-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NImqehcEePSRjIYM/RUYQYognx7l3piAo3PHYO6H90EiiyAiF0Qa1F/ii0zy07Ru ceFqKWZRk44wMc0eK2t2+w== 0000713095-01-000002.txt : 20010328 0000713095-01-000002.hdr.sgml : 20010328 ACCESSION NUMBER: 0000713095-01-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARMERS CAPITAL BANK CORP CENTRAL INDEX KEY: 0000713095 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 611017851 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-14412 FILM NUMBER: 1580314 BUSINESS ADDRESS: STREET 1: PO BOX 309 STREET 2: 202 W MAIN ST CITY: FRANKFORT STATE: KY ZIP: 40602 BUSINESS PHONE: 5022271668 MAIL ADDRESS: STREET 1: P O BOX 309 STREET 2: 202 WEST MAIN STREET CITY: FRANKFORT STATE: KY ZIP: 40602 10-K405 1 0001.txt 2000 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-14412 Farmers Capital Bank Corporation ------------------------------------------------------ (Exact name of registrant as specified in its charter) Kentucky 61-1017851 - --------------------------------------------- ---------------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification Number) P.O. Box 309, 202 West Main St. Frankfort, Kentucky 40601 - ---------------------------------------- ---------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (502) 227-1600 Securities registered pursuant to Section 12(b) of the Act: None None - --------------------- ------------------------------------------- (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: Common Stock - $.125 per share Par Value ---------------------------------------- (Title of Class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of March 21, 2001 was $232,980,931. As of March 21, 2001, there were 6,967,654 shares issued and outstanding. Documents incorporated by reference: Portions of the Registrant's 2000 Annual Report to Shareholders are incorporated by reference into Part II. Portions of the Registrant's Proxy Statement relating to the Registrant's 2001 Annual Meeting of Shareholders are incorporated by reference into Part III. An index of exhibits filed with this Form 10-K can be found on page 15. FARMERS CAPITAL BANK CORPORATION FORM 10-K INDEX Page Part I Item 1. Business 3 Item 2. Properties 7 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 8 Part II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 9 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 10 Item 8. Financial Statements and Supplementary Data 10 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 11 Part III Item 10. Directors and Executive Officers of the Registrant 11 Item 11. Executive Compensation 11 Item 12. Security Ownership of Certain Beneficial Owners and Management 11 Item 13. Certain Relationships and Related Transactions 11 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 12 Signatures 14 Index of Exhibits 15 PART I ITEM 1. BUSINESS ORGANIZATION Farmers Capital Bank Corporation (the "Registrant" or the "Company") is a financial holding company. The Registrant was originally formed as a bank holding company under the Bank Holding Company Act of 1956, as amended on October 28, 1982, under the laws of the Commonwealth of Kentucky. During 2000, the Registrant elected to change from a bank holding company to a financial holding company (see discussion in Supervision and Regulation section). 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 and Kentucky General Life Insurance Company, Inc., ("Kentucky General"), a nonbank insurance agency subsidiary located in Frankfort, Kentucky. The Registrant's banking operations are aggregated into one reportable operating segment. As of December 31, 2000, the Registrant had $1.2 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, 2000, it had total consolidated assets of $601 million, including net loans of $266 million. On the same date, total deposits were $452 million and shareholders' equity totaled $44 million. Farmers Bank had four subsidiaries at year end 2000: Farmers Bank Realty Co. ("Realty"), Leasing One Corporation ("Leasing One"), Farmers Capital Insurance Corporation ("Farmers Insurance"), and E Properties, Inc. ("E Properties"). Farmers Bank also participated 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, 2000. 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 2000 it had total assets of $19.2 million. Farmers Insurance was organized in 1988 to engage in insurance activities permitted to the Registrant by federal and state law. This corporation, which had no activity prior to 1998, was capitalized by Farmers Bank in December 1998 and acts as an agent for Commonwealth Land Title Co. At year end 2000 it had total assets of $54 thousand. Farmers Insurance has a 50% interest in Farmers Fidelity Insurance Company, LLP ("Farmers Fidelity"). The Creech & Stafford Insurance Agency, Inc., an unrelated party to the Registrant, also has a 50% interest in Farmers Fidelity. E Properties was incorporated on May 5, 2000. This company is involved in real estate management and liquidation for properties repossessed by Farmers Bank. E Properties had total assets of $11 thousand on December 31, 2000. Farmers Bank had 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 had a 50% interest in ATM. ATM was dissolved in December 2000, and the total remaining assets were distributed to its partners. 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 $144 million and total deposits of $128 million at December 31, 2000. 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 the Harrodsburg site and two branches in Anderson County, Kentucky. Lawrenceburg Bank is the largest bank chartered in Mercer County with total assets of $115 million and total deposits of $104 million at December 31, 2000. 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 $140 million and total deposits of $119 million at December 31, 2000. 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 $149 million and total deposits of $119 million at December 31, 2000. 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 $86 million and total deposits of $72 million at December 31, 2000. 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 $2.9 million at December 31, 2000. Kentucky General was incorporated on June 22, 2000 to engage in insurance activities permitted by federal and state law. This corporation was inactive as of December 31, 2000. SUPERVISION AND REGULATION The Registrant was originally registered as a bank holding company and was restricted to those activities permissible under the Bank Holding Company Act of 1956, as amended ("BHC Act"). The BHC Act provides for regulation, supervision, and examination by the Board of Governors of the Federal Reserve System. The Registrant had the option of becoming a financial holding company upon the Gramm-Leach-Bliley Act ("GLB Act") becoming law on November 12, 1999. The GLB Act permits an expanded list of permissible activities for those companies meeting the requirements and electing to operate in accordance with the GLB Act. The Registrant elected this option on June 9, 2000. The Federal Reserve will continue to be the primary regulatory agency under the GLB Act. The Registrant 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 Banking 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. During 2000, the State Wide Branching Bill became effective, which allows banks to open a branch anywhere in the state of Kentucky. Previously, banks were limited to the county where the main office was located. 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 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. References under the caption "Supervision and Regulation" to applicable statutes and regulations are brief summaries of portions thereof which do not purport to be complete and which are qualified in their entirety by reference thereto. COMPETITION The Registrant and its subsidiaries compete for banking business with various types of businesses other than commercial banks and savings and loan associations. These include, but are not limited to, credit unions, mortgage lenders, finance companies, insurance companies, stock and bond brokers, financial planning firms, and department stores which compete for one or more lines of banking business. The banks also compete for commercial and retail business not only with banks in Central Kentucky, but with banking organizations from Ohio, Indiana, Tennessee and Pennsylvania which have banking subsidiaries located in Kentucky and may possess greater resources than the Corporation. The primary areas of competition pertain to quality of services, interest rates, and fees 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, 2000, the Registrant and its subsidiaries had 456 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. 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. ITEM 3. LEGAL PROCEEDINGS Farmers Bank was named, on September 10, 1992, as a defendant in Case No. 92CIO5734 in Jefferson Circuit Court, Louisville, Kentucky, Earl H. Shilling et al. v. Farmers Bank & Capital Trust Company. Details of this case have been disclosed in the 1999 Annual Report on Form 10-K and subsequent 10-Q filings. 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 and County of Jefferson, Kentucky, Nursing Home Improvement Revenue Bonds (Filson Care Home Project) Series 1986B (collectively "the Bonds"). The plaintiffs alleged that the class had been damaged through a reduction in the value of the Bonds and a loss of interest on the Bonds because of the actions of the Bank in its capacity as indenture trustee for the Bondholders. The plaintiffs demanded compensatory and punitive damages. On July 6, 1993, the Court denied the plaintiffs' motion to certify the case as a class action. Subsequently, the plaintiffs amended their complaint to join additional Bondholders as plaintiffs. The plaintiffs claimed to hold Bonds in the aggregate principal amount of $480,000. Before trial, the Court dismissed thirty-nine of the plaintiffs because they were unable or unwilling to present testimony to support their claims. The case was tried to a jury beginning on March 28, 2000 on the claims of four plaintiffs holding Bonds in the aggregate principal amount of $80,000. The Court granted a directed verdict in favor of the Bank on the plaintiff's claim that the Bank had engaged in commercial bribery and that the legal fees that were paid by the Bank should be disgorged because of an alleged conflict of interest of the Bank's counsel. The jury found for the plaintiffs on the claim that the Bank had breached its fiduciary duty and awarded the plaintiffs $99,875 in compensatory damages and $600,000 in punitive damages. The Bank filed a motion for judgment notwithstanding the verdict or, in the alternative, for a new trial, asserting that the jury's verdict that the Bank breached its fiduciary duty was not supported by sufficient evidence, that the jury's award of damages was speculative and was not supported by the evidence, and that the jury's award of punitive damages was not supported by sufficient evidence. The Bank also asserted that a new trial is warranted because of the erroneous admission of evidence concerning legal fees paid by the Bank. Plaintiffs filed appeals contending that the denial of class certification was erroneous, that the individual plaintiffs should not have been dismissed from the lawsuit, that certain evidence was erroneously excluded, and that the directed verdict regarding the disgorgement of legal fees and the commercial bribery claims was erroneous. On August 1, 2000 the Kentucky Court of Appeals dismissed the appeals as having been prematurely filed. On January 3, 2001 the Jefferson Circuit Court entered judgment in favor of the Bank notwithstanding the jury's verdict in favor of the plaintiffs, holding that the Bank reasonably relied in good faith on the advice of its counsel, that there was no evidence that the Bank breached its fiduciary duty to the plaintiffs, and that there was no evidence that the Bank caused the plaintiff's losses. On January 31, 2001 the plaintiff bondholders appealed, and on February 9, 2001 defendant Bank cross-appealed, the judgment of the Jefferson Circuit Court to the Kentucky Court of Appeals. In their appeal, the Bondholders claim that the trial court's denial of class certification was erroneous, that certain individual plaintiffs should not have been dismissed from the lawsuit, that the trial court erroneously directed a verdict against them on the issue of a conflict of interest, and that the judgment notwithstanding the verdict was erroneously granted because the evidence was sufficient to support the jury's verdict. In its cross-appeal, the Bank claims that the trial court erroneously bifurcated the trial on the issue of liability and damages, that certain witnesses should have been excluded from the trial, that the Bank should have been granted summary judgment, and that certain evidence and testimony regarding attorneys' fees should have been excluded. The Bank intends to vigorously pursue its pending motion and to defend plaintiff claims. It is not possible at this stage of the proceedings to make any prediction as to the outcome. As of December 31, 2000, there were various other pending legal actions and proceedings against the Company, including these above, arising from the normal course of business and in which claims for damages are asserted. Management, after discussion with legal counsel, believes that these actions are without merit and that the ultimate liability resulting from these legal actions and proceedings, if any, will not have a material adverse effect upon the consolidated financial statements of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The information set forth under the sections "Shareholder Information" and "Stock Prices" on page 30 of the 2000 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 49 of the 2000 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 Morgan, Keegan and Company (800) 260-0280 ITEM 6. SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------ December 31, (In thousands, except per share data) 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ RESULTS OF OPERATIONS Interest Income $ 75,481 $ 69,034 $ 69,681 $ 67,360 $ 67,485 Interest Expense 32,536 27,184 29,147 27,450 28,703 Net Interest Income 42,945 41,850 40,534 39,910 38,782 Provision for Loan Losses 2,472 2,863 1,134 1,830 4,162 Net Income 14,380 13,930 14,247 14,103 12,656 - ------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net Income - Basic and Diluted $ 1.97 $ 1.86 $ 1.89 $ 1.86 $ 1.65 Cash Dividends Declared 1.17 1.13 1.00 .855 .745 Book Value 17.49 16.82 16.47 15.48 14.43 - ------------------------------------------------------------------------------------------------------------------------------- SELECTED RATIOS Percentage of Net Income to: Average Shareholders' Equity (ROE) 11.61% 11.20% 11.88% 12.50% 11.80% Average Total Assets (ROA) 1.40 1.41 1.49 1.56 1.41 Percentage of Dividends Declared to Net Income 59.33 60.66 53.02 45.90 45.21 Percentage of Average Shareholders' Equity to Average Total Assets 12.06 12.58 12.55 12.46 11.94 - -------------------------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity $ 125,461 $ 125,106 $ 123,839 $ 117,044 $ 109,596 Total Assets 1,204,752 1,039,787 992,338 1,014,183 925,319 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 7,304 7,478 7,555 7,572 7,684 Diluted 7,307 7,478 7,555 7,572 7,684 - --------------------------------------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion on pages 18 through 31 of the 2000 Annual Report to Shareholders is hereby incorporated by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth under the item "Market Risk Management" on page 27 of the 2000 Annual Report to Shareholders is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information set forth below on pages 33 through 54, and the inside back cover of the 2000 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. 