for loan losses 232 202 216 484
----- ------ ------ ------
Net interest income after provision for loan losses 9,624 9,827 9,880 10,069
Other income 3,236 3,187 3,107 3,250
Other expense 7,847 8,803 8,135 7,861
----- ------ ------ ------
Income before income taxes 5,013 4,211 4,852 5,458
Income tax expense 1,431 1,043 1,322 1,491
----- ------ ------ ------
Net income $3,582 $3,168 $3,530 $3,967
====== ====== ====== ======
Net income per common share, basic $0.47 $0.42 $0.47 $0.53
Net income per common share, diluted 0.47 0.41 0.46 0.52
Weighted average shares outstanding, basic 7,559 7,555 7,556 7,550
Weighted average shares outstanding, diluted 7,622 7,675 7,662 7,627
1 As described in note 10 to the Company's consolidated financial statements,
the Company's stock option plan was ratified by its shareholders on May 12,
1998. The impact of the noncash compensation expense resulting from this plan
had not been reflected in the Company's previously issued second and third
quarter 1998 financial statements. Accordingly, the information presented above
with respect to the second and third quarters has been restated from the
previously reported information to reflect noncash compensation expense related
to the plan. The total noncash compensation expense recorded in 1998 was $918
thousand, net of tax of $495 thousand. As a result, the second quarter reflects
a $566 thousand decrease in previously reported net income, and a $0.07 and
$0.08 decrease in basic and diluted net income per share, respectively, from
previously reported information. The third quarter reflects a $176 thousand
decrease in previously reported net income, and a $0.02 decrease in basic and
diluted net income per share. The fourth quarter includes $176 thousand of
noncash compensation expense, net of tax.
Unaudited (In thousands, except per share data)
Quarters Ended 1997 March 31 June 30 Sept. 30 Dec. 31
- ------------------- -------- ------- -------- -------
Interest income $16,563 $16,713 $16,952 $17,132
Interest expense 6,868 6,719 6,875 6,988
----- ------ ------ ------
Net interest income 9,695 9,994 10,077 10,144
Provision for loan losses 568 518 407 337
----- ------ ------ ------
Net interest income after provision for loan losses 9,127 9,476 9,670 9,807
Other income 3,262 2,995 3,086 3,171
Other expense 7,633 7,165 7,795 8,076
----- ------ ------ ------
Income before income taxes 4,756 5,306 4,961 4,902
Income tax expense 1,365 1,521 1,499 1,437
----- ------ ------ ------
Net income $3,391 $3,785 $3,462 $3,465
Net income per common share, basic $0.45 $0.50 $0.46 $0.46
Net income per common share, diluted 0.45 0.50 0.46 0.45
Weighted average shares outstanding - basic 7,591 7,572 7,562 7,562
Weighted average shares outstanding - diluted 7,591 7,572 7,562 7,629
SHAREHOLDER INFORMATION
CORPORATE ADDRESS
The headquarters of Farmers Capital Bank Corporation is located at:
202 West Main Street
Frankfort, Kentucky 40601
Direct correspondence to:
Farmers Capital Bank Corporation
P.O. Box 309
Frankfort, Kentucky 40602-0309
Phone: (502) 227-1600
ANNUAL MEETING
The annual meeting of shareholders of Farmers Capital Bank Corporation will be
held Tuesday, May 11, 1999 at 11:00 a.m. at the main office of Farmers Bank &
Capital Trust Co., Frankfort, Kentucky.
FORM 10-K
For a copy of Farmers Capital Bank Corporation's Annual Report on Form 10-K
filed with the Securities and Exchange Commission, please write:
James H. Childers, Secretary
Farmers Capital Bank Corporation
P.O. Box 309
Frankfort, Kentucky 40602-0309
STOCK INFORMATION
Farmers Capital Bank Corporation's stock is traded on the National Association
of Securities Dealers Automated Quotation System (NASDAQ) SmallCap Market tier
of The NASDAQ Stock Market, with sales prices reported under the symbol: FFKT.
NASDAQ MARKET MAKERS
J.J.B. Hilliard, W.L. Lyons, Inc. Herzog, Heine, Geduld, Inc.
(502) 588-8400 or (800) 221-3600
(800) 444-1854
J.C. Bradford and Co., Inc. Knight Securities LP
(800) 443-8749 (800)302-9197
Morgan, Keegan and Company
(800)260-0280
The Transfer Agent and Registrar for Farmers Capital Bank Corporation is the
Farmers Bank & Capital Trust Co.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
KPMG LLP replaced Coopers & Lybrand L.L.P. (the Former Accountant ) as principal
accountants for the Registrant on February 28, 1997. The change in the
Registrant's independent public accountants was the result of a formal proposal
process conducted by an appointed committee involving several accounting firms.
The decision to change accountants was approved by the Registrant's Board of
Directors.
