ITEM 1. BUSINESS
ORGANIZATION
Farmers Capital Bank Corporation (the "Registrant" or the "Company") 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"), Harrodsburg, 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, 1999, the Registrant had $1.0 billion 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 and 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, 1999, it had total consolidated assets of $476 million, including net loans of $254 million. On the same date, total deposits were $395 million and shareholders' equity totaled $43 million.
Farmers Bank had three subsidiaries at year end 1999: Farmers Bank Realty Co. ("Realty"), Leasing One Corporation ("Leasing One"), and Farmers Capital Insurance Corporation ("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 $3.3 million on December 31, 1999.
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 1999 it had total assets of $18.8 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. At year end 1999 it had total assets of $30 thousand.
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 in Midway. United Bank is the largest bank chartered in Woodford County with total assets of $130 million and total deposits of $111 million at December 31, 1999.
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. During 1998, it 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. Construction of the new site in Harrodsburg was completed and operations began there in July 1999. Lawrenceburg Bank conducts business at it Harrodsburg site and two branches in Anderson County, Kentucky. Lawrenceburg Bank is the largest bank chartered in Mercer County with total assets of $108 million and total deposits of $96 million at December 31, 1999.
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. During 1999, First Citizens Bank closed its South Dixie branch in Elizabethtown, Kentucky. It now conducts business in its four 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 $132 million and total deposits of $110 million at December 31, 1999.
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. As a result of this notice, the branch was relocated in the downtown Georgetown area. Farmers Georgetown Bank is the largest bank chartered in Scott County with total assets of $139 million and total deposits of $113 million at December 31, 1999.
On June 15, 1987, the Registrant acquired Horse Cave State 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 $85 million and total deposits of $70 million at December 31, 1999.
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 $2.3 million at December 31, 1999.
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 that 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 that will benefit the community.
Upon the Gramm-Leach-Bliley Act ("Act") becoming law on November 12, 1999, the Registrant has the option of becoming a Financial Holding Company. Currently, the Registrant is a multi-bank holding company whose activities are limited by the Federal Reserve. Under the Act, the Federal Reserve will continue to be the primary regulatory agency for Financial Holding Companies, but will have a much more expanded list of permissible activities.
At this time, the Registrant has not yet decided to become a Financial Holding Company, but if it does so elect, it may become one by certifying to the Federal Reserve that all its banks are well managed and well capitalized and that each has a CRA rating of at least satisfactory. The Registrant's subsidiary banks have received no criticisms from regulatory authorities. All are categorized as well capitalized and, since all have CRA ratings of at least satisfactory, it is believed that the Registrant could easily qualify as a Financial Holding Company.
If, as a Financial Holding Company, the Registrant engages in other non-bank activities, those activities will be regulated by state or federal agencies depending on the activities involved. The Federal Reserve will continue to have oversight regulatory authority.
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 and interest rates and fees charged on loans and deposits.
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, 1999, the Registrant and its subsidiaries had 443 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. 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.
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 in Harrodsburg and its two branch sites in Lawrenceburg. First Citizens Bank owns its main office and two of its four 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.
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 a benefit for 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 certification, the complaint has been amended to join additional Bondholders as plaintiffs. The plaintiffs claim to hold Bonds having an aggregate face value of $430,000. Recently, the plaintiffs filed a motion for leave to amend their complaint. The Amended Complaint would abandon the negligence and aiding and abetting misappropriation of funds claims and would reassert the class action allegations. Farmers Bank has opposed the reassertion of the class action allegations, but the Court has not yet ruled on the motion. The case is currently scheduled for trial beginning on March 28, 2000. Each side has retained expert witnesses and additional depositions are being scheduled. Additionally, Farmers Bank is preparing to depose approximately eight plaintiffs who are willing and able to come to Louisville for their depositions. Farmers Bank has moved to dismiss the remaining plaintiffs (approximately 35) who are unwilling and unable to come to Louisville for depositions or trial. Additionally, Farmers Bank has moved for summary judgment on plaintiffs' commercial bribery claims, aiding and abetting misappropriation of funds claims, and has asserted Farmers Banks reliance on the advice of its counsel and financial consultants as a complete defense to plaintiffs' claims. The plaintiffs have not yet responded nor has the Court ruled upon any of these motions. Farmers Bank is vigorously contesting the plaintiffs' allegations and intends to continue to do so. It is not possible at this stage of the proceedings to make any prediction as to the outcome.
As of December 31, 1999, 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.
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.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information set forth under the sections "Shareholder Information" and "Stock Prices" on page 19 of the 1999 Annual Report to Shareholders is hereby incorporated by reference. Additional information set forth under Note 16 to the Registrant's Consolidated Financial Statements on page 36 of the 1999 Annual Report to Shareholders is also hereby incorporated by reference.
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. Knight Securities LP (502) 588-8400 or (800) 302-9197 (800) 444-1854
J.C. Bradford and Co., Inc. Morgan, Keegan and Company (800) 443-8749 (800) 260-0280
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion on pages 8 through 20 of the 1999 Annual Report to Shareholders is herby incorporated by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under the item "Market Risk Management" on page 17 of the 1999 Annual Report to Shareholders is hereby incorporated by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information set forth below on pages 22 through 45 of the 1999 Annual Report to Shareholders is hereby incorporated by reference:
Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Shareholder Information
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Registrant has had no disagreement on accounting and financial disclosure matters and has not changed accountants during the two year period ending December 31, 1999.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Positions and Years of Service Offices With With the Executive Officer 1 Age the Registrant Registrant - ------------------- --- --------------------------- ----------------
Charles S. Boyd 58 President and CEO, 36* Director 2
James H. Childers 57 Executive Vice President, 30* Secretary, General Counsel, Director 3
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 9, 2000 which will be filed with the Commission on or about April 3, 2000, pursuant to Regulation 14A.
* Includes years of service with the Registrant and Farmers Bank.
1 For Regulation O purposes, Frank W. Sower, Jr., Chairman of the Registrant's board of directors, is considered an executive officer in name only. 2 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).
3 Also a director of Farmers Bank, Ky. Banking Centers, First Citizens Bank, and Farmers Insurance.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.
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 9, 2000 which will be filed with the Commission on or about April 3, 2000, pursuant to Regulation 14A.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1999 Annual Report To Shareholders (a)1. FINANCIAL STATEMENTS Page
Report of Independent Accountants 22
Consolidated Balance Sheets at December 31, 1999 and 1998 23
Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 24
Consolidated Statements of Comprehensive Income for the years ended December 31, 1999, 1998 and 1997 25
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 26
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 27
Notes to Consolidated Financial Statements 28-42
(a)2. FINANCIAL STATEMENT SCHEDULES
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.
(a)3. EXHIBITS:
13. Annual Report to Shareholders 21. Subsidiaries of the Registrant 23. Independent Auditors' Consent 27. Financial Data Schedule (for SEC use only)
(b) REPORTS ON FORM 8-K
The Registrant has filed no reports on Form 8-K during the three month period ended December 31, 1999
(c) EXHIBITS
See Index of Exhibits set forth on page 15.
(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: 3/20/00 -------------------------------------
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 3/20/00 - ----------------------- and Director (principal executive -------------------- Charles S. Boyd officer of the Registrant)
/s/ Frank W. Sower, Jr. Chairman 3/20/00 - ----------------------- -------------------- Frank W. Sower, Jr.