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 three year period ended December 31, 2000. PART III 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 59 President and CEO, 37* Director 2 James H. Childers 58 Executive Vice President, 31* 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 8, 2001 which will be filed with the Commission on or about April 2, 2001, 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. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Items 11 through 13 is hereby incorporated by reference from the Registrant's definitive proxy statement in connection with its annual meeting of shareholders scheduled for May 8, 2001 which will be filed with the Commission on or about April 2, 2001, pursuant to Regulation 14A. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 2000 Annual Report To Shareholders (a)1. FINANCIAL STATEMENTS Page Independent Auditors' Report 33 Consolidated Balance Sheets at December 31, 2000 and 1999 34 Consolidated Statements of Income for the years ended December 31, 2000, 1999, and 1998 35 Consolidated Statements of Comprehensive Income for the years ended December 31, 2000, 1999, and 1998 36 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2000, 1999, and 1998 37 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998 38 Notes to Consolidated Financial Statements 39-54 (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 (b) REPORTS ON FORM 8-K On January 11, 2001, the Registrant filed a Form 8-K in regards to the case of Schilling, et al vs. Farmers Bank & Capital Trust Co. As reported in the 10-Q's, filed on behalf of the Registrant for the quarters ending March 31, 2000 and June 30, 2000, the Registrant's largest subsidiary, Farmers Bank & Capital Trust Co. had filed a motion for judgment notwithstanding the verdict in the above mentioned case. On January 3, 2001 the Jefferson Circuit Court entered judgment in favor of Farmers Bank & Capital Trust Co. ("the Bank") notwithstanding the jury's verdict in favor of the plaintiffs, holding that the Bank reasonably relied in good faith on the advice of it's counsel, that there was no evidence that the Bank breached it's fiduciary duty to the plaintiffs, and that there was no evidence that the Bank caused the plaintiffs' losses. The plaintiffs may appeal the judgment entered in favor of the Bank to the Kentucky Court of Appeals within 30 days of the entry of judgment. The Bank will contest any such appeal. Financial statements were not required with this Form 8-K. (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: 3/14/01 -------------------------------------- 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 3/14/01 - ------------------------- and Director (principal executive ------------------- Charles S. Boyd officer of the Registrant) /s/ Frank W. Sower, Jr. Chairman 3/25/01 - ------------------------- ------------------- Frank W. Sower, Jr. /s/ G. Anthony Busseni Director 3/16/01 - ------------------------- ------------------- G. Anthony Busseni /s/ Lloyd C. Hillard, Jr. Director 3/15/01 - ------------------------- ------------------- Lloyd C. Hillard, Jr. /s/ Dr. John D. Sutterlin Director 3/20/01 - ------------------------- ------------------- Dr. John D. Sutterlin /s/ Stokes A. Baird, IV Director 3/15/01 - ------------------------- ------------------- Stokes A. Baird, IV /s/ Harold G. Mays Director 3/19/01 - ------------------------- ------------------- Harold G. Mays /s/ E. Glenn Birdwhistell Director 3/19/01 - ------------------------- ------------------- E. Glenn Birdwhistell /s/ Michael M. Sullivan Director 3/21/01 - ------------------------- ------------------- Michael M. Sullivan /s/ J. Barry Banker Director 3/16/01 - ------------------------- ------------------- J. Barry Banker /s/ James H. Childers Director 3/16/01 - ------------------------- ------------------- James H. Childers /s/ Robert Roach, Jr. Director 3/13/01 - ------------------------- ------------------- Robert Roach, Jr. /s/ C. Douglas Carpenter Vice President and CFO 3/13/01 - ------------------------- (principal financial and ------------------- C. Douglas Carpenter accounting officer) INDEX OF EXHIBITS Page 13. 2000 Annual Report to Shareholders Enclosed 21. Subsidiaries of the Registrant 16 23. Independent Auditors' Consent 17 EXHIBIT 13 2000 ANNUAL REPORT TO SHAREHOLDERS
- ------------------------------------------------------------------------------------------------------------------------------ December 31, (In thousands, except per share data) 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ RESULTS OF OPERATIONS Interest Income $ 75,481 $ 69,034 $ 69,681 $ 67,360 $ 67,485 Interest Expense 32,536 27,184 29,147 27,450 28,703 Net Interest Income 42,945 41,850 40,534 39,910 38,782 Provision for Loan Losses 2,472 2,863 1,134 1,830 4,162 Net Income 14,380 13,930 14,247 14,103 12,656 - ------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net Income - Basic and Diluted $ 1.97 $ 1.86 $ 1.89 $ 1.86 $ 1.65 Cash Dividends Declared 1.17 1.13 1.00 .855 .745 Book Value 17.49 16.82 16.47 15.48 14.43 - ------------------------------------------------------------------------------------------------------------------------------- SELECTED RATIOS Percentage of Net Income to: Average Shareholders' Equity (ROE) 11.61% 11.20% 11.88% 12.50% 11.80% Average Total Assets (ROA) 1.40 1.41 1.49 1.56 1.41 Percentage of Dividends Declared to Net Income 59.33 60.66 53.02 45.90 45.21 Percentage of Average Shareholders' Equity to Average Total Assets 12.06 12.58 12.55 12.46 11.94 - -------------------------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity $ 125,461 $ 125,106 $ 123,839 $ 117,044 $ 109,596 Total Assets 1,204,752 1,039,787 992,338 1,014,183 925,319 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 7,304 7,478 7,555 7,572 7,684 Diluted 7,307 7,478 7,555 7,572 7,684 - --------------------------------------------------------------------------------------------------------------------------------
TABLE OF CONTENTS Letter to Our Shareholders 2 Farmers Capital Bank Corporation Board of Directors and Officers 3 Insurance: Innovation, Integration, Implementation 4 Affiliates' Directors and Officers 12 Glossary of Financial Terms 17 Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Management's Report on Responsibility for Financial Reporting 32 Independent Auditors' Report 33 Consolidated Balance Sheets 34 Consolidated Statements of Income 35 Consolidated Statements of Comprehensive Income 36 Consolidated Statements of Changes in Shareholders' Equity 37 Consolidated Statements of Cash Flow 38 Notes to Consolidated Financial Statements 39 Shareholder Information 57 LETTER TO OUR SHAREHOLDERS Farmers Capital Bank Corporation reported net income of $14.4 million for year-end 2000. This is an increase of $450 thousand over the same period of 1999 or 3.2%. Diluted net income per share of $1.97 for the year ended December 31, 2000 compared to $1.86 for the prior year represents an increase of 5.9%. In comparison with 1999, interest income from loans for year 2000 increased $5.8 million, or 10.7%, and interest on temporary investments increased $901 thousand, or 65.9%. Interest on deposits increased $3.8 million, or 15.3%, and interest on other borrowed funds increased $1.5 million, or 71.3%. As a result, net interest income increased $1.1 million, or 2.6%. The provision for loan losses decreased $391 thousand, or 13.7%. Noninterest income was up 2.5% while noninterest expense increased $744 thousand or 2.3%. From December 31, 1999 to December 31, 2000, the effective tax rate increased from 26.0% to 27.7%. A share buy-back program has been in effect for several years. The Company purchased 278 thousand shares at a total price of $9.3 million during 2000. The positive impact of the buy-back program can be seen in the earnings per share results. The earnings per share growth is 270 basis points higher than the net income growth for the year ended December 31, 2000. As a financial institution, Farmers Capital Bank Corporation specializes in banking services and products. Increasing competition, not only from other banks but from nontraditional avenues which now provide banking services, has us watching our profit margins. To combat this problem, we need new areas of growth. Changes in banking laws have made insurance as an ongoing business venture a possibility for us. We have always been comfortable with the discussion of insurance at the lending desk because of our term insurance policies for Credit Life and Accident and Health . However, the thought of true insurance relationships is a novel concept for the traditional banker. At Farmers, we already know about the types of insurance policies needed to complete the loan process. We are now able to offer coverage that encourages long term relationships, providing greater convenience for our customers and bringing our strengths into play: the knowledge of insurance needs, the understanding of relationship banking, and the innate ability to serve the customer. We studied the process of insurance and the best vehicle to deliver it to our customers for more than four years, starting with the simple yet successful idea of title insurance. Since its inception in December of 1998, Farmers Title Company has been profitable. We now write title insurance policies on over 70% of our mortgage loans. At year-end, Farmers Title Company had generated over 45% of our entire insurance income. Cautiously, we dug further into insurance - how do we provide full service insurance to our customers without high costs and years of preparation and training? We investigated the strengths and weaknesses of three potential venues: buying an existing agency, starting one from the ground up or forming a partnership. With the formation of the Farmers Fidelity Property and Casualty Insurance Company, LLP and the addition of Jamey Bennett to our corporation, we found the winning combination for Farmers Capital Bank Corporation. Our entrance into property and casualty also gave us the opportunity to re-examine our own policies. These included our Directors and Officers Liability coverage and property and casualty coverage throughout the corporation. The results were very gratifying: we more than doubled our coverages while realizing a savings in premiums of over $100 thousand. These results alone increased our interest in the business of insurance; if we save, so will our customers. Our passage into insurance is further detailed in the narrative of this annual report. Please read it and realize that the vision, the teamwork, and the expertise that brought us to the reality of profitable insurance sales is the same vision, teamwork, and expertise that make Farmers Capital Bank Corporation a strong and successful company. /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 E. Glenn Birdwhistell, Realtor and Auctioneer and Chairman of the Board of Directors of Lawrenceburg National Bank 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 Linda L. Faulconer, Vice President, Human Resources Janelda R. Mitchell, Vice President, Marketing Dawn M. Simpson, CPA, Vice President, Auditing Anna Kaye Hall, Assistant Vice President, Finance Ann Hodgkin, Human Resources Officer Teresa Tipton, Human Resources Officer INSURANCE: INNOVATION, INTEGRATION, IMPLEMENTATION JAMES CHILDERS - Innovation: "to introduce changes and new ideas" For a corporation constantly seeking new ways to improve profitability and variety to our customers, insurance was the most logical step. Adding a broad range of insurance products to the services already offered at Farmers Capital Bank Corporation was a natural fit. In lending, insurance coverage is required on certain types of collateral and a lender can be the first person to discuss insurance with a customer - property and casualty for asset coverage, credit life and accidental health for consumer loans, and mortgage protection for homeowners. James Childers, legal counsel for the corporation, was a visionary for Farmers Capital Bank Corporation. Through extensive study of state legislation and economic trends, he realized a growing interest in allowing banks to offer insurance. Both the banking and insurance industries lobbied for a blending of the two to allow broader avenues of service to each. Anticipating legislative change, Mr. Childers began laying the groundwork. Farmers Title Company was formed in 1998. Title insurance policies on mortgage loans are a judicious prerequisite to ensure the safety of our assets. However, among our affiliates there were no common rules of when to require it, nor a common cost. With the formation of the title company and the assistance of a local firm of attorneys, we were able to provide a standard for title insurance coverage both in policy and in cost. Kentucky legislators passed a law enabling community banks to provide property and casualty insurance lines to their customers in 1998. This could be done either through a solely owned agency or through a joint venture with an existing agency. Childers then took the idea one step further. At a seminar for banks interested in insurance, Mr. Childers discussed our potential with Dale Creech, partner of the Creech and Stafford Insurance Agency of Lexington, Kentucky. This discussion proved advantageous to both parties; Creech and Stafford Agency was exploring inroads to additional markets. With more than 125 years of combined insurance sales and service, qualified personnel and relationships with multiple insurance companies, they were the ready-made answer to our search for property and casualty insurance offerings. Farmers Capital Bank Corporation brought new geographic markets, existing and potential customers and financial service providers trained to sell, to the table. The partnership, Farmers Fidelity Property and Casualty Insurance Agency LLP, was a marriage made in heaven. JAMEY BENNETT - Integration: "to make into a part of the whole" With the insurance groundwork in place, Farmers Capital Bank Corporation was ready for the transformation of idea to reality. Insurance services complement bank offerings and serve as a way to broaden customer relationships and create greater value, but a plan was needed to progress to this greater sophistication of benefits. Being novices to the insurance business, we studied our options. We needed an expert: someone to lead the way into profitability. While exploring myriad insurance possibilities, Jamey Bennett was approached to lead the effort for two reasons. Mr. Bennett was an independent insurance agent with 15 years of experience in offering employee benefits and was a prime source of information and direction on the insurance business. As early as 1996, Farmers Capital Bank Corporation had looked at acquiring a specific third party insurance administrator as an inroad to insurance. Mr. Bennett was a chief producer for that national third party. It took three years to lure Jamey away from that agency, and the addition of him to our staff was a major victory. Since its inception in 1999, Bennett has served as vice president of the Capital Insurance Group which provides group benefit services. Solutions for health insurance, income and asset protection services, and plan administration have become a boon to our commercial lenders and increased our appeal as a full service financial provider to other existing and potential customers. Mr. Bennett and our affiliates' loan officers work together to help commercial customers as they consider these plans available to their businesses. This team approach allows the customer the benefit of an experienced loan officer and an experienced benefit insurance provider without compromising either function. Subsequently, Mr. Bennett has also become the interpreter between our property and casualty insurance lines and our employees. TONY BUSSENI - Implementation: "to put into practice an idea or theory" The success of the Farmers Title Company and Capital Insurance Group ventures proved that we were heading in the right direction. The new partnership - - Farmers Fidelity Property and Casualty Insurance Agency LLP with Creech and Stafford - was ready to be introduced and implemented. Tony Busseni , President and CEO of Farmers Bank & Capital Trust Co., committed to the insurance programs, realized the importance of commitment and acceptance by all employees. The insurance businesses were made subsidiaries of his bank for logical reasons. Farmers Bank with $500 million in assets had the capacity for these ventures and was willing to subsidize the start-up costs. However, these costs were minimal; besides Mr. Bennett's salary, there was little overhead. The office space was located in a bank-owned building with phone, fax and computer lines already installed. Perhaps the largest contribution Mr. Busseni made was the involvement of his bank employees. And it paid off. Anticipating the employee reaction to "selling insurance," Mr. Busseni involved them as collaborators in the Farmers Fidelity insurance partnership: he let the employees try the services themselves. The first step was to educate the employees. Meetings were held corporate-wide to discuss what lines of insurance were available and to talk about the role insurance coverage could play in our customers' financial well being. Armed with referral brochures and other marketing information, employees were asked to check their own property and casualty coverage against Farmers Fidelity's various independent carriers. Then they were encouraged to hand out the referral brochures to customers, family and friends for the same purpose - not the hard selling of insurance, but a chance to perform the necessary duty of up to date insurance inspection. The results were overwhelming; in a three-month period, more than 1,000 referrals were logged at the Farmers Fidelity office. We had proven that education, incentive and encouragement made for success when introducing a unfamiliar service such as insurance. CONCLUSION Innovation, Integration and Implementation - key steps for our successful undertaking of the insurance business. The potential for our growth is unlimited. With our geographically broad markets, our reach is endless. With our attained experience and knowledge, our abilities are boundless. 