Neither KPMG LLP's report on the consolidated financial statements for 1998 and
1997 nor the Former Accountant's report on the consolidated financial statements
for 1996 contained an adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
During the two most recent fiscal years or subsequent period preceding the
change in accountants there were no disagreements with the Former Accountant on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure or any reportable events.
None of the following occurred during 1996 and 1995:
(A) the Former Accountant did not advise the Registrant that the internal
controls necessary for the Registrant to develop reliable financial
statements do not exist;
(B) the Former Accountant did not advise the Registrant that information had
come to the Former Accountant's attention that led it to no longer be able
to rely on management's representations, or that made it unwilling to be
associated with the financial statements prepared by management;
(C) (1) the Former Accountant did not advise the Registrant of the need to
expand significantly the scope of its audit, or that information had come
to the Former Accountant's attention that if further investigated could (i)
materially impact the fairness or reliability of either a previously issued
audit report or the underlying financial statements, or the financial
statements issued or to be issued covering the fiscal periods subsequent to
the date of the most recent financial statements covered by an audit report
(including information that could prevent it from rendering an unqualified
report on those financial statements), or (ii) cause it to be unwilling to
rely on management's representations or be associated with the Registrant's
financial statements, and (2) due to the accountant's dismissal, or for any
other reason, the Former Accountant did not so expand the scope of its
audit or conduct such further investigations; or
(D) (1) the Former Accountant did not advise the Registrant that information
had come to the Former Accountant's attention that it concluded materially
impacted the fairness or reliability or either (i) a previously issued
audit report or the underlying financial statements, or (ii) the financial
statements issued or to be issued covering the fiscal periods subsequent to
the date of the most recent financial statements issued or to be issued
covered by an audit report (including information that, unless resolved to
the Former Accountant's satisfaction, would prevent it from rendering an
unqualified audit report on those financial statements), and (2) due to the
Former Accountant's dismissal, or for any other reason, the issue had not
been resolved to the Former Accountant's satisfaction prior to its
dismissal.
During the two most recent fiscal years or subsequent interim period prior to
engaging KPMG LLP, neither the Registrant, nor anyone on its behalf, consulted
KPMG LLP regarding (i) either the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Registrant's financial statements, where
either a written report was provided to the Registrant or oral advice was
provided, that KPMG LLP concluded was an important factor considered by the
Registrant in reaching a decision as to the accounting, auditing or financial
reporting issue; or (ii) any matter that was either the subject of a
disagreement (as defined in paragraph 304(a)(l)(iv) of Regulation S-K and the
related instructions) or a reportable event (as described in paragraph
304(a)(l)(v) of Regulation S-K).
The Registrant has requested that the Former Accountant furnish it with a letter
addressed to the SEC stating whether it agrees with the above statements. A copy
of the Former Accountant's letter to the SEC dated March 5, 1997 is attached as
an exhibit to this report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Positions and Years of Service
Offices With With the
Executive Officer Age Registrant Registrant
- ----------------- --- ---------- ----------
Charles S. Boyd 57 Director 1 , President 35*
and CEO
James H. Childers 56 Executive Vice President, 29*
Secretary, General Counsel,
Director 2
Additional information required by Item 10 is hereby incorporated by reference
from the Registrant's definitive proxy statement in connection with its annual
meeting of shareholders scheduled for May 11, 1999 which will be filed with the
Commission in March 1999, pursuant to Regulation 14A.
* Includes years of service with the Registrant and Farmers Bank & Capital Trust
Co.
1 Also a director of Farmers Bank, Ky Banking Centers, Farmers Georgetown
Bank, United Bank, Lawrenceburg Bank, First Citizens Bank, FCB Services and
Money One (prior to the dissolution of Money One in 1996).
2 Also a director of Ky Banking Centers, First Citizens Bank and Farmers Bank
& Capital Trust Co.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 11 through 13 is hereby incorporated by
reference from the Registrant's definitive proxy statement in connection with
its annual meeting of shareholders scheduled for May 11, 1999 which will be
filed with the Commission in April 1999, pursuant to Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS AND EXHIBITS REFERENCE (PAGE)
1 & 2 Financial Statements and Schedules
Report of Independent Accountants 30-31
Consolidated Balance Sheets at
December 31, 1998 and 1997 32
Consolidated Statements of Income
for the years ended December 31, 1998, 1997 and 1996 33
Consolidated Statements of Comprehensive Income
for the years ended December 31, 1998, 1997 and 1996 34
Consolidated Statements of Changes in
Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996 34
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996 35
Notes to the Consolidated Financial Statements 36-55
All schedules are omitted for the reason they are not required, or are not
applicable, or the required information is disclosed elsewhere in the financial
statements and related notes thereto.