/s/ G. Anthony Busseni Director 3/20/00 - ----------------------- -------------------- G. Anthony Busseni
/s/ Lloyd C Hillard, Jr. Director 3/18/00 - ------------------------ -------------------- Lloyd C. Hillard, Jr.
/s/ J. D. Sutterlin Director 3/21/00 - ----------------------- -------------------- Dr. John D. Sutterlin
/s/ Stokes A. Baird Director 3/17/00 - ----------------------- -------------------- Stokes A. Baird, IV
/s/ Harold G. Mays Director 3/24/00 - ----------------------- -------------------- Harold G. Mays
/s/ Cecil Bell, Jr. Director 3/20/00 - ----------------------- -------------------- Cecil D. Bell, Jr.
Director - ----------------------- -------------------- Michael M. Sullivan
Director - ----------------------- -------------------- J. Barry Banker
/s/ J. H. Childers Director 3/20/00 - ----------------------- -------------------- James H. Childers
Director - ----------------------- -------------------- Robert Roach, Jr.
/s/ C. Douglas Carpenter Vice President and CFO 3/16/00 - ------------------------ (principal financial and -------------------- C. Douglas Carpenter accounting officer)
INDEX OF EXHIBITS
Page
13. Annual Report to Shareholders Enclosed
21. Subsidiaries of the Registrant 16
23. Independent Auditors' Consent 17
27. Financial data Schedule (for SEC use only)
Exhibit 13 1999 ANNUAL REPORT TO SHAREHOLDERS
Letter to Our Shareholders 2 Farmers Capital Bank Corporation Board of Directors and Officers 3 Affiliates' Directors and Officers 4 Glossary of Financial Terms 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Management's Report on Responsibility for Financial Reporting 21 Independent Auditors' Report 22 Consolidated Balance Sheets 23 Consolidated Statements of Income 24 Consolidated Statements of Comprehensive Income 25 Consolidated Statements of Changes in Shareholders' Equity 26 Consolidated Statements of Cash Flows 27 Notes to Consolidated Financial Statements 28 Shareholder Information 45
LETTER TO OUR SHAREHOLDERS
In 1999, Farmers Capital Bank Corporation took advantage of the strong economies in its markets to expand its loan portfolio. While retaining our commitment to credit quality, we increased loan volumes by over $38 million or 6.4%. Our correspondent banking effort continues to contribute to these increases by developing relationships with banks throughout the Commonwealth of Kentucky. Total deposits also increased in 1999 compared to 1998 by approximately $32 million or 3.9%. This growth was obtained while continuing to maintain a strong net interest margin of 4.91%. During 2000, we will continue to look for opportunities for profitable expansion within our core banking activities.
While net income of $13.9 million represented a slight decline in earnings from 1998, we are well positioned to achieve higher profitability during 2000. We continue to focus on maintaining and increasing our net interest income while maintaining our expense controls. As such, net interest income increased by 3.2% in 1999 compared to 1998, while operating expenses only increased 1.2%. These expenses were held at this level even with the expansion of one location and our increase in loan and deposit volumes.
We are excited with the advent of the year 2000. For us it signifies undertaking new challenges and moving into new areas. We are looking at the future with excitement and promise. Operationally we are embracing new technology for ourselves and our affiliates. In the final board meeting of 1999, the board of directors unanimously approved Internet Banking, Archival Imaging, and a Wide Area Network.
While Internet Banking may be a defensive measure for many community banks, we are seeing a true need for it in our markets. A majority of our customers commute to work, and the banking hours of the past do not fit their schedules. By offering them the ability to bank on-line, we are giving them convenience. Where in the past we have discussed bricks and mortar, in these advanced high tech days, "clicks and mortar" is a better description of banking options.
Archival imaging is the means to capture the image of documents, mainly checks, and store them electronically instead of the space wasting method of warehousing the hard copy. With the advances in imaging, the electronic image is accepted as a legal document. Imaging will provide cost savings by eliminating the need for storage and saving time in document research duties. Also, it allows FCB Services, Inc., our data processing affiliate, another offering when bidding on outside bank processing. For the business customers of our banks, imaging is a requested option; most businesses prefer receiving their statement images on diskette or CD-ROM to facilitate reconciliation methods. In the near future, with the unlimited ability of the Internet, our customers will be able to access images of their canceled checks while banking on-line.
The Wide Area Network (WAN) will enhance the delivery of Imaging and Internet Banking for Farmers Capital Bank Corporation affiliates and also allow for highly sophisticated applications of the future. Currently, we have radio and satellite communication systems in place in our branches. These systems are fast reaching their design limits and are not capable of carrying the volume or type of communication required by today's new applications. The new WAN system will provide us increased reliability and enhanced support; and because it is the industry standard, the components and services are competitively priced. Additionally, WAN offers scalability; this system with its flexible band width is able to grow as more and more applications are developed.
All three of these projects are integral to how we deliver our products and services to our customers. Technology is not going to die down; indeed, with the advancement of technology, the opportunities are astonishing. We must stay abreast of new developments to examine how they can improve our delivery methods. However, we are enthusiastic that we can accomplish these tasks; we have talented individuals in our affiliate and corporate offices whose energetic attitudes kindle in all of us the goal to achieve our best.
Of these individuals, two need mentioning. Allison Gordon has joined the corporate offices as Senior Vice President. Ms. Gordon's strengths lie in her ability to bring together ideas, turn them into projects, and select the people to carry them out. Her fresh ideas will provide more enthusiasm throughout our companies. Previously Ms. Gordon held the title of Executive Vice President, FCB Services, Inc.; she has also served as Executive Vice President of Lawrenceburg National Bank and prior to that was Chief Financial Officer of the Corporation.
Karen Wade, who came to us from Central Bank of Lexington, Kentucky, now holds the FCB Services' Executive Vice President position. Ms. Wade brings to the table a vast array of talents; she has previously worked in management, operations, and retail. Her addition to the FCB Services' staff adds a new depth to their proven qualities.
Farmers Capital Bank Corporation is prepared for the challenges of the new century. We are eager for the tasks at hand and those on the horizon. During our strategic planning day held last year in November, we evidenced a newfound zeal in our people. Collectively we are ready to face challenges with tried and true ways, but also with the tools new technology and other advancements have given us. Working harder, working smarter, your company is committed to the ongoing success of Farmers Capital Bank Corporation.