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, Chief Financial Officer Barbara Conway, Vice President, Main Office Manager Jack Diamond, Vice President, Trust Investment Officer Bruce G. Dungan, Vice President, Retail, Security Officer, Compliance Officer, Bank Secrecy Act 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 Bonnie Adams, Assistant Vice President, East Branch Patsy Briscoe, Assistant Vice President, Loan Administration Gail Combs, Assistant Vice President, Franklin Square Branch Manager Nancy Gatewood, Assistant Vice President, West Branch Manager Bobby Hall, Assistant Vice President, Trust Officer Judy Isaacs, Assistant Vice President Elizabeth Johns, Assistant Vice President, Trust Officer Joan Lee, Assistant Vice President, Franklin Square Branch 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, Assistant Manager, Main Office Karen DiRaimo, Trust Officer Kay Henninger, Trust Officer Wesley Stivers, Investment Officer Margaret Colston, Assistant Cashier, Retail Services Jennifer Parrish, Assistant Cashier, Retail Services C. Ray Baldwin, Property Management Director Sally L. Bell, Assistant Trust Operations Manager Leigh Ann Young, Assistant Trust Operations Officer Dorothy H. Switzer, Director of Capital First Travelers Wendy F. Boardman, Director of Human Resources UNITED BANK & Trust Co. member FDIC DIRECTORS W. Benjamin Crain, Chairman Charles S. Boyd Bobby G. Dotson J. Stephen Hogg Michael L. Lawson J. C. Moraja Denny Nunnelley Leighton Riddle James E. Staples Shannon Greely Totty 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 Rita Green, Assistant Vice President Leisa M. Newton, Assistant Vice President, Compliance Officer Betty K. Poynter, Assistant Vice President, Human Resources Rick Roberts, Assistant Vice President John R. Thompson, Loan Officer Evie P. Knight, Assistant Cashier, Security Officer 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 C. Douglas Carpenter 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, Accounting Officer Beth Barker, Assistant Branch Manager Teresa Higginbotham, Assistant Branch Manager Robin Miller, Operations Officer Sarah Grace, Administrative Assistant 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.R ay 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 Patricia J. Paris, Senior Vice President, Controller David P. Tackett, Senior Vice President, Trust Investment Center Director Richard E. Clements, Vice President, Bullitt County Branch Manager Scott T. Conway, Vice President, Loan Officer David E. Hunt, Vice President, Radcliff Branch Manager Marquetta L. 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 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 Cheryl Jessup, 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 Kenneth Sturgill Rollie D. Graves, Director Emeritus Dr. Horace T. Hambrick, Director Emeritus W. Carrick James, Director Emeritus Bobby Vance, Director Emeritus OFFICERS Joseph C. Murphy, President and CEO Thomas P. Porter, Executive Vice President Lynn C. McKinney, Senior Vice President and Cashier Michael E. Schornick, Jr., Senior Vice President J. Michael Easley, Vice President James L. Ewbank, Vice President Tina M. Johnston, Vice President, Chief Financial Officer Kimberly E. Marshall, Vice President Susan K. Tackett, Vice President Wanda C. Wilson, Vice President Bonnie M. Glass, Assistant Vice President Gregory L. Howard, 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 Kimberly T. Thompson, Assistant Vice President Carole S. Wagoner, Assistant Vice President Lorraine B. Baldwin, Assistant Cashier Phyllis 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 Larry Jewell Odell Martin Phillip Patton David Shadburne, CPA Terry Smith W. T. Austin, Director Emeritus OFFICERS Sue Bunnell, President and CEO David Shadburne, CPA, Executive Vice President and COO Lewis Bauer, Senior Vice President Vanessa Puckett, Senior Vice President Jeffrey Edwards, Vice President Linda Forbes, 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 Melissa Sturgeon, Loan Officer Ramona Fancher, Assistant Cashier Carolyn Russell, Assistant Cashier Sharon Williams, Assistant Cashier Mellyn Church, Compliance Officer Debra Willis, Administrative Assistant 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 Mark A. Hampton, 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 James F. Palmer, 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 Eddie Miller, Assistant 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 Farmers Capital Insurance Corporation doing business as: Capital Insurance Group Farmers Title Company GLOSSARY OF FINANCIAL TERMS ALLOWANCE FOR 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 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 Consolidated net income for 2000 was $14.4 million compared to $13.9 million for 1999, a 3.2% increase. Diluted net income per share for the year was $1.97, up 5.9% from $1.86 reported for 1999. The earnings per share growth was 268 basis points higher than the net income growth for the year ended December 31, 2000. This is the positive impact of the share buy back program that has been in effect for several years. The company purchased 278,000 shares of common stock at a total price of $9.3 million during 2000. As a result, the diluted weighted average shares outstanding for 2000 totaled 7.3 million and were 2.3% less than the weighted average of 7.5 million for 1999. Other major components of the of the improvement in earnings are as follows: >> Net interest income increased $1.1 million, or 2.6%. >> The provision for loan losses decreased $391 thousand, or 13.7%. >> The increase in noninterest expenses was held to $600 thousand, which was only 1.8%. The return on assets was 1.40% in 2000 compared to 1.41% reported in the prior year. The return on equity increased 41 basis points to 11.61%. This is another positive reflection of the share buy back program. INTEREST INCOME Interest income results from interest earned on earning assets, which primarily include loans and investment securities. Interest income is affected by volume, composition of earning assets and the related rates earned on those assets. Total interest income for 2000 was $75.5 million, up $6.4 million, or 9.3% from the previous year. The increase in interest income was due to an increase in the volume of total earning assets and an increase in the rates earned on those assets in almost identical proportions. The average tax equivalent yield on total interest bearing assets was 8.35%, up 41 basis points from 1999. The Company accomplished three goals concerning interest income - 1) increased interest from growth in loans without sacrificing credit quality standards, 2) maintained an appropriate interest rate for the level of risk assumed, and 3) reallocated funds supporting lower earning asset alternatives to higher earning loans. Interest income on loans increased $5.8 million, or 10.7%, mainly due to the increase in volume with some support from an increase in rates. The average balance of loans increased $48.4 million, or 7.8% compared to the prior year. Most of this increase was in commercial real estate loans. The tax equivalent rate earned on loans was 9.12%, up 23 basis points from 1999. Interest income on taxable investment securities increased $41 thousand, which was less than 1%. This was due to a decrease in volume as funds were shifted to higher earning loans. The rate earned increased 71 basis points to 6.35%. Interest on nontaxable investment securities decreased $326 thousand, or 8.6%. This was nearly entirely due to a reduction in volume even though the tax equivalent rate decreased 7 basis points to 6.54%. Interest income on temporary investments increased $890 thousand for 2000, or 61.5% from the prior year. Temporary investments consist of Federal funds sold, securities purchased under agreement to resell and to a lesser extent, deposits in other banks. Volume and rate both contributed to this increase in interest income. Volume was up $6.7 million on average and the rate increased 153 basis points to 6.21%. INTEREST EXPENSE Interest expense results from incurring interest on interest bearing liabilities, which primarily include interest bearing deposits, securities sold under agreement to repurchase, and other borrowed funds. Interest expense is affected by volume, composition of interest bearing liabilities and the related rates paid on those liabilities. Total interest expense was $32.5 million for 2000, an increase of $5.4 million, or 19.7% from the prior year. This increase is primarily due to increases in rate with volume increases contributing to a lesser degree. The average rate paid on total interest bearing liabilities was 4.36% in 2000, up 58 basis points from 1999. The Company had to cope with three factors that had a large influence on the cost of funds during 2000 - 1) additional borrowings were needed to fund the growth in loan demand, 2) the Federal Reserve Board raised interest rates several times during the year, and 3) increased competition in our local market places. Interest expense on time deposits, the largest component of total interest expense, increased $2.5 million, or 15.3%. Rate and volume accounted for 69% and 31% of the increase respectively. Interest expense on interest bearing demand deposits increased $551 thousand, or 13.9%, entirely due to rate. Interest expense on savings increased $762 thousand, or 16.7%. This increase was also due to rate and was partially offset by declining volume. Interest expense on securities sold under agreement to repurchase increased $1.2 million, or 62.1%. The average rate paid during 2000 was 5.9%, up from 4.6% in 1999. Interest expense on other borrowed funds increased $320 thousand, up greater than 100%. These alternatives were utilized more in 2000 to help fund the increase in loan demand. 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 the interest earning assets and interest bearing liabilities on a tax equivalent basis (TE) where tax exempt interest 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 $44.8 million for 2000, an increase of $845 thousand, or 1.9% over 1999. The net interest margin was 4.84%, down 7 basis points from the prior year. Changes in net interest income and margin result from the interaction between the volume and the composition of earning assets, the related yields, and the associated cost and composition of the interest bearing liabilities. Accordingly, portfolio size, composition, and the related yields earned and the average rates paid can have a significant impact on net interest and margin. During 2000, the tax equivalent yield on total earning assets increased 5.2%, but did not keep up with the 15.3% increase in the cost of funds, resulting in the lower margin and spread. The increase in earning asset volume and rate along with the reallocation of earning assets more than offset the increase in the cost of funds and are responsible for the increase in net interest income. The tax equivalent spread between rates earned on earning assets and rates paid on interest bearing liabilities decreased 17 basis points to 3.99% for 2000.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL December 31, 2000 1999 1998 Average Average Average Average Average Average (In thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate - -------------- ------- -------- ---- ------- -------- ---- ------- -------- ---- EARNING ASSETS Investment Securities Taxable $145,479 $9,232 6.35% $163,077 $9,191 5.64% $143,567 $8,598 5.99% Nontaxable 1 75,918 4,967 6.54 83,211 5,499 6.61 77,676 5,189 6.68 Time Deposits with Banks, Federal Funds Sold and Securities Purchased Under Agreements to Resell 37,595 2,336 6.21 30,902 1,446 4.68 54,260 2,942 5.42 Loans 1,2,3 667,241 60,834 9.12 618,860 55,036 8.89 589,714 54,908 9.31 ------- ------ ---- ------- ------ ---- ------- ------ ---- Total Earning Assets 926,233 $77,369 8.35% 896,050 $71,172 7.94% 865,217 $71,637 8.28% Allowance for Loan Losses (10,092) (9,272) (9,134) -------- ------- ------- Total Earning Assets, Net of Allowance for Loan Losses 916,141 886,778 856,083 NONEARNING ASSETS Cash and Due From Banks 66,706 64,464 62,001 Premises and Equipment, net 24,659 24,985 24,083 Other Assets 20,242 12,821 12,973 ------ ------ ------ Total Assets $1,027,748 $989,048 $955,140 ========== ======== ======== INTEREST BEARING LIABILITIES Deposits Interest Bearing Demand $193,982 $4,528 2.33% $192,695 $3,977 2.06% $180,265 $4,343 2.41% Savings 153,574 5,319 3.46 158,501 4,557 2.88 150,499 4,879 3.24 Time 337,667 19,053 5.64 322,616 16,527 5.12 328,351 17,916 5.46 Securities Sold Under Agreements to Repurchase 52,773 3,119 5.91 41,741 1,926 4.61 34,788 1,762 5.06 Other Borrowed Funds 7,979 517 6.48 3,634 197 5.45 4,581 247 5.39 ----- --- ---- ----- --- ---- ----- --- ---- Total Interest Bearing Liabilities 745,975 32,536 4.36 719,187 27,184 3.78 698,484 29,147 4.17 ------ ---- ------ ---- ------ ---- NONINTEREST BEARING LIABILITIES Commonwealth of Kentucky Deposits 32,621 30,329 28,245 Other Demand Deposits 113,271 110,299 100,907 Other Liabilities 11,977 4,839 7,620 ------ ----- ----- Total Liabilities 903,844 864,654 835,256 Shareholders' Equity 123,904 124,394 119,884 ------- ------- ------- Total Liabilities and Shareholders' Equity $1,027,748 $989,048 $955,140 ========== ======== ======== Net Interest Income 44,833 43,988 42,490 TE Basis Adjustment (1,888) (2,138) (1,956) ------- ------- ------- Net Interest Income $42,945 $41,850 $40,534 ======= ======= ======= Net Interest Spread 3.99% 4.16% 4.11% Net Interest Margin 4.84% 4.91% 4.91%
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 $1.7 million, $1.8 million, and $2.0 million in 2000, 1999, and 1998, respectively. The following table is an analysis of the change in net interest income.
ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX EQUIVALENT BASIS) Variance Variance Attributed to Variance Variance Attributed to (In thousands) 2000/1999 1 Volume Rate 1999/1998 1 Volume Rate - --------------- ------------- ------------------------ ------------- ------------------------- INTEREST INCOME Taxable Investment Securities $41 $(1,050) $1,091 $593 $1,117 $(524) Nontaxable Investment Securities 2 (532) (475) (57) 310 365 (55) Time Deposits with Banks, Federal Funds Sold and Securities Purchased Under Agreements to Resell 890 354 536 (1,496) (1,135) (361) Loans 2 5,798 4,357 1,441 128 2,657 (2,529) ------- ------- ------- ------- ------- ------- Total Interest Income 6,197 3,186 3,011 (465) 3,004 (3,469) INTEREST EXPENSE Interest Bearing Demand Deposits 551 27 524 (366) 289 (655) Savings Deposits 762 (144) 906 (322) 246 (568) Time Deposits 2,526 795 1,731 (1,389) (304) (1,085) Securities Sold Under Agreements to Repurchase 1,193 578 615 163 330 (167) Other Borrowed Funds 320 276 44 (49) (52) 3 ------- ------- ------- ------- ------- ------- Total Interest Expense 5,352 1,532 3,820 (1,963) 509 (2,472) ------- ------- ------- ------- ------- ------- Net Interest Income $845 $1,654 $(809) $1,498 $2,495 $(997) ======= ======= ======= ======= ======= ======= Percentage Change 100.0% 195.7% (95.7%) 100.0% 166.6% (66.6%)
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 Total noninterest income increased $160 thousand, or 1.3%, to $12.4 million for 2000. Service charges and fees on deposits, the largest component of noninterest income, were relatively unchanged compared to the prior year. Other service charges, commissions and fees increased $165 thousand, or 4.3%, mainly from insurance commissions. Data processing income declined $66 thousand, or 4.8%. Trust income increased $252 thousand, or 17.2%, primarily due to changing from the cash method of accounting to an accrual method. Net gains on sales of investment securities were $49 thousand in 1999, with none in 2000. Other noninterest income decreased $151 thousand in 2000, primarily due to less gains on the sale of fixed assets and less income from a low-income housing partnership venture. NONINTEREST EXPENSE Total noninterest expense increased $600 thousand, or 1.8%, to $33.0 million for the year. Salaries and employee benefits account for more than half of the total noninterest expense and all of the increase in cost from 1999. During 2000, salaries and benefits increased $784 thousand, or 4.5%, to $18.4 million. This is a modest increase, given the nationwide as well as local issues with containing employment costs while maintaining competent staff in this highly competitive service oriented industry. This challenge is further compounded due to low unemployment. Noncash compensation related to the Company's nonqualified stock option plan was $967 thousand, a decrease of $102 thousand from 1999. As of December 31, 2000, the Company had 456 full time equivalent employees, an increase of 13 from the prior year end. Efforts to control noninterest expenses were successful during 2000. Occupancy expense increased $60 thousand, or 2.7%, compared to the prior year while equipment expense decreased $94 thousand, or 3.1%. Other noninterest expense decreased $208 thousand, or 2.4%, partially due to reductions in supply expenses. INCOME TAX Income tax expense for 2000 was $5.5 million, an increase of $596 thousand, or 12.2%. The effective tax rate increased to 27.7% from 26.0% in 1999. The change in the effective tax rate is primarily related to the level of tax-exempt investment securities and tax-exempt loans in the Company's portfolio. During 2000, the growth in earning assets was predominately in taxable investments and loans. The available tax-exempt alternatives were not sufficiently attractive to warrant significant investment. Future investments will be made in tax-exempt alternatives when the yield and credit quality is more attractive than those of the available taxable opportunities. FINANCIAL CONDITION On December 31, 2000, assets were $1.2 billion, an increase of $165 million, or 15.9% from the prior year end. While core assets and liabilities did grow, $98 million of the increase in total assets is 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. Total assets averaged $1.0 billion for 2000, an increase of $39 million, or 3.9%, from the prior year. Earning assets, primarily loans and investment securities increased $30 million on average, or 3.4%, to $926 million. LOANS Loans, net of unearned income, totaled $683 million, an increase of $40 million, or 6.2%, from 1999. Most of the increase was in real estate mortgage loans. Real estate mortgage loans make up 62% of the total loans outstanding at December 31, 2000, and increased $35 million, or 8.9%, over a year ago. Real estate construction loans increased $2.5 million, or 6.6%. Lease financing increased $2 million, or 5.8%. The outstandings for commercial, financial and agriculture loans were relatively flat, compared to the prior year end, as was the outstandings for installment loans. The composition of the loan portfolio is summarized in the table below.
(In thousands) Year Ended December 31, 2000 % 1999 % 1998 % 1997 % 1996 % - ------------------------ ------ --- ------ --- ------ --- ------ --- ------ --- Commercial, Financial, $105,248 15.4% $105,064 16.3% $116,625 19.3% $114,377 19.5% $120,256 21.5% and Agriculture Real Estate - Construction 40,993 6.0 38,471 6.0 24,770 4.1 26,299 4.5 27,098 4.9 Real Estate - Mortgage 425,555 62.3 390,598 60.7 352,033 58.2 334,612 57.1 305,229 54.6 Installment 77,284 11.3 77,051 12.0 81,254 13.4 83,368 14.2 80,741 14.5 Lease Financing 34,269 5.0 32,379 5.0 30,155 5.0 27,284 4.7 24,925 4.5 --------- ------- --------- ------- --------- ------ --------- ------ --------- ------ Total $683,349 100.0% $643,563 100.0% $604,837 100.0% $585,940 100.0% $558,249 100.0% ========= ======= ========= ======= ========= ====== ========= ====== ========= ======
The following table presents commercial, financial, and agricultural loans and real estate construction loans outstanding at December 31, 2000, which, based on remaining scheduled repayments of principal, are due in the periods indicated.
LOAN MATURITIES Within After One But After (In thousands) One Year Within Five Years Five Years Total - -------------- ---------- ------------------- ------------ -------- Commercial, Financial, and Agricultural $66,104 $28,612 $10,532 $105,248 Real Estate - Construction 36,479 4,499 15 40,993 --------- --------- --------- --------- Total $102,583 $33,111 $10,547 $146,241 ========= ========= ========= =========
The table below presents commercial, financial, and agricultural loans and real estate construction loans outstanding at December 31, 2000, 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 $21,707 $11,404 Due After Five Years 1,532 9,015 -------- ---------- Total $23,239 $20,419 ======== ========== 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 decreased $391 thousand, or 13.7%, in 2000 compared to 1999. The Company had $1.9 million in net charge offs, down from $2.3 million the year before. During 1999, $1.0 million of the net charge offs was related to the deterioration of a single commercial loan credit. An additional $230 thousand of the net charge offs in 2000 was attributed to that single commercial loan credit. The allowance for loan losses was 1.50% of net loans at year end 2000 and 1999. 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 to any individual or industry. The table below summarizes the loan loss experience for the past five years.
Year Ended December 31, (In thousands) 2000 1999 1998 1997 1996 - -------------------------------------- ---- ---- ---- ---- ---- BALANCE OF ALLOWANCE FOR LOAN LOSSES AT BEGINNING OF YEAR $9,659 $9,048 $9,114 $8,741 $8,472 Loans Charged Off: Commercial, Financial, and Agricultural 1,336 1,590 716 720 1,609 Real Estate 369 79 386 465 920 Installment Loans to Individuals 857 1,209 1,061 1,133 1,862 Lease Financing 97 64 109 433 18 ------ ------ ------ ------ ------ Total Loans Charged Off 2,659 2,942 2,272 2,751 4,409 Recoveries of Loans Previously Charged Off: Commercial, Financial, and Agricultural 313 249 383 437 144 Real Estate 132 172 345 527 38 Installment Loans to Individuals 310 267 341 330 334 Lease Financing 22 2 3 ----- ----- ----- ----- ----- Total Recoveries 777 690 1,072 1,294 516 ----- ----- ----- ----- ----- Net Loans Charged Off 1,882 2,252 1,200 1,457 3,893 Additions to Allowance Charged to Expense 2,472 2,863 1,134 1,830 4,162 ----- ----- ----- ----- ----- Balance at End of Year $10,249 $9,659 $9,048 $9,114 $8,741 ======= ====== ====== ====== ====== Average Loans Net of Unearned Income $667,241 $618,860 $589,714 $566,033 $546,040 Ratio of Net Charge Offs During Year to Average Loans, Net of Unearned Income .28% .36% .20% .26% .71%
The following table presents an estimate of the allocation of the allowance for loan losses by type for the date indicated. Although specific allocations exist, the entire allowance is available to absorb losses in any particular category.
ALLOWANCE FOR LOAN LOSSES Year Ended December 31, (In thousands) 2000 1999 1998 1997 1996 - -------------------------------------- ---- ---- ---- ---- ---- Commercial, Financial, and Agricultural $4,050 $3,649 $2,536 $2,942 $3,806 Real Estate 3,835 3,807 4,637 4,324 2,974 Installment Loans to Individuals 1,861 1,829 1,450 1,417 1,304 Lease Financing 503 374 425 431 657 ------- ------ ------ ------ ------ Total $10,249 $9,659 $9,048 $9,114 $8,741 ======= ====== ====== ====== ======
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 assets decreased $373 thousand, or 6.5%, to $5.3 million at year end 2000. The decrease is primarily due to a $363 thousand reduction in loans past due 90 days or more. Nonperforming loans represent 0.67% of net loans at year end 2000, down from 0.76% for 1999. Information pertaining to nonperforming loans and assets is presented in the table below.
Year Ended December 31, (In thousands) 2000 1999 1998 1997 1996 - -------------------------------------- ---- ---- ---- ---- ---- Loans Accounted for on Nonaccrual Basis $2,852 $2,767 $1,286 $3,137 $2,938 Loans Past Due 90 Days or More 1,739 2,102 1,645 2,196 1,822 Restructured Loans 1,285 1,814 ------ ------ ------ ------ ------ Total Nonperforming Loans 4,591 4,869 2,931 6,618 6,574 Other Real Estate Owned 598 734 1,671 29 Other Foreclosed Assets 136 95 69 47 ------ ------ ------ ------ ------ Total Nonperforming Assets $5,325 $5,698 $4,671 $6,647 $6,621 ====== ====== ====== ====== ======
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 2000, temporary investments averaged $38 million, an increase of $7 million, or 21.7%. Temporary investments are reallocated as loan demand and other investment alternatives present 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 $261 million on December 31, 2000, an increase of $31 million, or 13.5%, from year end 1999. The funds made available from maturing or called bonds have been redirected, primarily to fund new loan growth and to purchase Company stock, 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. Investment securities averaged $221 million in total for the year, a decrease of $25 million, or 10.1%. The majority of the purchases during 2000 were U.S. Government agencies that were classified as available for sale. On December 31, 2000, available for sale securities made up 81% of the total investment securities, as apposed to 73% a year earlier. U.S. Government agencies made up 53% of the total available for sale securities and 43% of the total portfolio at year end. A year ago, U.S. Government securities made up 45% of the total available for sale securities, and 34% of the total portfolio. The Company realized $49 thousand in net gains on the sale of available for sale securities during 1999, and none in 2000. The net unrealized gain on available for sale securities included as a component of shareholders' equity, was $557 thousand, compared to a unrealized loss of $1.9 million at the end of 1999. The following table summarizes the carrying values of investment securities on December 31, 2000, 1999, and 1998. The investment securities are divided into available for sale and held to maturity securities. Available for sale securities are carried at the estimated fair value and held to maturity securities are carried at amortized cost.