3. Exhibits:
16. Letter re change in certifying accountant
21. Subsidiaries of the Registrant
23. Consent of Independent Auditors
27. Financial Data Schedule (for SEC only)
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed by the Registrant during the
three month period ended December 31, 1998
(c) EXHIBITS
See Index of Exhibits set forth on page 61.
(d) SEPARATE FINANCIAL STATEMENTS AND SCHEDULES
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FARMERS CAPITAL BANK CORPORATION
By: /s/ Charles S. Boyd
-----------------------
Charles S. Boyd
President and Chief Executive Officer
Date: March 19, 1999
-----------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Charles S. Boyd President, Chief Executive Officer
- ------------------------- and Director (principal executive
Charles S. Boyd officer of the Registrant)
/s/ Frank W. Sower, Jr. Chairman 3/23/99
- ------------------------- -------------------------
Frank W. Sower, Jr.
/s/ G. Anthony Busseni Director 3/22/99
- ------------------------- -------------------------
G. Anthony Busseni
/s/ Lloyd C. Hillard, Jr. Director 3/19/99
- ------------------------- -------------------------
Lloyd C. Hillard, Jr.
/s/ J.D. Sutterlin Director 3/23/99
- ------------------------- -------------------------
Dr. John D. Sutterlin
/s/ E Bruce Dungan Director 3/22/99
- ------------------------- -------------------------
E. Bruce Dungan
/s/ Harold G Mays Director 3/23/99
- ------------------------- -------------------------
Harold G. Mays
/s/ Cecil Bell, Jr. Director 3/22/99
- ------------------------- -------------------------
Cecil D. Bell, Jr.
/s/ James E. Bondurant Director 3/19/99
- ------------------------- -------------------------
James E. Bondurant
/s/ J. Barry Banker Director 3/23/99
- ------------------------- -------------------------
J. Barry Banker
/s/ JH Childers Director 3/19/99
- ------------------------- -------------------------
James H. Childers
/s/ Robert Roach, Jr. Director 3/22/99
- ------------------------- -------------------------
Robert Roach, Jr.
/s/ C Douglas Carpenter Vice President and CFO 3/19/99
- ------------------------- (principal financial and -------------------------
C. Douglas Carpenter accounting officer)
INDEX OF EXHIBITS
Page
16. Letter re change in certifying accountant 62
21. Subsidiaries of the Registrant 63
23. Consent of Independent Auditors 64
27. Financial data Schedule (for SEC use only)
Exhibit 16
LETTER RE CHANGE IN CERTIFYING ACCOUNTANT
Coopers Suite 1800 Telephone (502)589-6100
& Lybrand, L.L.P. 500 West Main Street Facsimile (502)585-7775
Louisville, KY 40202-4264
March 5, 1997
Securities and Exchange Commission 450 5th Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read the statements made by Farmers Capital Bank Corporation (copy
attached), which we understand will be filed with the Commission, pursuant to
Item 4 of Form 8-K, as part of the Company's Form 8-K report for the month of
March 1997. We agree with the statements concerning Coopers & Lybrand L.L.P. in
such Form 8-K.
Very truly yours,
/s/Coopers & Lybrand L.L.P.
JFF:jkh
Attachment
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
The following table provides a listing of the direct and indirect operating
subsidiaries of the Registrant, the percent of voting stock held by the
Registrant as of December 31, 1998 and the jurisdiction of incorporation in
which each subsidiary was incorporated or organized.
Percentage of
Voting
Jurisdiction Stock held by
Subsidiaries of the Registrant of Incorporation Registrant
- ------------------------------ ---------------- ----------
Farmers Bank & Capital Trust Co. Kentucky 100%
United Bank & Trust Company Kentucky 100%
First Citizens Bank Kentucky 100%
Lawrenceburg National Bank Kentucky 100%
Farmers Bank and Trust Company Kentucky 100%
Kentucky Banking Centers, Inc. Kentucky 100%
FCB Services, Incorporated Kentucky 100%
Farmers Capital Insurance Company 1 Kentucky
Farmers Bank Realty Co. 1 Kentucky
Frankfort ATM Ltd. 2 Kentucky
Leasing One Corporation 1 Kentucky
1 A wholly-owned subsidiary of Farmers Bank & Capital Trust Co.
2 A fifty (50%) percent owned joint venture of Farmers Bank & Capital Trust Co.
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Farmers Capital Bank Corporation
We consent to incorporation by reference in the registration statement (No.
333-63037) on Form S-8 of Farmers Capital Bank Corporation of our report dated
January 29, 1999, relating to the consolidated balance sheets of Farmers Capital
Bank Corporation and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, shareholders'
equity, and cash flows for each of the years in the two-year period ended
December 31, 1998, which report appears in the December 31, 1998 annual report
on Form 10-K of Farmers Capital Bank Corporation.
/s/ KPMG LLP
Louisville, Kentucky
March 23, 1999