/s/Frank W. Sower, Jr. /s/Charles S. Boyd Frank W. Sower, Jr. Charles S. Boyd
FARMERS CAPITAL BANK CORPORATION BOARD OF DIRECTORS Frank W. Sower, Jr., Chairman, retired Appeals Officer, Internal Revenue Service Charles S. Boyd, President and CEO of the Corporation Stokes A. Baird, IV, Attorney and Chairman of the Board of Directors of Kentucky Banking Centers, Inc. J. Barry Banker, President of the Stewart Home School Cecil D. Bell, Jr., Chairman of the Board of Directors of Farmers Bank and Trust Company G. Anthony Busseni, President and CEO of Farmers Bank & Capital Trust Co. James H. Childers, Executive Vice President, Secretary and General Counsel of the Corporation Lloyd C. Hillard, Jr., President and CEO of First Citizens Bank Harold G. Mays, President of H.G. Mays Corporation, an asphalt paving firm Robert Roach, Jr., retired Teacher, City Commissioner Michael M. Sullivan, retired Senior Vice President of FCB Services, Inc. Dr. John D. Sutterlin, retired Dentist and Chairman of the Board of Directors of Farmers Bank & Capital Trust Co. E. Bruce Dungan, Advisory Director, retired President and CEO of Farmers Capital Bank Corporation Charles T. Mitchell, CPA, Advisory Director, Consultant, Charles T. Mitchell Co., CPA Dr. John P. Stewart, Chairman Emeritus, retired Physician, Director of Stewart Home School
OFFICERS Charles S. Boyd, President and CEO James H. Childers, Executive Vice President, Secretary and General Counsel Allison B. Gordon, Senior Vice President C. Douglas Carpenter, Vice President, Chief Financial Officer Dawn M. Castanis, CPA, Vice President, Auditing Linda L. Faulconer, Vice President, Human Resources Janelda R. Mitchell, Vice President, Marketing Anna Kaye Hall, Assistant Vice President, Finance Mark A. Hampton, CPA, Assistant Vice President, Finance Ann Hodgkin, Human Resources Officer Teresa Tipton, Human Resources Officer
AFFILIATES' DIRECTORS AND OFFICERS
FARMERS BANK & CAPITAL TRUST CO. member FDIC
DIRECTORS Dr. John D. Sutterlin, Chairman C. Gary Adkinson Clyde P. Baldwin Charles S. Boyd G. Anthony Busseni James H. Childers Don C. Giles Robert W. Kellerman David R. Lee Marvin E. Strong, Jr. William R. Sykes John J. Hopkins, Advisory Director Frank W. Sower, Advisory Director Joseph C. Yagel, Jr., Advisory Director
OFFICERS G. Anthony Busseni, President and CEO Bruce W. Brooks, Executive Vice President, Chief Lending Officer and Environmental Officer Elizabeth D. Hardy, Senior Vice President, Retail Rickey D. Harp, Senior Vice President, Senior Trust Officer Fontaine Banks, III, Vice President, Investments George Burgess, Vice President, Commercial Loans Gregory S. Burton, Vice President, Commercial Loans L. Hobbs Cheek, CPA, Vice President, Financial Officer Barbara Conway, Vice President, Main Office Manager Jack Diamond, Vice President, Trust Investment Officer Bruce G. Dungan, Vice President, Retail, Security Officer Richard Gobber, Vice President, Retail Sarah Gowins, Vice President, Commercial Loans Jane Sweasy, Vice President, East Branch Manager Nancy W. Whitaker, Vice President, Senior Trust Officer Brenda Y. Rogers, Executive Secretary Patsy Briscoe, Assistant Vice President, Loan Administration Gail Combs, Assistant Vice President, Franklin Square Branch Manager Nancy Gatewood, Assistant Vice President, West Branch Manager Judy Isaacs, Assistant Vice President Kathy R. Mangeot, Assistant Vice President, Trust Officer Lydwina Napier, Assistant Vice President, Commercial Loans Patricia Norris Peavler, Assistant Vice President, Marketing Jo Ann Reynolds, Assistant Vice President, Investments Deborah West, Assistant Vice President, Cardinal Hills Branch Manager Bobby Hall, Trust Officer Alice Jones, Trust Officer Wesley Stivers, Investment Officer Margaret Colston, Assistant Cashier, Retail Services Jennifer Parrish, Assistant Cashier, Retail Services Holly B. True, Assistant Cashier Greg Howard, Assistant Manager, Main Office Joan Lee, Assistant Manager, Franklin Square Charles A. Wilkerson, Commercial Loan Officer C. Ray Baldwin, Property Management Director Sally L. Bell, Assistant Trust Operations Manager Dorothy H. Switzer, Director of Capital First Travelers
UNITED BANK & TRUST CO. member FDIC
DIRECTORS W. Benjamin Crain, Chairman Charles S. Boyd Bobby G. Dotson John J. Greely, III J. Stephen Hogg Michael L. Lawson J. C. Moraja Denny Nunnelley Leighton Riddle James E. Staples Hampton H. Henton, Advisory Director Howard B. Montague, Advisory Director Ben F. Roach, MD, Advisory Director
OFFICERS J. C. Moraja, President and CEO Paul A. Edwards, Executive Vice President Linda C. Bosse, Vice President, Cashier Joyce L. Eaves, Vice President Bruce Marshall, Vice President Spencer A. Wall, Vice President, Branch Manager Cornelia T. Ethington, Assistant Vice President Leisa M. Newton, Assistant Vice President Betty K. Poynter, Assistant Vice President, Human Resources Rick Roberts, Assistant Vice President Rita Green, Loan Officer John R. Thompson, Loan Officer Evie P. Knight, Assistant Cashier, Security Manager Carolyn C. Logan, Assistant Cashier Carolyn F. Patterson, Assistant Cashier Sherry T. Reynolds, Assistant Cashier Patricia R. Stokley, Executive Secretary
LAWRENCEBURG NATIONAL BANK member FDIC
DIRECTORS E. Glenn Birdwhistell, Chairman William T. Bond Charles S. Boyd Charles L. Cammack Keith Freeman Tom D. Isaac James McGlone Donald F. Peach Oneita M. Perry David Shadburne, CPA Paul Vaughn, Jr. Thomas B. Ripy, Advisory Director
OFFICERS Charles L. Cammack, President and CEO Paul Vaughn, Jr., Executive Vice President, Senior Trust Officer Gail Gottshall, Executive Vice President Bob Baughman, Vice President Ben Birdwhistell, Vice President Timothy A. Perry, Vice President, Compliance Bonnie S. Childs, Assistant Vice President, Marketing Representative Clark Gregory, Assistant Vice President Linda B. Hahn, Assistant Vice President Barbara Markwell, Assistant Vice President, Cashier Warren R. Leet, Assistant Vice President Drayma Holmes, Assistant Vice President, Branch Manager Libby Goodlett, Operations Officer Angela Raley, Accounting Officer Shelly Grimes, Assistant Branch Manager
FIRST CITIZENS BANK member FDIC
DIRECTORS James E. Bondurant, Chairman R. Terry Bennett Charles S. Boyd Laymon Byers James H. Childers R. T. Clagett, DMD Patricia V. Durbin William Godfrey, MD Gerald R. Hignite Lloyd C. Hillard, Jr. Ray Mackey Virgil T. Price, DMD George Roederer Martha G. Davis, Director Emeritus
OFFICERS Lloyd C. Hillard, Jr., President and CEO H. Y. Davis, IV, Senior Vice President, Senior Loan Administrator Marilyn B. Ford, Senior Vice President, Cashier and Bank Secrecy Officer Jacqueline Hamm, Senior Vice President and Director of Trust Investment Center Patricia B. Paris, Senior Vice President, Controlle Richard N. Clements, Vice President, Bullitt County Branch Manager Scott T. Conway, Vice President, Loan Officer David E. Hunt, Vice President, Radcliff Branch Manager Marquetta Lively, Vice President, Loan Officer Mary Lou Mobley, Vice President, CRA Officer and Compliance Officer Thomas S. Reynolds, Vice President, Trust Operations Brenda Fullerton, Assistant Vice President, Members First Coordinator Patricia A. Johnson, Assistant Vice President, Operations Jeffrey S. Pendleton, Assistant Vice President, Allotment Department Ronald G. Penwell, Assistant Vice President, Mulberry Branch Manager Diana Byers, Assistant Cashier, Main Office Branch Manager Mary P. Edlin, Assistant Cashier, Deposit Processing Carol A. Goodman, Assistant Cashier and Director of Human Resources Phyllis Higdon, Assistant Cashier, Branch Manager Debbie Roberts, Assistant Branch Manager, Bullitt County Branch Connie Kersey, Operations Officer, Radcliff Branch Kendra Stewart, Marketing Director