December 31, 2000 1999 1998 Available Held to Available Held to Available Held to (In thousands) for Sale Maturity for Sale Maturity for Sale Maturity - -------------- -------- -------- -------- -------- -------- -------- U.S. Treasury Securities $1,250 $3,748 $22,379 Obligations of U.S. Government Agencies 113,033 $100 75,997 $2,600 86,998 $2,600 Obligations of States and Political Subdivisions 22,804 48,895 21,152 58,562 17,807 65,891 Mortgage-backed Securities 52,941 395 50,889 734 45,520 2,878 Corporate Debt 13,904 11,969 14,915 Equity Securities 7,487 4,189 3,868 -------- ------- -------- ------- -------- ------- Total $211,419 $49,390 $167,944 $61,896 $191,487 $71,369 ======== ======= ======== ======= ======== =======
The following table presents an analysis of the contractual maturity distribution and tax equivalent weighted average interest rates of investment securities at December 31, 2000. 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 and investments in unrelated financial institution stocks, which have no stated maturity and are not included in the maturity schedule that follows.
AVAILABLE FOR SALE After One But After Five But Within One Year Within Five Years Within Ten Years After Ten Years (In thousands) Amount Rate Amount Rate Amount Rate Amount Rate - -------------- ------ ---- ------ ---- ------ ---- ------ ---- U.S. Treasury Securities $1,250 5.4% Obligations of U.S. Government Agencies 63,881 6.3 $38,924 6.2% $7,754 6.1% $2,474 5.6% Obligations of States and Political Subdivisions 1,044 5.7 4,935 6.3 14,834 6.6 1,991 7.3 Mortgage-backed Securities 2,167 6.5 43,351 6.6 7,424 6.3 Corporate Debt 5,461 6.1 7,362 6.2 1,080 5.8 ------- ---- ------- ---- ------- ---- ------- ---- Total $71,636 6.3% $53,388 6.2% $65,939 6.5% $12,969 6.3% ======= ==== ======= ==== ======= ==== ======= ====
HELD TO MATURITY After One But After Five But Within One Year Within Five Years Within Ten Years After Ten Years (In thousands) Amount Rate Amount Rate Amount Rate Amount Rate - -------------- ------ ---- ------ ---- ------ ---- ------ ---- Obligations of U.S. Government Agencies $100 6.0% Obligations of States and Political Subdivisions $11,172 6.6% 21,116 6.9 $16,332 7.2% $275 7.2% Mortgage-backed Securities 2 6.5 393 7.2 ------- ---- ------- ---- ------- ---- ---- ---- Total $11,172 6.6% $21,218 6.9% $16,725 7.2% $275 7.2% ======= ==== ======= ==== ======= ==== ==== ====
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, 2000, deposits totaled $969 million, an increase of $107 million, or 12.4%, from year end 1999. A significant deposit received from the Commonwealth of Kentucky at year end 2000 contributed to the increase in deposits. Deposits averaged $831 million in 2000, an increase of $17 million, or 2.0%. During 2000, total average interest bearing deposits increased $11 million, or 1.7%, to $685 million, while average noninterest bearing deposits increased $5 million, or 3.7%, to $146 million. A summary of average balances and rates paid on deposits follows.
2000 1999 1998 Average Average Average Average Average Average (In thousands) Balance Rate Balance Rate Balance Rate - -------------- -------- ---- -------- ---- -------- ---- Noninterest Bearing Demand $145,892 0.00% $140,628 0.00% $129,152 0.00% Interest Bearing Demand 193,982 2.33 192,695 2.06 180,265 2.41 Savings 153,574 3.46 158,501 2.88 150,499 3.24 Time 337,667 5.64 322,616 5.12 328,351 5.46 -------- ---- -------- ---- -------- ---- Total $831,115 3.47% $814,440 3.08% $788,267 3.44% ======== ==== ======== ==== ======== ====
Maturities of time deposits of $100,000 or more outstanding at December 31, 2000 are summarized as follows. (In thousands) Amount - -------------- ------- 3 Months or Less $19,090 Over 3 through 6 Months 14,344 Over 6 through 12 Months 12,717 Over 12 Months 27,464 ------- Total $73,615 ======= SHORT-TERM BORROWINGS Short-term borrowings primarily consist of securities sold under agreements to repurchase with year end balances of $90 million, $41 million and $26 million in 2000, 1999 and 1998, respectively. Such borrowings are generally on an overnight basis. Other short-term borrowings primarily consist 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) 2000 1999 1998 - -------------- ---- ---- ---- Amount Outstanding at Year End $91,181 $41,971 $26,784 Maximum Outstanding at any Month End 91,181 101,359 51,095 Average Outstanding 53,315 42,442 35,807 Weighted Average Rate During the Year 5.91% 4.61% 5.05% 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. Principal Cash Flows and Related Weighted Average Interest Rates
Fair December 31, (Dollars in thousands) 2001 2002 2003 2004 2005 Thereafter Total Value - ----------------------------------- ---- ---- ---- ---- ---- ---------- ----- ----- RATE SENSITIVE ASSETS Interest Bearing Due From Banks $1,912 $1,912 $1,912 Average Interest Rate 6.32% 6.32% Federal Funds Sold and Securities Purchased Under Agreements to Resell 65,925 65,925 65,925 Average Interest Rate 6.48 6.48 Investment in Debt Securities Fixed Rate $82,794 $27,215 $13,834 $14,020 $18,772 $89,172 $245,807 $246,430 Average Interest Rate 5.99% 5.85% 5.29% 5.58% 5.64% 5.76% 5.79% Variable Rate 15,002 15,002 15,002 Average Interest Rate 5.58 5.58 Loans, Net Fixed Rate $191,473 $61,442 $62,072 $39,988 $21,075 $21,903 $397,953 $395,529 Average Interest Rate 9.36% 8.91% 8.86% 8.36% 8.91% 8.32% 9.03% Variable Rate 214,903 26,750 21,134 11,311 11,043 255 285,396 285,396 Average Interest Rate 9.60 8.39 8.52 8.19 8.39 10.89 9.30 RATE SENSITIVE LIABILITIES Noninterest Bearing Checking $231,483 $231,483 $281,483 Savings and Interest Bearing Checking 374,849 374,849 374,849 Average Interest Rate 2.23% 2.23% Time Deposits 207,352 $88,872 $56,285 $4,807 $4,221 $1,328 362,865 362,865 Average Interest Rate 5.95 6.22% 6.52% 5.80% 6.32% 5.84% 6.10 Fixed Interest Rate Borrowings 10,887 2,175 525 197 197 551 14,532 14,543 Average Interest Rate 6.61 6.57 6.73 7.02 7.02 7.02 6.64 Variable Interest Rate Borrowings 87,150 87,150 87,150 Average Interest Rate 5.40 5.40
LIQUIDITY The liquidity of the Parent Company is primarily affected by the receipt of dividends from its subsidiary banks (see footnote 16 in the notes to the consolidated financial statements) and cash balances maintained. Management expects that in the aggregate, its subsidiary banks will continue to have the ability to dividend adequate funds to the Parent Company. The Company's objective, as it relates to liquidity, is to ensure that subsidiary banks have funds available to meet deposit withdrawals and credit demands without unduly penalizing profitability. In order to maintain a proper level of liquidity, the banks have several sources of funds available on a daily basis 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, 2000, liquid assets totaled $441 million. For the year ended December 31, 2000, cash and due from banks totaled $162 million, up nearly 100% from the prior year end. This increase is primarily the result of a significant cash deposit received from the Commonwealth of Kentucky. Net cash provided by operating activities was $19.6 million in 2000, a decrease of $3.9 million from the prior year. Most of the decrease came from a $2.3 million reduction in the proceeds from the sale of mortgage loans. Net cash used in investing activities increased $54.4 million mainly due to increased purchases of investment securities which utilized $46.2 million more than the proceeds provided from maturities and calls of investment securities. Net cash provided by financing activities totaled $145.5 million for the year 2000, up $109 million over 1999. This increase is primarily the result of an increase in deposits of $74.8 million and an increase in securities sold under agreements to repurchase $33.9 million. CAPITAL RESOURCES Shareholders' equity was $125.5 million on December 31, 2000, increasing $355 thousand, or less than 1% from year end 1999. During 2000, the Company purchased 278,000 shares of its outstanding common stock for a total cost of $9.3 million. Favorable results of the share buy back program are reflected in the growth in earnings per share, out pacing the growth in net income, and in the improvement in the return on equity. The Company issued 12,000 shares of common stock pursuant to its nonqualified employee stock option plan. Dividends of $8.5 million, or $1.17 per share, were declared during the year. The dividend declared increased 3.5% on a per share basis. Accumulated other comprehensive income, consisting of the unrealized holding gain on available for sale securities (net of tax), improved $2.5 million over the prior year. 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, 2000, 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 16.66% 4.00% 6.00% Total Risk Based 17.93 8.00 10.00 Leverage 12.13 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, 2000. The table below is an analysis of dividend payout ratios and equity to asset ratios for the previous five years. December 31, 2000 1999 1998 1997 1996 - ------------ ---- ---- ---- ---- ---- Percentage of Dividends Declared to Net Income 59.33% 60.66% 53.02% 45.90% 45.21% Percentage of Average Shareholders' Equity to Average Total Assets 12.06 12.58 12.55 12.46 11.94 SHARE BUY BACK PROGRAM On July 25, 2000, the Company announced that it intends to purchase up to 500,000 shares of its outstanding common stock. This is in addition to the stock purchase plan announced on November 9, 1998 to purchase 400,000 shares. The purchases will be dependant on market conditions and there is no guarantee as to the exact number of shares to be purchased by the Company. Shares would be used for general corporate purposes. Consistent with the objective of maximizing shareholder value, the Company considers the purchase of its outstanding shares in a given price range to be a good investment of the Company's available funds. As of December 31, 2000, 486,162 additional shares could be purchased under the existing program. SHAREHOLDER INFORMATION As of January 1, 2001, there were 843 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 2000 and 1999. STOCK PRICES High Low Dividends Declared ---- --- ------------------ 2000 Fourth Quarter $37.500 $27.000 $0.30 Third Quarter 37.500 29.250 0.29 Second Quarter 34.000 28.500 0.29 First Quarter 34.000 27.250 0.29 1999 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 Dividends declared per share increased $0.04 or 3.5%, and $0.13 or 13.0%, for the years 2000 and 1999, respectively. 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, which delays the effective date of SFAS 133 until January 1, 2001; however, early adoption is permitted. In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, which provides guidance with respect to certain implementation issues related to SFAS No. 133. Upon adoption, the provisions of SFAS No. 133 must be applied prospectively. The Company will adopt SFAS No. 133 on January 1, 2001. Because the Company currently has no derivative instruments or hedging activities, the Company believes the effect of adoption will not have a material impact on the consolidated financial statements. Any derivative instruments acquired, or hedging activities entered into, will be recorded in the financial statements as required by SFAS No. 133 and SFAS No. 138. In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, which replaces SFAS No. 125. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales, from transfers that are secured borrowings. The standards are based on the consistent application of the financial components approach, where upon after a transfer, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, and derecognizes financial liabilities when extinguished. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This Statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. A transfer of financial assets in which the transferor surrenders control is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. This Statement requires that liabilities and derivatives transferred be initially measured at fair value, if practicable. Servicing assets and other retained interest in the transferred assets are to be measured by allocating the previous carrying amount between the assets and retained interest sold, if any, based on their relative fair values on the date of the transfer. This Statement requires that servicing assets and liabilities be subsequently measured by amortization in proportion to and over the period of estimated net servicing income or loss, and assessment for asset impairment or increased obligation based on their fair values. This Statement requires that a liability be derecognized if the debtor pays the creditor and is relieved of its obligation for the liability, or the debtor is legally released from being the primary obligor under the liability either judicially or by the creditor. The Company does not expect the implementation of this Statement to have a material effect on the consolidated financial statements. 1999 COMPARED WITH 1998 Net income was $13.9 million in 1999 compared to $14.2 million in 1998, a decrease of $317 thousand, or 2.2%. Diluted net income per share decreased 1.6%, from $1.89 to $1.86 in 1999. The decrease in net income was primarily attributed to the $1.7 million increase in the provision for loan losses. A significant portion of that increase was related to the deterioration of a single commercial loan credit. The Company purchased 91 thousand shares of its own common stock under a share buy back program in 1999. The return on average assets was 1.41% in 1999 and the return on average equity was 11.20%, compared to 1.49% and 11.88%, respectively, for 1998. Total interest income on a tax equivalent basis was $71.2 million, a decrease of $465 thousand, or less than 1%, from 1998. A $31 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. Total interest expense was $27.2 million, a decrease of $2.0 million, or 6.7%, from 1998. The average rate paid on interest bearing liabilities decreased 39 basis points from 1998 and more than compensated for the $21 million, or 3% decrease in the average balance. The spread between rates earned and paid was 4.16% in 1999, a 5 basis point increase from 1998. This increase was 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. The net interest margin was 4.91%, unchanged from the prior year. Noninterest income increased $325 thousand, or 2.7%, to $12.3 million for 1999. Other service charges, commissions and fees increased $347 thousand, or 9.9%, and trust income increased $106, or 7.8%. These increases were partially offset by a $114 thousand, or 7.6%, decrease in data processing fees and $53 thousand additional losses on the sale of loans. Noninterest expense was $32.4 million for 1999, an increase of $613 thousand, or 1.9% from 1998. Salaries and employee benefits decreased $225 thousand, or 1.3%. This was more than offset by increases in occupancy expense of $127 thousand, or 6.1%, equipment expense of $148, or 5.2%, and other noninterest expenses of $467 thousand. 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 was primarily due to an increase in tax-exempt income and the realization of investment tax credits through the 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 accounting principles generally accepted in the United States of America. 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 2000 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, 2000, 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, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Louisville, Kentucky January 16, 2001