FARMERS BANK AND TRUST COMPANY member FDIC
DIRECTORS Cecil D. Bell, Jr., Chairman Charles S. Boyd Allison B. Gordon Frank R. Hamilton, Jr. Vivian M. House R. Sharon McMillin Joseph C. Murphy Gervis Showalter Bobby Vance J. C. Bradley, Jr., Director Emeritus Rollie D. Graves, Director Emeritus Marion F. Hall, Director Emeritus Dr. Horace T. Hambrick, Director Emeritus W. Carrick James, Director Emeritus
OFFICERS Joseph C. Murphy, President and CEO Thomas P. Porter, Executive Vice President J. Michael Easley, Vice President James L. Ewbank, Vice President Tina M. Johnston, Vice President, Chief Financial Officer Lynn C. McKinney, Vice President and Cashier Michael E. Schornick, Jr., Vice President Kimberly E. Sharp, Vice President Susan K. Tackett, Vice President Wanda C. Wilson, Vice President Bonnie M. Glass, Assistant Vice President Karen K. Jarvis, Assistant Vice President Paula S. Moran, Assistant Vice President Deborah L. Marshall, Assistant Vice President Linda F. Muszynski, Assistant Vice President Calvin Petrey, Assistant Vice President Kimberly T. Thompson, Assistant Vice President Carole S. Wagoner, Assistant Vice President Lorraine B. Baldwin, Assistant Cashier Judy F. Sinkhorn, Assistant Cashier Phyllis J. True, Assistant Cashier
KENTUCKY BANKING CENTERS, INC. member FDIC
DIRECTORS Stokes A. Baird, IV, Chairman Charles S. Boyd Sue Bunnell James H. Childers Steve Hayes Odell Martin Phillip Patton David Shadburne, CPA W. T. Austin, Director Emeritus
OFFICERS Sue Bunnell, President and CEO David Shadburne, CPA, Executive Vice President and COO Lewis Bauer, Senior Vice President Jeffrey Edwards, Vice Presiden Linda Forbes, Vice President Vanessa Puckett, Vice President Angela Banks, Assistant Vice President Jean Bastin, Assistant Vice President Jane T. Howell, Assistant Vice President Greg Isenberg, Assistant Vice President Patty J. Wright, Assistant Vice President Daryl Lowe, Cashier and Head Teller Cindy Atwell, Loan Officer Karisa Clark, Loan Officer Ramona Fancher, Assistant Cashier Carolyn Russell, Assistant Cashier Sharon Williams, Assistant Cashier Mellyn Church, Compliance Officer
FCB SERVICES, INC.
DIRECTORS E. Bruce Dungan, Chairman Charles S. Boyd Sue Bunnell G. Anthony Busseni Charles L. Cammack James H. Childers, Secretary Allison B. Gordon Lloyd C. Hillard, Jr. Donald R. Hughes, Jr. J. C. Moraja Joseph C. Murphy Michael M. Sullivan Karen R. Wade
OFFICERS Donald R. Hughes, Jr., President and CEO Karen R. Wade, Executive Vice President William Bell, Vice President Georgeann Burton, Vice President Michael Hedges, Vice President Martin Serafini, Vice President Bill Ballinger, Assistant Vice President Steve Bolin, Assistant Vice President Jeffrey S. Brewer, Assistant Vice President Rita Kennedy, Assistant Vice President Michael S. Sullivan, Assistant Vice President
LEASING ONE CORPORATION
DIRECTORS G. Anthony Busseni, Chairman C. Douglas Carpenter L. Hobbs Cheek, CPA Charles J. Mann Marvin E. Strong Bruce W. Brooks David Lee
OFFICERS Charles J. Mann, President and CEO Mark Lester, Vice President Jim Morris, Vice President
FARMERS CAPITAL INSURANCE CORPORATION
DIRECTORS James H. Childers, Chairman G. Anthony Busseni Sue Coles Jamey Bennett
OFFICERS James H. Childers, Chairman G. Anthony Busseni, President Sue Coles, Secretary Jamey Bennett, Vice President
doing business as: CAPITAL INSURANCE GROUP FARMERS TITLE COMPANY
GLOSSARY OF FINANCIAL TERMS
ALLOWANCE FOR POSSIBLE LOAN LOSSES A valuation allowance to offset credit losses specifically identified in the loan portfolio, as well as management's best estimate of probable losses inherent in the remainder of the portfolio at the balance sheet date. The allowance is determined by management as the result of the assessment of the risks in the loan portfolio based on past experience. This assessment includes, but is not limited to, consideration of the current economic conditions, changes in mix and volume of the loan portfolio and historical net loan charge off experience.
DIVIDEND PAYOUT Cash dividends paid on common shares, divided by net income.
BASIS POINTS Each basis point is one hundredth of one percent. Basis points are calculated by multiplying percentage points times 100. For example: 3.7 percentage points equals 370 basis points.
INTEREST RATE SENSITIVITY The relationship between interest sensitive earning assets and interest bearing liabilities.
NET CHARGE OFFS The amount of total loans charged off net of recoveries of loans which have been previously charged off.
NET INTEREST INCOME Total interest income less total interest expense.
NET INTEREST MARGIN Net interest income expressed as a percentage of average earning assets.
NET INTEREST SPREAD The difference between the yield on earning assets and the rate paid on interest bearing funds.
OTHER REAL ESTATE OWNED Real estate not used for banking purposes. For example, real estate acquired through foreclosure.
PROVISION FOR LOAN LOSSES The charge against current income needed to maintain an adequate allowance for possible loan losses.
RETURN ON AVERAGE ASSETS (ROA) Net income divided by average total assets. Measures the relative profitability of the resources utilized by the Company.
RETURN ON AVERAGE EQUITY (ROE) Net income divided by average common equity. Measures the profitability of the shareholders' investment in the Company.
TAX EQUIVALENT BASIS Income from tax exempt loans and investment securities has been increased by an amount equivalent to the taxes which would have been paid if this income was taxable at statutory rates.
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING The number of shares determined by relating (a) the portion of time within a reporting period that common shares have been outstanding to (b) the total time in that period.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following pages present management's discussion and analysis of the consolidated financial condition and results of operations of Farmers Capital Bank Corporation (the "Company"), which include both its banking and nonbanking subsidiaries. Banking subsidiaries include Farmers Bank & Capital Trust Co. in Frankfort, KY and its insurance and leasing company subsidiaries; Farmers Bank and Trust Company in Georgetown, KY; First Citizens Bank in Shepherdsville, KY; United Bank & Trust Co. in Versailles, KY; Lawrenceburg National Bank in Harrodsburg, KY; and Kentucky Banking Centers, Inc. in Glasgow, KY. The Company's only nonbank subsidiary is FCB Services, Inc., a data processing subsidiary located in Frankfort, KY. The following discussion should be read in conjunction with the audited consolidated financial statements and related notes that follow.
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 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 $13.9 million for the year ended December 31, 1999 compared to $14.2 million for the same period in 1998. This represents a decrease of $317 thousand or 2.2%. Basic and diluted net income per share was $1.86 for the year ended December 31, 1999 compared to $1.89 for the same period in 1998, a decrease of $.03 or 1.6%. The decrease in net income for 1999 is primarily attributed to an increase in the provision for loan losses of $1.7 million. A significant portion of the increase in provision relates to the deterioration of a single commercial loan credit in the fourth quarter of 1999.
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 $71.2 million, a decrease of $465 thousand or less than 1% from the prior year. The decrease in interest income was driven by decreases in the average rates earned in each category of earning assets. A $30.8 million increase in the average balance of earning assets nearly offset the 34 basis point decrease in the overall average rate earned on earning assets.
The average balance of taxable securities increased $19.5 million or 13.6% compared to a year earlier. Interest income on taxable securities increased $593 thousand as a result of the increase in average outstandings and offset a decrease in the average rate earned of 35 basis points. Interest on nontaxable securities increased $310 thousand or 6.0% due primarily to a $5.5 million increase in the average balance. The tax equivalent average rate earned on nontaxable securities was 6.6% in 1999, a decrease of 7 basis points from 1998.
Interest income on time deposits with banks, federal funds sold, and securities purchased under agreements to resell totaled $1.4 million for 1999, a decrease of $1.5 million or 51%. The decrease is attributable to a $23.4 million decline in the average balance. The average rate earned on these temporary investments was 4.7% for 1999 compared to 5.4% in 1998.
Interest and fees on loans, on a tax equivalent basis, remained unchanged at $55.0 million versus the prior year. A 42 basis point decrease in the average rate earned was offset by a $29.1 million or 4.9% increase in the average balance.
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 interest bearing liabilities, and the related rates paid thereon. Total interest expense for 1999 was $27.2 million, a decrease of $2.0 million or 6.7% from the prior year. The decrease in interest expense is primarily attributable to decreases in the average rate paid on interest bearing liabilities. The average rate paid on interest bearing liabilities was 3.8% for 1999, which is a 39 basis point decrease from 1998 and more than compensated for the $20.7 million or 3.0% increase in the average balance.
Interest expense on interest bearing demand deposits decreased 8.4% to $4.0 million due primarily to a 35 basis point decrease in the average rate paid in 1999. The decrease in rate offset a $12.4 million or 6.9% increase in the average balance. Interest expense on savings deposits decreased $322 thousand or 6.6% due to a 36 basis point decrease in the average rate paid, which offset an $8.0 million or 5.3% growth in average savings deposits. Interest on time deposits, the largest component of interest expense, totaled $16.5 million for 1999, a $1.4 million or 7.8% decrease from 1998. This decrease was primarily the result of a 34 basis point decrease in the average rate paid in 1999 compared to 1998. A $5.7 million decrease in the average balance in 1999 also contributed to the reduction in interest expense.
Interest expense on securities sold under agreements to repurchase and other borrowed funds increased $114 thousand, which was due primarily to an increase in the average liability of $6.0 million. The average rate paid on these liabilities was 4.7% for 1999, a decrease of 4 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 table on the following page 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).
Tax equivalent net interest income was $44.0 million for 1999, an increase of $1.5 million or 3.5% over 1998. The net interest margin was 4.91% for 1999, unchanged compared to 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 is primarily attributable to a $2.0 million decrease in interest expense. This decrease offset a $465 thousand decline in interest income and was driven by a 39 basis point decrease in the average rate paid on interest bearing sources of funds. The most significant reduction in interest expense was related to interest on time deposits, which decreased $1.4 million or 7.8%. Interest on savings and interest bearing demand deposits declined 6.6% and 8.4%, respectively.
Tax equivalent net interest spread increased 5 basis points to 4.16% compared to 4.11% in the prior year. The increase is the result of a 34 basis point decrease in the average rate earned on earning assets and a decrease of 39 basis points in the average rate paid on interest bearing liabilities.
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 $1.8 million, $2.0 million, and $1.6 million in 1999, 1998, and 1997, respectively.
The following table is an analysis of the change in net interest income.
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 $83 thousand or 0.7% to $12.4 million for 1999. Service charges and fees on deposits, the largest component of noninterest income, increased $66 thousand to $5.2 million. Trust department income increased $106 thousand or 7.8% to $1.5 million due primarily to an increase in assets under management. Other service charges, commissions, and fees increased $57 thousand or 1.5%. Custodial safekeeping fees, the largest component of other service charges, commissions, and fees increased $185 thousand or 20%. Data processing fees declined $114 thousand or 7.6% due to a reduction in ATM authorization fees. Net gains on the sale of investment securities totaled $49 thousand compared to $60 thousand a year earlier. Other noninterest income for 1999 was $470 thousand, a decrease of $21 thousand compared to 1998. Significant components of the decrease include an increase in losses on the sale of loans of $53 thousand and an increase in gains on the sale of fixed assets of $94 thousand.
NONINTEREST EXPENSE
Noninterest expense was $32.6 million for 1999, an increase of $371 thousand or 1.2% from 1998. The largest component of noninterest expense is salaries and employee benefits, which declined $225 thousand or 1.3% to $17.6 million at year end 1999. The decline in salaries and employee benefits is attributable to a $299 thousand decrease in noncash compensation related to the Company's nonqualified stock option plan. As of December 31, 1999, the Company had 443 full time equivalent employees, an increase of 4 from the prior year end.
The Company estimates additional future noncash compensation expense as detailed in the table below. The amounts are net of tax and unadjusted for future forfeitures.
Year (In thousands) Amount - ------------------- ------
2000 $ 633 2001 631 2002 536 2003 297 2004 145 ----- Total $ 2,242 ========
Occupancy expense increased $127 thousand or 6.1% in 1999 to $2.2 million primarily due to an increase in depreciation of banking premises. Equipment expenses increased $148 thousand or 5.2% to $3.0 million primarily due to increases in depreciation on furniture, fixtures, and equipment. Increases in other noninterest expenses of $415 thousand were partially offset by a decrease in data processing expense of $94 thousand. The decrease in data processing expense is primarily attributed to decreases in credit card processing expenses of $77 thousand.
INCOME TAX
Income tax expense for 1999 was $4.9 million, a decrease of $384 thousand or 7.3% from 1998. The effective tax rates were 26.0% and 27.1% for the years ended 1999 and 1998, respectively. The reduction in the effective tax rate for 1999 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, 1999 assets were $1.0 billion, an increase of $47.4 million or 4.8% from the prior year end. The increase 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. Farmers Bank received a significant deposit from the Commonwealth at year end 1999 that accounts for most of the increase in total assets. On an average basis, assets increased $33.9 million or 3.6% to $989 million for 1999. Earning assets, primarily loans and investment securities, averaged $896 million, an increase of $30.8 million or 3.6%.
LOANS
As of December 31, 1999, loans, net of unearned income, totaled $643 million, an increase of $38.5 million or 6.4% from $605 million in the prior year. Real estate mortgage loans increased $38.3 million or 10.9% in the comparison. This increase was led by additional nonfarm, nonresidential loans of $21.2 million and residential first mortgage loans of $13.6 million. Installment loans decreased $4.2 million or 5.2%. Lease financing increased $2.2 million or 7.4% and commercial and real estate construction loans increased $2.1 million or 1.5%.
The composition of the loan portfolio is summarized in the table below.
The following table presents commercial, financial, and agricultural loans and real estate construction loans outstanding at December 31, 1999, which, based on remaining scheduled repayments of principal, are due in the periods indicated.
The table below presents commercial, financial, and agricultural loans and real estate construction loans outstanding at December 31, 1999, 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 $19,259 $8,894 Due after five years 3,148 ------- ------ Total $22,407 $8,894 ======= ======
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 on a consolidated and subsidiary basis.
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.