CONSOLIDATED BALANCE SHEETS December 31, (In thousands, except share data) 2000 1999 - ---------------------------------------------- ---- ---- ASSETS Cash and Cash Equivalents: Cash and Due From Banks $162,034 $82,862 Interest Bearing Deposits in Other Banks 1,912 11,594 Federal Funds Sold and Securities Purchased Under Agreements to Resell 65,925 40,904 ------- ------- Total Cash and Cash Equivalents 229,871 135,360 Investment Securities: Available for Sale, Amortized Cost of $210,575 (2000) and $170,885 (1999) 211,419 167,944 Held to Maturity, Fair Value of $50,013 (2000) and $61,636 (1999) 49,390 61,896 ------- ------- Total Investment Securities 260,809 229,840 Loans, Net of Unearned Income 683,349 643,563 Allowance for Loan Losses (10,249) (9,659) ------- ------- Loans, Net 673,100 633,904 Premises and Equipment, Net 24,916 24,409 Other Assets 16,056 16,274 ---------- ---------- Total Assets $1,204,752 $1,039,787 ========== ========== LIABILITIES Deposits: Noninterest Bearing $231,483 $176,315 Interest Bearing 737,714 685,905 ------- ------- Total Deposits 969,197 862,220 Securities Sold Under Agreements to Repurchase 90,004 41,200 Other Borrowed Funds 11,678 4,439 Dividends Payable 2,155 2,162 Other Liabilities 6,257 4,660 --------- ------- Total Liabilities 1,079,291 914,681 Commitments and Contingencies SHAREHOLDERS' EQUITY Common Stock, Par Value $.125 Per Share; 9,608,000 Shares Authorized; 8,031,552 and 8,019,378 Shares Issued at December 31, 2000 and 1999, respectively 1,004 1,002 Capital Surplus 13,634 12,370 Retained Earnings 131,021 125,173 Treasury stock, at cost, 859,898 and 581,586 shares at December 31, 2000 and 1999, respectively (20,755) (11,498) Accumulated Other Comprehensive Income (Loss) 557 (1,941) ------- ------- Total Shareholders' Equity 125,461 125,106 ---------- ---------- Total Liabilities and Shareholders' Equity $1,204,752 $1,039,787 ========== ========== See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) For the Years Ended December 31, 2000 1999 1998 - ------------------------------------- ---- ---- ---- INTEREST INCOME Interest and Fees on Loans $60,458 $54,616 $54,556 Interest on Investment Securities: Taxable 9,232 9,191 8,598 Nontaxable 3,455 3,781 3,585 Interest on Deposits in Other Banks 68 79 154 Interest on Federal Funds Sold and Securities Purchased Under Agreements to Resell 2,268 1,367 2,788 ------ ------ ------ Total Interest Income 75,481 69,034 69,681 INTEREST EXPENSE Interest on Deposits 28,900 25,061 27,138 Interest on Securities Sold Under Agreements to Repurchase 3,119 1,926 1,762 Interest on Other Borrowed Funds 517 197 247 ------ ------ ------ Total Interest Expense 32,536 27,184 29,147 ------ ------ ------ Net Interest Income 42,945 41,850 40,534 Provision for Loan Losses 2,472 2,863 1,134 ------ ------ ------ Net Interest Income After Provision for Loan Losses 40,473 38,987 39,400 NONINTEREST INCOME Service Charges and Fees on Deposits 5,229 5,220 5,154 Other Service Charges, Commissions, and Fees 4,009 3,844 3,497 Data Processing Income 1,314 1,380 1,494 Trust Income 1,718 1,466 1,360 Investment Securities Gains, Net 49 60 Other 173 324 393 ------ ------ ------ Total Noninterest Income 12,443 12,283 11,958 NONINTEREST EXPENSE Salaries and Employee Benefits 18,372 17,588 17,813 Occupancy Expenses, Net 2,267 2,207 2,080 Equipment Expenses 2,899 2,993 2,845 Bank Franchise Tax 1,159 1,101 1,005 Other 8,340 8,548 8,081 ------ ------ ------ Total Noninterest Expense 33,037 32,437 31,824 ------ ------ ------ Income Before Income Taxes 19,879 18,833 19,534 Income Tax Expense 5,499 4,903 5,287 ------- ------- ------- Net Income $14,380 $13,930 $14,247 ======= ======= ======= NET INCOME PER COMMON SHARE Basic and Diluted $1.97 $1.86 $1.89 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 7,304 7,478 7,555 Diluted 7,307 7,478 7,555 See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) For the Years Ended December 31, 2000 1999 1998 - -------------------------------- ---- ---- ---- NET INCOME $14,380 $13,930 $14,247 Other Comprehensive Income (Loss): Unrealized Holding Gain (Loss) on Available For Sale Securities Arising During the Period, Net of Tax of $1,287, ($1,153), and $172, Respectively 2,498 (2,239) 334 Reclassification Adjustment for Prior Period Unrealized Gain Recognized During Current Period, Net of Tax of $37 and $33 in 1999 and 1998 (71) (65) ------- ------- ------- Other Comprehensive Income (Loss) 2,498 (2,310) 269 ------- ------- ------- Comprehensive Income $16,878 $11,620 $14,516 ======= ======= ======= See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Accumulated (In thousands, except per share data) Other Total For the Years Ended Common Stock Capital Retained Treasury Stock Comprehensive Shareholders' December 31, 2000, 1999, and 1998 Shares Amount Surplus Earnings Shares Amount Income (Loss) Equity - ------------------------------------- ------ ------ ------- -------- ------ ------ ------------- ------------- Balance at January 1, 1998 8,001 $1,000 $9,409 $112,999 438 $(6,465) $100 $117,043 Net Income 14,247 14,247 Other Comprehensive Income 269 269 Cash Dividends Declared, $1.00 Per Share (7,554) (7,554) Purchase of Common Stock 53 (1,856) (1,856) Stock Options Exercised 11 1 275 276 Noncash Compensation Expense Attributed to Stock Option Grants 1,413 1,413 ----- ----- ------ ------- --- ----- --- ------- Balance at December 31, 1998 8,012 1,001 11,097 119,692 491 (8,321) 369 123,838 Net Income 13,930 13,930 Other Comprehensive Loss (2,310) (2,310) Cash Dividends Declared, $1.13 Per Share (8,449) (8,449) Purchase of Common Stock 91 (3,177) (3,177) Stock Options Exercised 8 1 204 205 Noncash Compensation Expense Attributed to Stock Option Grants 1,069 1,069 ----- ----- ------ ------- --- ------ ----- ------- Balance at December 31, 1999 8,020 1,002 12,370 125,173 582 (11,498) (1,941) 125,106 Net Income 14,380 14,380 Other Comprehensive Income 2,498 2,498 Cash Dividends Declared, $1.17 Per Share (8,532) (8,532) Purchase of Common Stock 278 (9,257) (9,257) Stock Options Exercised 12 2 297 299 Noncash Compensation Expense Attributed to Stock Option Grants 967 967 ----- ------ ------- -------- --- -------- ---- -------- Balance at December 31, 2000 8,032 $1,004 $13,634 $131,021 860 $(20,755) $557 $125,461 ===== ====== ======= ======== === ======== ==== ======== See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, (In thousands) 2000 1999 1998 - ----------------------------------------------- ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $14,380 $13,930 $14,247 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 2,784 2,951 2,757 Net Amortization of Investment Security Premiums and Discounts: Available for Sale (1,014) (196) (135) Held to Maturity (7) 25 68 Provision for Loan Losses 2,472 2,863 1,134 Noncash Compensation Expense 967 1,069 1,413 Mortgage Loans Originated for Sale (10,738) (10,016) (18,351) Proceeds from Sale of Mortgage Loans 10,761 13,030 15,104 Deferred Income Tax Benefit (161) (324) (131) (Gain) Loss on Sale of Mortgage Loans (50) 46 (7) (Gain) Loss on Sale of Premises and Equipment (5) (83) 11 Gain on Sale of Available for Sale Investment Securities, Net (49) (60) (Increase) Decrease in Accrued Interest Receivable (738) (130) (405) (Increase) Decrease in Other Assets (360) 1,154 (2,853) Increase (Decrease) in Accrued Interest Payable 752 (173) 29 Increase (Decrease) in Other Liabilities 541 (610) (177) ------ ------ ------ Net Cash Provided by Operating Activities 19,584 23,487 12,644 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Maturities and Calls of Investment Securities: Available for Sale 311,677 162,755 135,899 Held to Maturity 12,513 9,448 30,899 Proceeds from Sale of Available for Sale Investment Securities 19,989 13,396 25,673 Purchases of Investment Securities: Available for Sale (370,342) (155,863) (233,379) Held to Maturity (6,650) Loans Originated for Investment, Net of Principal Collected (41,642) (44,037) (16,843) Purchases of Premises and Equipment (2,821) (2,257) (5,911) Proceeds from Sale of Equipment 30 362 22 ------ ------ ------ Net Cash Used in Investing Activities (70,596) (16,196) (70,290) CASH FLOWS FROM FINANCING ACTIVITIES Net Increase (Decrease) in Deposits 106,977 32,219 (4,975) Net Increase (Decrease) in Other Borrowed Funds 7,239 513 (1,464) Net Increase (Decrease) of Securities Sold Under Agreements to Repurchase 48,804 14,876 (21,941) Dividends Paid (8,539) (8,401) (7,256) Purchase of Common Stock (9,257) (3,177) (1,856) Stock Options Exercised 299 205 232 ------- ------ ------ Net Cash Provided By (Used In) Financing Activities 145,523 36,235 (37,260) ------- ------ ------ Net Increase (Decrease) in Cash and Cash Equivalents 94,511 43,526 (94,906) Cash and Cash Equivalents at Beginning of Year 135,360 91,834 186,740 -------- -------- ------- Cash and Cash Equivalents at End of Year $229,871 $135,360 $91,834 ======== ======== ======= Supplemental Disclosures Cash Paid During the Year For: Interest $31,784 $27,357 $29,118 Income Taxes 5,450 6,025 5,185 Cash Dividend Declared and Unpaid 2,155 2,162 2,113 See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Farmers Capital Bank Corporation and Subsidiaries conform to accounting principles generally accepted in the United States of America 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 financial 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 accounting principles generally accepted in the United States of America 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 2000 presentation. These reclassifications do not affect net income or total 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, and does not differ materially from the interest method. Fees and incremental direct costs associated with loan origination are deferred and amortized as yield adjustments over the respective loan terms. Generally, the accrual of interest on loans 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. Loans which are part of a large group of smaller-balance homogeneous loans, such as residential mortgage and consumer 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. There were none of these loans at December 31, 2000. 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, 2000, 1999, and 1998. 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 income tax expense. 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. TREASURY STOCK The purchase of the Company's common stock is recorded at cost. 2. INVESTMENT SECURITIES The following summarizes the amortized cost and estimated fair values of the securities portfolio at December 31, 2000. The summary is divided into available for sale and held to maturity securities.
Amortized Gross Gross Estimated December 31, 2000 (In thousands) Cost Unrealized Gains Unrealized Losses Fair Value - -------------------------------- ------ ---------------- ----------------- ---------- AVAILABLE FOR SALE U.S. Treasury Securities $1,251 $1 $1,250 Obligations of U.S. Government Agencies 113,028 $67 62 113,033 Obligations of States and Political Subdivisions 22,692 151 39 22,804 Mortgage-Backed Securities 52,597 380 36 52,941 Corporate Debt 13,954 33 83 13,904 Equity Securities 7,053 434 7,487 -------- ------ ---- -------- Total Securities - Available For Sale $210,575 $1,065 $221 $211,419 ======== ====== ==== ======== HELD TO MATURITY Obligations of U.S. Government Agencies $100 $100 Obligations of States and Political Subdivisions 48,895 $622 $3 49,514 Mortgage-Backed Securities 395 4 399 ------- ---- -- ------- Total Securities - Held To Maturity $49,390 $626 $3 $50,013 ======= ==== == =======
The following summarizes the amortized cost and estimated fair values of the securities portfolio at December 31, 1999.