In addition, borrowers may experience difficulty in periods of economic deterioration, and the level of nonperforming loans, charge offs, and delinquencies could rise and require additional increases in the provision. Also, regulatory agencies, as an integral part of their examinations, periodically review the allowance for loan losses. These reviews could result in additional adjustments to the provision based upon their judgments about relevant information available during an examination.
The provision for loan losses increased $1.7 million in 1999 compared to 1998. $1.0 million of the increase in provision relates to the deterioration of a single commercial loan credit in the fourth quarter of 1999. The Company had net charge offs of $2.3 million in 1999, of which $1.0 million relates to the previously mentioned commercial credit. The allowance for loan losses was 1.50% of net loans at year end 1999 and 1998. Management continues to emphasize collection efforts and evaluation of risks within the portfolio. 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.
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.
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 increased $1.9 million to $4.9 million at year end 1999. The increase is primarily attributed to an increase in nonaccrual loans of $1.5 million. Included in this amount is $418 thousand attributed to the commercial loan credit discussed under the caption titled "Asset Quality". Nonperforming loans represent 0.76% of net loans at year end 1999 compared to 0.48% for 1998. The $1.9 million increase in nonperforming loans was partially offset by a $911 thousand decrease in other repossessed and foreclosed assets. Information regarding nonperforming loans and assets is presented in the table below.
TEMPORARY INVESTMENTS
Federal funds sold and securities purchased under agreements to resell are the primary components of temporary investments. The Company uses these funds in the management of liquidity and interest rate sensitivity. In 1999, temporary investments averaged $30.9 million, a decrease of $23.4 million or 43.0% from 1998. 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. Government agency securities, mortgage-backed securities, and tax-exempt securities of states and political subdivisions. Total investment securities were $230 million on December 31, 1999, a decrease of $33.0 million or 12.6% from year end 1998.
The funds made available from maturing or called bonds have been redirected primarily to fund new loan growth as needed. 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 and held to maturity securities were $168 million and $61.9 million at year end 1999, a decrease of $23.5 million and $9.5 million, respectively. Total investment securities averaged $246 million, an increase of $25.0 million or 11.3% from year end 1998. The Company realized $49 thousand in net gains on the sale of available for sale investment securities during 1999, a decrease of $11 thousand versus the prior year. The net unrealized loss on available for sale securities, included as a component of shareholders' equity, was $1.9 million on December 31, 1999.
The following table summarizes the carrying values of investment securities on December 31, 1999, 1998, and 1997. 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.
The following table presents an analysis of the contractual maturity distribution and tax equivalent weighted average interest rates of investment securities at December 31, 1999. 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 and are not included in the maturity schedule that follows.
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 result from its customer deposits, which consist of noninterest and interest bearing demand, savings, and time deposits. On December 31, 1999, deposits totaled $862 million, an increase of $32.2 million or 3.9% from year end 1998. A significant deposit received from the Commonwealth of Kentucky at year end 1999 contributed to the increase in deposits. Deposits averaged $814 million in 1999, an increase of $26.2 million or 3.3%.
During 1999 total average interest bearing deposits increased $14.7 million or 2.2% to $674 million while average noninterest bearing deposits increased $11.5 million or 8.9% to $141 million.
Increases in average interest bearing deposits were made in interest bearing demand and savings deposits. Interest bearing demand deposits increased $12.4 million or 6.9% to $193 million and savings deposits increased $8.0 million or 5.3% to $159 million. Average time deposits decreased $5.7 million or 1.7%.
A summary of average balances and rates paid on deposits follows.
Maturities of time deposits of $100,000 or more outstanding at December 31, 1999 are summarized as follows.
(In thousands) Amount -------------- ------
3 months or less $18,026 Over 3 through 6 months 13,891 Over 6 through 12 months 12,620 Over 12 months 18,146 ------ Total $62,683 =======
Short-term Borrowings
Short-term borrowings are made up primarily of securities sold under agreements to repurchase with balances of $41.2 million, $26.3 million, and $48.3 million in 1999, 1998, and 1997, respectively. Such borrowings are generally on an overnight basis. Other short-term borrowings consist 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) 1999 1998 1997 -------------- ---- ---- ---- Amount outstanding at year end $41,971 $26,784 $50,602 Maximum outstanding at any month end 101,359 51,095 50,602 Average outstanding 42,442 35,807 28,117 Weighted average rate during the year 4.61% 5.05% 4.75%
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.
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's of the subsidiary banks. ALCO is also responsible for monitoring risks on a Company wide basis. ALCO 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 that 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 contractual maturity dates.
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 audited 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 that 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 cash equivalents and available for sale investment securities. At December 31, 1999, such assets totaled $303 million.
For the year ended December 31, 1999, cash and due from banks totaled $82.9 million. This represents an increase of $44.5 million compared to the prior year. The increase in cash and due from banks in 1999 results primarily from a significant cash deposit received on December 31, 1999 from the Commonwealth of Kentucky and a planned strategy of maintaining additional cash on hand for potential customer deposit withdrawals relating to the Year 2000. Net cash provided by operating activities was $23.3 million in 1999, an increase of $10.8 million over the prior year. Net cash used in investing activities decreased $54.2 million, primarily as a result of decreased purchases of investment securities. Net cash provided by financing activities totaled $36.2 million for the year 1999. This is primarily the result of a net increase in deposits of $32.2 million.
CAPITAL RESOURCES
Shareholders' equity was $125 million on December 31, 1999, increasing $1.3 million or 1.0% from year end 1998. During 1999 the Company purchased 90 thousand shares of its outstanding common stock for a total cost of $3.2 million. Dividends of $8.5 million or $1.13 per share were declared during the year. The Company issued 8 thousand shares of common stock during 1999 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, 1999, 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 18.63% 4.00% 6.00% Total risk based 19.89 8.00 10.00 Leverage 12.77 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, 1999.
The table below is an analysis of dividend payout ratios and equity to asset ratios for the previous five years.
December 31, 1999 1998 1997 1996 1995 - ------------ ---- ---- ---- ---- ----
Percentage of dividends declared to net income 60.66% 53.02% 45.90% 45.21% 50.24% Percentage of average shareholders' equity to average total assets 12.58 12.55 12.46 11.94 11.81
SHAREHOLDER INFORMATION
As of January 1, 2000, there were 867 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 lists the stock prices and dividends declared for 1999 and 1998.
STOCK PRICES
Dividends High Low Declared ---- --- -------- Fourth Quarter $36.000 $30.000 $0.29 Third Quarter 43.500 34.500 0.28 Second Quarter 36.625 32.125 0.28 First Quarter 39.375 30.875 0.28
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
Dividends declared per share increased $0.13 or 13.0% and $0.145 or 17.0% for the years 1999 and 1998, respectively.
YEAR 2000 COMPLIANCE
During 1999 the Company completed its efforts of preparing for the January 1, 2000 date change. This process included the five phases as prescribed by regulatory guidelines. As of the date of this report, the Company has not experienced any system failures, miscalculations, or any other disruptions of operations related to the Year 2000 date change. Although considered unlikely, unanticipated disruptions could still occur as a result of noncompliant third parties or other factors that are beyond the control of the Company. The Company will continue to monitor its systems throughout the coming year.
EFFECT OF IMPLEMENTING RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133. This Statement defers the effective date of SFAS No. 133, ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES until fiscal years beginning after June 15, 2000. The Company expects to adopt SFAS No. 133, as amended by SFAS No. 137, effective January 1, 2001. The Company does not expect the implementation of this Statement to have a material effect on the consolidated financial statements.
1998 COMPARED WITH 1997
Net income was $14.2 million in 1998 compared to $14.1 million in 1997, an increase of $144 thousand. Diluted net income per share increased from $1.86 to $1.89. Net income was relatively unchanged primarily due to noncash compensation expense of $918 thousand, net of tax, related to the adoption of the Company's nonqualified stock option plan. The increase in diluted net income per share was primarily the result of the Company's plan to purchase its own common shares from the open market. The Company purchased 53 thousand shares under the plan, which offset the effect of 11 thousand shares issued pursuant to stock options exercised. This combination resulted in a reduction in the average number of common shares outstanding by 17 thousand. In 1998, the return on average assets was 1.49% and the return on average equity was 11.88% compared to 1.56% and 12.50%, respectively, for 1997.
Total interest income on a tax equivalent basis was $71.6 million, an increase of $2.5 million or 3.7% from 1997. A $41.8 million increase in average earning assets offset an 11 basis point decrease in the average rate earned on earning assets. Average loans, which increased $23.7 million or 4.2% to $590 million, represented the largest increase in average earning assets.
Total interest expense was $29.1 million, an increase of $1.7 million or 6.2% from 1997. The increase was primarily due to increases in the average balance of each category of interest bearing liabilities. The average rate paid on time deposits increased 10 basis points, which was also a significant contributing factor.
The spread between rates earned and paid was 4.11% in 1998, a 17 basis point decrease from 1997. The decrease is primarily due to an 11 basis point decrease in the yield earned on loans and increases in the overall costs of funding by 6 basis points. The net interest margin was 4.91% in 1998, a decrease of 15 basis points from 1997.
Noninterest income increased $363 thousand or 3.0% to $12.3 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 $395 thousand to $3.8 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 was $32.2 million for 1998, an increase of $2.1 million or 6.9% 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 nonqualified stock option plan. Excluding the noncash compensation for 1998, salaries and employee benefits increased $232 thousand or 1.4%.
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.
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Farmers Capital Bank Corporation has the responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles. The consolidated financial statements include amounts that are based on management's best estimates and judgments. Management also prepared other information in the annual report and is responsible for its accuracy and consistency with the financial statements.
Farmers Capital Bank Corporation's 1999 consolidated financial statements have been audited by KPMG LLP independent accountants. Management has made available to KPMG LLP all financial records and related data, as well as the minutes of Boards of Directors' meetings. Management believes that all representations made to KPMG LLP during the audit were valid and appropriate.
Management of Farmers Capital Bank Corporation has established and maintains a system of internal control that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and the prevention and detection of fraudulent financial reporting. The system of internal control provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees with significant roles in the financial reporting process and updated as necessary. Management continually monitors the system of internal control for compliance.
Farmers Capital Bank Corporation maintains an internal auditing program that independently assesses the effectiveness of the internal controls and recommends possible improvements thereto. Management has considered the recommendations of the internal audit staff and KPMG LLP and has taken actions that we believe respond appropriately to these recommendations. Management believes that, as of December 31, 1999, the system of internal control was adequate to accomplish the objectives discussed herein.
/s/Charles S. Boyd /s/C Douglas Carpenter - ------------------ ---------------------- Charles S. Boyd C. Douglas Carpenter President and CEO Vice President and CFO
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Farmers Capital Bank Corporation
We have audited the accompanying consolidated balance sheets of Farmers Capital Bank Corporation and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999. 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.
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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles.
/s/KPMG LLP Louisville, Kentucky January 17, 2000
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 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 1999 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 level. The Company's chief decision makers monitor the results of the various banking products and services of its subsidiaries. Accordingly, all of the Company's operations are considered by management to be aggregated in one reportable operating segment.
CASH AND CASH EQUIVALENTS 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. 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 was $182 thousand, or less than 0.5% of net loans at December 31, 1999. 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, 1999, 1998, and 1997.
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 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.
2. INVESTMENT SECURITIES
The following summarizes the amortized cost and estimated fair values of the securities portfolio at December 31, 1999. The summary is divided into available for sale and held to maturity securities.
The following summarizes the amortized cost and estimated fair values of the securities portfolio at December 31, 1998.
The amortized cost and estimated fair value of the securities portfolio at December 31, 1999, by contractual maturity, are shown below. The summary is divided into available for sale and held to maturity securities. 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 have no stated maturity and are not included in the maturity schedule that follows.
Gross gains of approximately $75,000 and $100,000 for 1999 and 1998, respectively, were realized on the sale of investment securities. Gross losses of approximately $26,000 and $40,000 were realized during 1999 and 1998, respectively.
Investment securities with a book value of $157,725,000 and $154,528,000 at December 31, 1999 and 1998 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) 1999 1998 - --------------------------- ---- ----
Commercial, financial, and agricultural $105,064 $116,625 Real estate - construction 38,471 24,770 Real estate - mortgage 390,225 351,879 Installment loans 78,451 85,156 Lease financing 37,100 34,955 ------- ------- Total loans 649,311 613,385 Less unearned income (6,121) (8,702) ------- ------- Total loans, net of unearned income $643,190 $604,683 ======== ========
Loans to directors, executive officers and 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 $15,808,000 and $16,011,000 at December 31, 1999 and 1998, respectively. An analysis of the activity with respect to these loans follows.
(In thousands) Amount - -------------- ------
Balance, December 31, 1998 $16,011 New loans 12,721 Repayments (12,525) Loans no longer meeting disclosure requirements (399) ------- Balance, December 31, 1999 $15,808 =======
4. ALLOWANCE FOR LOAN LOSSES
The Company's recorded investment in impaired loans, as defined in SFAS No. 114, was $2,975,000 at December 31, 1999 and $348,000 at December 31, 1998. Of those amounts, $1,252,000 and $0, respectively, represent loans for which an allowance for loan losses, in the amounts of $874,000 and $0, has been established under SFAS No. 114. For the years ended December 31, 1999 and 1998, the recorded investment in impaired loans averaged $2,463,000 and $1,601,000, respectively. Interest income recognized on impaired loans totaled $331,000, $103,000 and $226,000 for the years 1999, 1998, and 1997, 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, (In thousands) 1999 1998 1997 - -------------------------------------- ---- ---- ----
Balance, beginning of year $9,048 $9,114 $8,741 Provisions for loan losses 2,863 1,134 1,830 Recoveries 690 1,072 1,294 Loans charged off (2,942) (2,272) (2,751) ------ ------ ------ Balance, end of year $9,659 $9,048 $9,114 ====== ====== ======
5. PREMISES AND EQUIPMENT
Premises and equipment consist of the following.
December 31, (In thousands) 1999 1998 - --------------------------- ---- ----
Land, buildings, and leasehold improvements $30,236 $29,703 Furniture and equipment 12,676 12,999 ------ ------ Total premises and equipment 42,912 42,702 Less accumulated depreciation and amortization (18,503) (17,841) ------- ------- Premises and equipment, net $24,409 $24,861 ======= =======
Depreciation and amortization of premises and equipment was $2,430,000, $2,230,000, and $2,054,000 in 1999, 1998, and 1997, respectively.
6. DEPOSIT LIABILITIES
Time deposits of $100,000 or more at December 31, 1999 and 1998 were $62,683,000 and $63,454,000, respectively.
At December 31, 1999, the scheduled maturities of time deposits were as follows.
(In thousands) Amount -------------- ------
2000 $192,198 2001 59,783 2002 49,302 2003 6,940 Thereafter 7,726 -------- Total $315,949 ========
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 is as follows.