Amortized Gross Gross Estimated December 31, 1999 (In thousands) Cost Unrealized Gains Unrealized Losses Fair Value - -------------------------------- ------ ---------------- ----------------- ---------- AVAILABLE FOR SALE U.S. Treasury Securities $3,759 $11 $3,748 Obligations of U.S. Government Agencies 76,935 938 75,997 Obligations of States and Political Subdivisions 22,040 $6 894 21,152 Mortgage-Backed Securities 51,710 5 826 50,889 Corporate Debt 12,252 283 11,969 Equity Securities 4,189 4,189 -------- --- ------ -------- Total Securities - Available For Sale $170,885 $11 $2,952 $167,944 ======== === ====== ======== HELD TO MATURITY Obligations of U.S. Government Agencies $2,600 $13 $2,587 Obligations of States and Political Subdivisions 58,562 $192 448 58,306 Mortgage-Backed Securities 734 14 5 743 ------- ---- ---- ------- Total Securities - Held To Maturity $61,896 $206 $466 $61,636 ======= ==== ==== =======
The amortized cost and estimated fair value of the securities portfolio at December 31, 2000, 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 and investments in unrelated financial institution stocks, which have no stated maturity and are not included in the maturity schedule that follows.
Available For Sale Held To Maturity Amortized Estimated Amortized Estimated December 31, 2000 (In thousands) Cost Fair Value Cost Fair Value - -------------------------------- ------ ---------- ------ ---------- Due in One Year or Less $71,631 $71,636 $11,172 $11,193 Due After One Year Through Five Years 53,429 53,388 21,218 21,467 Due After Five Years Through Ten Years 65,591 65,939 16,725 17,075 Due After Ten Years 12,871 12,969 275 278 -------- -------- ------- ------- Total $203,522 $203,932 $49,390 $50,013 ======== ======== ======= =======
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. There were no gross gains or losses realized on the sale of investment securities during 2000. Investment securities with a book value of $195,217,000 and $157,725,000 at December 31, 2000 and 1999 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) 2000 1999 - --------------------------- ---- ---- Commercial, Financial, and Agricultural $105,247 $105,064 Real Estate - Construction 40,993 38,471 Real Estate - Mortgage 425,555 390,598 Installment Loans 77,703 78,451 Lease Financing 39,669 37,100 ------- ------- Total Loans 689,167 649,684 Less Unearned Income (5,818) (6,121) ------- ------- Total Loans, Net of Unearned Income $683,349 $643,563 ======= ======= 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 $14,641,000 and $15,808,000 at December 31, 2000 and 1999, respectively. Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers and did not involve more than the normal risk of collectability. An analysis of the activity with respect to these loans follows. (In thousands) Amount - -------------- ------ Balance, December 31, 1999 $15,808 New loans 7,174 Repayments (6,117) Loans no longer meeting disclosure requirements and other adjustments (2,224) ------- Balance, December 31, 2000 $14,641 ======= 4. ALLOWANCE FOR LOAN LOSSES The Company's recorded investment in impaired loans, as defined in SFAS No. 114, was $2,138,000 at December 31, 2000 and $2,975,000 at December 31, 1999. Of those amounts, $0 and $1,252,000, respectively, represent loans for which an allowance for loan losses, in the amounts of $0 and $874,000, has been established. For the years ended December 31, 2000 and 1999, the recorded investment in impaired loans averaged $3,891,000 and $2,463,000, respectively. Interest income recognized on impaired loans totaled $34,000, $331,000, and $103,000 for the years 2000, 1999, and 1998, 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) 2000 1999 1998 - -------------------------------------- ---- ---- ---- Balance, Beginning of Year $9,659 $9,048 $9,114 Provisions for Loan Losses 2,472 2,863 1,134 Recoveries 777 690 1,072 Loans Charged Off (2,659) (2,942) (2,272) ------- ------ ------ Balance, End of Year $10,249 $9,659 $9,048 ======= ====== ====== 5. PREMISES AND EQUIPMENT Premises and equipment consist of the following. December 31, (In thousands) 2000 1999 - --------------------------- ---- ---- Land, Buildings, and Leasehold Improvements $30,895 $30,236 Furniture and Equipment 14,694 12,676 ------ ------ Total Premises and Equipment 45,589 42,912 Less Accumulated Depreciation and Amortization (20,673) (18,503) ------- ------- Premises and Equipment, Net $24,916 $24,409 ======= ======= Depreciation and amortization of premises and equipment was $2,289,000, $2,430,000, and $2,230,000 in 2000, 1999, and 1998, respectively. 6. DEPOSIT LIABILITIES Time deposits of $100,000 or more at December 31, 2000 and 1999 were $73,615,000 and $62,683,000, respectively. At December 31, 2000, the scheduled maturities of time deposits were as follows. (In thousands) Amount - -------------- ------ 2001 $207,353 2002 88,871 2003 56,284 2004 4,808 2005 4,221 Thereafter 1,328 -------- Total $362,865 ======== 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) 2000 1999 - ----------------------------------- ---- ---- Average Balance During the Year $52,773 $41,741 Average Interest Rate During the Year 5.91% 4.61% Maximum Month End Balance During the Year $90,004 $100,588 Other borrowed funds consist primarily of advances to the subsidiary banks from the Federal Home Loan Bank of Cincinnati. Such borrowings were $9,843,000 and $2,726,000 at December 31, 2000 and 1999, respectively. The weighted average interest rate on FHLB advances was 6.90% and 7.36% at December 31, 2000 and 1999, 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 125% of the outstanding advances. Maturities of long term borrowings at December 31, 2000 are as follows. (In thousands) Amount - -------------- ------ 2001 $7,473 2002 1,557 2003 525 2004 197 2005 197 Thereafter 552 ------- Total $10,501 ======= 8. INCOME TAXES The components of income tax expense are as follows. December 31, (In thousands) 2000 1999 1998 - --------------------------- ---- ---- ---- Currently Payable $5,660 $5,227 $5,418 Deferred Income Taxes (161) (324) (131) ----- ----- ----- Total Applicable to Operations 5,499 4,903 5,287 Charged to Components of Shareholders' Equity: Net Unrealized Securities Gains 1,286 (1,190) 139 ------ ------ ------ Total Income Taxes $6,785 $3,713 $5,426 ====== ====== ====== An analysis of the difference between the effective income tax rates and the statutory federal income tax rate follows. December 31, 2000 1999 1998 - ------------ ---- ---- ---- Federal Statutory Rate 35.0% 35.0% 35.0% Changes From Statutory Rates Resulting From: Tax Exempt Interest (7.2) (8.6) (7.7) Nondeductible Interest To Carry Municipal .9 1.0 .9 Obligations Amortization of Intangibles .8 .9 .9 Low Income Housing Tax Credits (1.7) (2.1) (1.0) Other, Net (.1) (.2) (1.0) ---- ---- ---- Effective Tax Rate 27.7% 26.0% 27.1% ==== ==== ==== The tax effects of the significant temporary differences which comprise deferred tax assets and liabilities at December 31, 2000 and 1999 follows. December 31, (In thousands) 2000 1999 - --------------------------- ---- ---- ASSETS Allowance for loan losses $3,587 $3,381 Deferred Directors' Fees 165 153 Post Retirement Benefit Obligations 625 586 Stock Options 1,108 808 Self-funded Insurance 89 81 Investment Securities 712 ----- ----- Total Deferred Tax Assets 5,574 5,721 LIABILITIES Depreciation 1,366 1,403 Investment Securities 694 Deferred Loan Fees 1,090 1,079 Lease Financing Operations 2,003 1,852 Other 165 139 ----- ----- Total Deferred Tax Liabilities 5,318 4,473 ----- ------ Net Deferred Tax Asset $256 $1,248 ==== ====== 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, 2000. 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, 2000. 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 2000, 1999, and 1998 was $915,000, $842,000, and $893,000, 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. All stock options are awarded at a price equal to the fair market value of the Company's common stock at the date the options are granted. 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 noncash compensation expense is being amortized over the vesting period of the options. The amount of such expense recorded in 2000, 1999 and 1998, net of tax, was $629,000, $724,000 and $918,000, respectively. At December 31, 2000, 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 - ------------------- ------ 2001 $628 2002 534 2003 294 2004 143 ------ Total $1,599 ====== 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. December 31, (In thousands, except per share data) 2000 1999 1998 - -------------------------------------------------- ---- ---- ---- NET INCOME As Reported $14,380 $13,930 $14,247 Proforma 14,341 13,884 14,189 NET INCOME PER COMMON SHARE Basic, As Reported $1.97 $1.86 $1.89 Basic, Proforma 1.96 1.86 1.88 Diluted, As Reported 1.97 1.86 1.89 Diluted, Proforma 1.96 1.86 1.88 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 2000 and 1997, respectively: dividend yield of 3.12% and 3.18%; expected volatility of 29.6% and 23.4%; risk free interest rate of 6.71% and 5.75%; and expected life of seven years for both grants. The weighted average fair value of options granted during 2000 and 1997 was $9.25 and $16.11 per share, respectively. 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 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. Forfeited options 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, 2000, 1999, and 1998 and changes during the years ended on those dates is presented below.
2000 1999 1998 Weighted Weighted Weighted Average Average Average Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at January 1 371,446 $24.50 394,136 $24.50 450,000 $24.50 Granted 54,000 29.75 Forfeited (3,429) 27.56 (14,337) 24.50 (41,382) 24.50 Exercised (12,174) 24.50 (8,353) 24.50 (14,482) 24.50 ------- ------ ------- ------ ------- ------ Outstanding at December 31 409,843 $25.17 371,446 $24.50 394,136 $24.50 ======= ====== ======= ====== ======= ======
2000 1999 1998 Weighted Weighted Weighted Average Average Average Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Exercisable 175,572 $24.50 123,839 $24.50 63,356 $24.50
The exercise price range of outstanding options at December 31, 2000 was $24.50 to $29.75 and the weighted average contractual life was 7.03 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 ended December 31, 2000 and 1999. (In thousands) 2000 1999 - -------------- ---- ---- RECONCILIATION OF BENEFIT OBLIGATION Obligation at Beginning of Year $2,630 $2,535 Service Cost 2 2 Interest Cost 190 165 Actuarial Loss 264 94 Benefit Payments (211) (166) ------ ------ Obligation at End of Year $2,875 $2,630 ====== ====== FUNDED STATUS $(2,875) $(2,630) Unrecognized Transition Obligation 1,218 1,319 Unrecognized Prior Service Cost 339 382 Unrecognized Gain (431) (726) ------- ------- Accrued Postretirement Benefit Costs $(1,749) $(1,655) ======= ======= The following table provides disclosure of the net periodic benefit cost as of December 31. (In thousands) 2000 1999 - -------------- ---- ---- Service Cost $2 $2 Interest Cost 190 165 Amortization of Transition Obligation 101 102 Amortization of Prior Service Cost 43 42 Amortization of Net Gain (30) (39) ---- ---- Net Periodic Benefit Cost $306 $272 ==== ==== Major Assumptions: Discount Rate 7.25% 7.25% 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 $19 $(17) 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 $117,890,000 and $134,378,000 at December 31, 2000 and 1999, 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 $6,460,000 and $4,421,000 in irrevocable letters of credit outstanding at December 31, 2000 and 1999, 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, 2000, 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, 2000, combined retained earnings of the subsidiary banks were approximately $52,948,000 of which $18,726,000 was available for the payment of dividends in 2001 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 reserve requirement was $7,721,000 and $8,333,000 at December 31, 2000 and 1999, respectively. The Company and its subsidiary 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 Company and its subsidiary 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 Company and its subsidiary 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). The Company and each of the subsidiary banks meet all capital adequacy requirements to which they are subject as of December 31, 2000. As of December 31, 2000, the most recent notification from the FDIC categorized the banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the tables. There are no conditions or events since that notification that management believes have changed the institutions' category. The banks' actual capital amounts and ratios are also presented in the following tables.
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions December 31, 2000 (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------- ------ ----- ------ ----- ------ ----- TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS) Consolidated $124,580 16.66% $29,917 4.00% Farmers Bank & Capital Trust Co. 43,988 13.98 12,587 4.00 $18,880 6.00% Farmers Bank and Trust Company 13,512 12.97 4,166 4.00 6,249 6.00 Lawrenceburg National Bank 9,912 12.56 3,157 4.00 4,736 6.00 First Citizens Bank 11,127 11.94 3,729 4.00 5,593 6.00 United Bank & Trust Co. 12,478 13.30 3,754 4.00 5,631 6.00 Kentucky Banking Centers, Inc. 7,141 10.81 2,641 4.00 3,962 6.00 TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS) Consolidated $134,069 17.93% $59,834 8.00% Farmers Bank & Capital Trust Co. 47,922 15.23 25,173 8.00 $31,466 10.00% Farmers Bank and Trust Company 14,816 14.23 8,332 8.00 10,416 10.00 Lawrenceburg National Bank 10,901 13.81 6,315 8.00 7,893 10.00 First Citizens Bank 12,294 13.19 7,457 8.00 9,322 10.00 United Bank & Trust Co. 13,653 14.55 7,508 8.00 9,385 10.00 Kentucky Banking Centers, Inc. 7,968 12.07 5,283 8.00 6,603 10.00 TIER 1 CAPITAL (TO AVERAGE ASSETS) Consolidated $124,580 12.13% $41,097 4.00% Farmers Bank & Capital Trust Co. 43,988 9.56 18,398 4.00 $22,998 5.00% Farmers Bank and Trust Company 13,512 9.51 5,685 4.00 7,106 5.00 Lawrenceburg National Bank 9,912 9.18 4,319 4.00 5,399 5.00 First Citizens Bank 11,127 8.64 5,151 4.00 6,439 5.00 United Bank & Trust Co. 12,478 9.50 5,251 4.00 6,564 5.00 Kentucky Banking Centers, Inc. 7,141 8.53 3,348 4.00 4,185 5.00
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions December 31, 1999 (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------- ------ ----- ------ ----- ------ ----- TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS) Consolidated $126,229 18.63% $27,097 4.00% Farmers Bank & Capital Trust Co. 43,597 15.48 11,268 4.00 $16,903 6.00% Farmers Bank and Trust Company 11,969 13.02 3,678 4.00 5,517 6.00 Lawrenceburg National Bank 9,688 13.35 2,903 4.00 4,355 6.00 First Citizens Bank 11,565 13.30 3,478 4.00 5,217 6.00 United Bank & Trust Co. 11,760 13.89 3,387 4.00 5,081 6.00 Kentucky Banking Centers, Inc. 7,455 11.40 2,615 4.00 3,923 6.00 TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS) Consolidated $134,712 19.89% $54,194 8.00% Farmers Bank & Capital Trust Co. 47,122 16.73 22,537 8.00 $28,171 10.00% Farmers Bank and Trust Company 13,121 14.27 7,356 8.00 9,196 10.00 Lawrenceburg National Bank 10,597 14.60 5,806 8.00 7,258 10.00 First Citizens Bank 12,654 14.55 6,956 8.00 8,695 10.00 United Bank & Trust Co. 12,821 15.14 6,775 8.00 8,469 10.00 Kentucky Banking Centers, Inc. 8,273 12.65 5,230 8.00 6,538 10.00 TIER 1 CAPITAL (TO AVERAGE ASSETS) Consolidated $126,229 12.77% $39,529 4.00% Farmers Bank & Capital Trust Co. 43,597 10.05 17,355 4.00 $21,964 5.00% Farmers Bank and Trust Company 11,969 8.99 5,327 4.00 6,658 5.00 Lawrenceburg National Bank 9,688 9.31 4,163 4.00 5,203 5.00 First Citizens Bank 11,565 9.18 5,039 4.00 6,298 5.00 United Bank & Trust Co. 11,760 9.32 5,048 4.00 6,310 5.00 Kentucky Banking Centers, Inc. 7,455 8.67 3,438 4.00 4,297 5.00
17. STOCK SPLIT On January 26, 1998, the Company's Board of Directors approved a two-for-one stock split of its common stock. The stock split was effective July 1, 1998 for holders of record on June 1, 1998. The stock split increased the Company's outstanding common shares from 3,777,620 to 7,555,240 shares on July 1, 1998. Additionally, all references in the Consolidated Financial Statements, Footnotes and Supplementary Data to the number of shares, per-share amounts, and market prices of the Company's common stock have been restated to give retroactive recognition to the stock split. 18. 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 judgment and, therefore, cannot be determined with precision. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from the disclosure requirements. Accordingly, the aggregate fair value amounts presented are not intended to represent the underlying value of the Company. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. CASH AND CASH EQUIVALENTS The carrying amount is a reasonable estimate of fair value. INVESTMENT SECURITIES For marketable equity securities, fair values are based on quoted market prices or dealer quotes. For other securities, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. LOANS RECEIVABLE The fair value of loans is estimated by discounting the future cash flows using current discount rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. DEPOSIT LIABILITIES The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for certificates of deposit with similar remaining maturities. Commitments to Extend Credit and Standby Letters of Credit Pricing of these financial instruments is based on the credit quality and relationship, fees, interest rates, probability of funding, compensating balance, and other covenants or requirements. Loan commitments generally have fixed expiration dates, variable interest rates and contain termination and other clauses which provide for relief from funding in the event there is a significant deterioration in the credit quality of the customer. Many loan commitments are expected to, and typically do, expire without being drawn upon. The rates and terms of the Company's commitments to lend and standby letters of credit are competitive with others in the various markets in which the Company operates. There are no unamortized fees relating to these financial instruments, as such the carrying value and fair value are both zero. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED FUNDS The fair value of securities sold under agreements to repurchase and other borrowed funds is estimated using rates currently available for debt with similar terms and remaining maturities. The estimated fair values of the Company's financial instruments are as follows.
December 31, 2000 1999 Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value - -------------- ------ ----- ------ ----- ASSETS Cash and Cash Equivalents $229,871 $229,871 $135,360 $135,360 Investment Securities: Available for Sale 211,419 211,419 167,944 167,944 Held to Maturity 49,390 50,013 61,896 61,636 Loans, Net 673,100 670,676 633,904 629,661 LIABILITIES Deposits 969,197 969,887 862,220 862,750 Securities Sold Under Agreements to Repurchase and Other Borrowed Funds 101,682 101,693 45,639 45,477
19. PARENT COMPANY FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS December 31, (In thousands) 2000 1999 - --------------------------- ---- ---- ASSETS Cash on Deposit with Subsidiaries $24,386 $31,846 Interest Bearing Deposits in Other Banks 100 Investment Securities Available for Sale 2,935 Investment in Subsidiaries 99,631 95,856 Other Assets 1,793 517 -------- -------- Total Assets $128,745 $128,319 ======== ======== LIABILITIES Dividends Payable $2,155 $2,162 Other Liabilities 1,129 1,051 ----- ----- Total Liabilities 3,284 3,213 ----- ----- SHAREHOLDERS' EQUITY Common Stock 1,004 1,002 Capital Surplus 13,634 12,370 Retained Earnings 131,021 125,173 Treasury stock (20,755) (11,498) Accumulated Other Comprehensive Income (Loss) 557 (1,941) ------- ------- Total Shareholders' Equity 125,461 125,106 ------- ------- Total Liabilities and Shareholders' Equity $128,745 $128,319 ======= =======
CONDENSED STATEMENTS OF INCOME December 31, (In thousands) 2000 1999 1998 - --------------------------- ---- ---- ---- INCOME Dividends from Subsidiaries $14,363 $10,382 $5,274 Interest Income 91 21 54 Other Dividend Income 86 Other Income 954 912 946 ------ ------ ----- Total Income 15,494 11,315 6,274 EXPENSE Other Expense 2,503 2,417 2,424 ----- ----- ----- Total Expense 2,503 2,417 2,424 ----- ----- ----- Income Before Income Tax Benefit and Equity in Undistributed Income of Subsidiaries 12,991 8,898 3,850 Income Tax Benefit 503 537 637 ------ ----- ----- Income Before Equity in Undistributed Income of Subsidiaries 13,494 9,435 4,487 Equity in Undistributed Income of Subsidiaries 886 4,495 9,760 ------- ------- ------- Net Income $14,380 $13,930 $14,247 ======= ======= =======
CONDENSED STATEMENTS OF CASH FLOWS December 31, (In thousands) 2000 1999 1998 - --------------------------- ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $14,380 $13,930 $14,247 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Equity in Undistributed Income of Subsidiaries (886) (4,495) (9,760) Noncash Compensation Expense 293 298 410 Change in Other Assets and Liabilities, Net (1,270) 6 (279) Deferred Income Tax (Benefit) Expense (78) (22) 144 ------ ----- ------ Net Cash Provided By Operating Activities 12,439 9,717 4,762 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of Investment Securities Available for Sale (2,502) ----- Net Cash Used in Investing Activities (2,502) CASH FLOWS FROM FINANCING ACTIVITIES Dividends Paid (8,539) (8,401) (7,256) Purchase of Common Stock (9,257) (3,177) (1,856) Stock Options Exercised 299 205 232 ------ ------ ----- Net Cash Used in Financing Activities (17,497) (11,373) (8,880) ------ ------ ----- Net Decrease in Cash and Cash Equivalents (7,560) (1,656) (4,118) Cash and Cash Equivalents at Beginning of Year 31,946 33,602 37,720 ------- ------- ------- Cash and Cash Equivalents at End of Year $24,386 $31,946 $33,602 ======= ======= ======= SUPPLEMENTAL DISCLOSURES Cash Paid During the Year for Income Taxes $5,450 $6,025 $5,185 Cash Dividend Declared and Unpaid 2,155 2,162 2,113
20. QUARTERLY FINANCIAL DATA
Unaudited (In thousands, except per share data) Quarters Ended 2000 March 31 June 30 Sept. 30 Dec. 31 - -------------------- -------- ------- -------- ------- Interest Income $17,940 $18,467 $19,146 $19,928 Interest Expense 7,081 7,789 8,370 9,296 ------ ------ ------ ------ Net Interest Income 10,859 10,678 10,776 10,632 Provision for Loan Losses 260 1,167 460 585 ------ ----- ------ ------ Net Interest Income After Provision for Loan Losses 10,599 9,511 10,316 10,047 Other Income 3,064 3,268 3,146 2,965 Other Expense 8,282 8,507 8,153 8,095 ----- ----- ----- ----- Income Before Income Taxes 5,381 4,272 5,309 4,917 Income Tax Expense 1,383 1,320 1,522 1,274 ------ ------ ------ ------ Net Income $3,998 $2,952 $3,787 $3,643 ====== ====== ====== ====== Net Income per Common Share, Basic and Diluted $0.54 $0.40 $0.52 $0.51 Weighted Average Shares Outstanding, Basic 7,422 7,346 7,263 7,188 Weighted Average Shares Outstanding, Diluted 7,423 7,348 7,279 7,215
Unaudited (In thousands, except per share data) Quarters Ended 1999 March 31 June 30 Sept. 30 Dec. 31 - -------------------- -------- ------- -------- ------- Interest Income $17,032 $17,090 $17,349 $17,563 Interest Expense 6,842 6,705 6,698 6,939 ------ ------ ------ ------ Net Interest Income 10,190 10,385 10,651 10,624 Provision for Loan Losses 194 441 506 1,722 ------ ------ ------ ------ Net Interest Income After Provision for Loan Losses 9,996 9,944 10,145 8,902 Other Income 2,892 3,113 2,950 3,328 Other Expense 8,011 8,219 7,906 8,301 ----- ----- ----- ----- Income Before Income Taxes 4,877 4,838 5,189 3,929 Income Tax Expense 1,374 1,170 1,421 938 ------ ------ ------ ------ Net Income $3,503 $3,668 $3,768 $2,991 ====== ====== ====== ====== Net Income per Common Share, Basic and Diluted $0.47 $0.49 $0.50 $0.40 Weighted Average Shares Outstanding, Basic 7,514 7,488 7,458 7,455 Weighted Average Shares Outstanding, Diluted 7,514 7,488 7,475 7,456
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 www.farmerscapital.com ANNUAL MEETING The annual meeting of shareholders of Farmers Capital Bank Corporation will be held Tuesday, May 8, 2001 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 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, 2000 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% Kentucky General Life Insurance Company, Inc. Kentucky 1 Farmers Capital Insurance Corporation 2 Kentucky Farmers Fidelity Insurance Agency, LLP 3 Kentucky Farmers Bank Realty Co. 2 Kentucky Leasing One Corporation 2 Kentucky E Properties, Inc. 2 Kentucky
1 None Issued 2 A wholly owned subsidiary of Farmers Bank & Capital Trust Co. 3 A fifty (50%) percent owned LLP of Farmers Capital Insurance Corporation 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 Farmers Capital Bank Corporation of our report dated January 16, 2001, relating to the consolidated balance sheets of Farmers Capital Bank Corporation and Subsidiaries as of December 31, 2000 and 1999, 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, 2000, which report appears in the December 31, 2000 annual report on Form 10-K of Farmers Capital Bank Corporation. /s/ KPMG LLP Louisville, Kentucky March 26, 2001 -----END PRIVACY-ENHANCED MESSAGE-----