December 31, (Dollars in thousands) 1999 1998 - ----------------------------------- ---- ----
Average balance during the year $41,741 $34,788 Average interest rate during the year 4.61% 5.06% Maximum month end balance during the year $100,588 $49,900
Other borrowed funds consist primarily of advances to the subsidiary banks from the Federal Home Loan Bank (FHLB) of Cincinnati. Such borrowings were $2,726,000 and $2,332,000 at December 31, 1999 and 1998, respectively. The weighted average interest rate on FHLB advances was 7.36% and 7.75% at December 31, 1999 and 1998, respectively. The subsidiary banks pledge FHLB stock and extend 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, 1999 are as follows.
(In thousands) Amount - -------------- ------
2000 $477 2001 1,488 2002 501 2003 245 2004 192 Thereafter 765 ------ Total $3,668 ======
8. INCOME TAXES
The components of income tax expense are as follows.
December 31, (In thousands) 1999 1998 1997 - --------------------------- ---- ---- ----
Currently payable $5,227 $5,418 $5,189 Deferred income taxes (324) (131) 633 ----- ----- ----- Total applicable to operations 4,903 5,287 5,822
Charged to components of shareholders' equity: Net unrealized securities gains (1,190) 139 238 ------ ------ ------ Total income taxes $3,713 $5,426 $6,060 ====== ====== ======
An analysis of the difference between the effective income tax rates and the statutory federal income tax rate follows.
December 31, 1999 1998 1997 - ------------ ---- ---- ----
Federal statutory rate 35.0% 35.0% 35.0% Changes from statutory rates resulting from: Tax exempt interest (8.6) (7.7) (6.7) Nondeductible interest to carry municipal obligations 1.0 .9 .8 Amortization of intangibles .9 .9 .9 Low income housing tax credits (2.1) (1.0) (.5) Other, net (.2) (1.0) (.3) ---- ---- ---- Effective tax rate 26.0% 27.1% 29.2% ==== ==== ====
The tax effects of the significant temporary differences which comprise deferred tax assets and liabilities at December 31, 1999 and 1998 follows.
December 31, (In thousands) 1999 1998 - --------------------------- ---- ----
ASSETS Loan loss reserve $3,381 $3,167 Deferred directors' fees 153 204 Postretirement benefit obligations 586 517 Stock options 808 450 Self-funded insurance 81 47 Investment securities 712 ----- ----- Total deferred tax assets 5,721 4,385
LIABILITIES Depreciation 1,403 1,521 Investment securities 370 Deferred loan fees 1,079 1,011 Lease financing operations 1,852 1,612 Other 139 137 ----- ----- Total deferred tax liabilities 4,473 4,651 ------ ------ Net deferred tax asset (liability) $1,248 $ (266) ====== ======
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, 1999.
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. There were no cash or stock contributions to the plan in each of the years in the three-year period ended December 31, 1999.
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 1999, 1998, and 1997 was $842,000, $893,000, and $847,000, 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 1999 and 1998, net of tax, was $724,000 and $918,000, respectively. At December 31, 1999, 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.
Year (In thousands) Amount - ------------------- ------
2000 $633 2001 631 2002 536 2003 297 2004 145 ------ Total $2,242 ======
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) 1999 1998 1997 - ----------------------- ---- ---- ----
NET INCOME As reported $13,930 $14,247 $14,103 Proforma 13,884 14,189 13,991
NET INCOME PER COMMON SHARE Basic, as reported 1.86 1.89 1.86 Basic, proforma 1.86 1.88 1.85
Diluted, as reported 1.86 1.89 1.86 Diluted, proforma 1.86 1.88 1.85
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. 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.
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 expires 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.
There were no options granted during 1998 or 1999. There were 55,719 shares forfeited during the two-year period ended December 31, 1999. 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, 1999, 1998, and 1997 and changes during the years ended on those dates is presented below.
The number of shares exercisable at December 31, 1999, 1998, and 1997 was 123,839, 63,356, and 0, respectively. The exercise price of outstanding options at December 31, 1999 was $24.50 and the weighted average contractual life was 7.75 years.
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 periods ending December 31, 1999 and 1998.
(In thousands) 1999 1998 - -------------- ---- ----
RECONCILIATION OF BENEFIT OBLIGATION Obligation at beginning of year $2,535 $2,977 Service cost 2 2 Interest cost 165 202 Actuarial loss (gain) 94 (581) Benefit payments (166) (65) ------ ------ Obligation at end of year $2,630 $2,535 ====== ======
FUNDED STATUS $(2,630) $(2,535) Unrecognized transition obligation 1,319 1,421 Unrecognized prior service cost 382 424 Unrecognized gain (726) (858) ------- ------- Accrued postretirement benefit costs $(1,655) $(1,548) ======= =======
The following table provides disclosure of the net periodic benefit cost as of December 31.
(In thousands) 1999 1998 - -------------- ---- ----
Service cost $2 $2 Interest cost 165 202 Amortization of transition obligation 102 102 Amortization of prior service cost 42 42 Amortization of net gain (39) ---- ---- Net periodic benefit cost $272 $348 ==== ====
Major assumptions: Discount rate 7.25% 6.75%
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. For measurement purposes, a 7% 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 $18 $(16)
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 $134,378,000 and $93,686,000 at December 31, 1999 and 1998, 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 $4,421,000 and $7,111,000 in irrevocable letters of credit outstanding at December 31, 1999 and 1998, 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, 1999, 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, 1999, combined retained earnings of the subsidiary banks were approximately $51,936,000 of which $12,943,000 was available for the payment of dividends in 2000 without obtaining prior approval from bank regulatory agencies.
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 $8,333,000 and $7,091,000 at December 31, 1999 and 1998, respectively.
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 possibly 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, 1999.
As of December 31, 1999, 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.
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. 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.
19. PARENT COMPANY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
December 31, (In thousands) 1999 1998 - --------------------------- ---- ----
ASSETS Cash on deposit with subsidiaries $31,846 $33,502 Interest bearing deposits in other banks 100 100 Investment in subsidiaries 95,856 92,856 Other assets 517 673 -------- -------- Total assets $128,319 $127,131
LIABILITIES Dividends payable $2,162 $2,113 Other liabilities 1,051 1,179 ----- ----- Total liabilities 3,213 3,292
SHAREHOLDERS' EQUITY Common stock 930 940 Capital surplus 11,686 10,520 Retained earnings 114,431 112,010 Accumulated other comprehensive (loss) income (1,941) 369 ------- ------- Total shareholders' equity 125,106 123,839 ------- ------- Total liabilities and shareholders' equity $128,319 $127,131 ======== ========
19. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
20. QUARTERLY FINANCIAL DATA
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 9, 2000 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. (502) 588-8400 (800) 444-1854
Knight Securities LP (800) 302-9197
J.C. Bradford and Co., Inc. (800) 443-8749
Morgan, Keegan and Company (800) 260-0280
The Transfer Agent and Registrar for Farmers Capital Bank Corporation is the Farmers Bank & Capital Trust Co.
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, 1999 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 Corporation 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 INDEPENDENT AUDITORS' CONSENT
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 our report dated January 17, 2000, relating to the consolidated balance sheets of Farmers Capital Bank Corporation and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the years in the three year period ended December 31, 1999, which report appears in the December 31, 1999, annual report on Form 10-K of Farmers Capital Bank Corporation.
/s/ KPMG LLP
Louisville, Kentucky March 24, 2000