Item 1 - Business
Organization
Farmers Capital Bank Corporation ("the Registrant") is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and was organized on October 28, 1982, under the laws of the Commonwealth of Kentucky. Its subsidiaries provide a wide range of banking and bank-related services to customers throughout Kentucky. The bank subsidiaries owned by the Registrant are Farmers Bank & Capital Trust Company ("Farmers Bank"), Frankfort, Kentucky; United Bank & Trust Co. ("United Bank"), Versailles, Kentucky; Lawrenceburg National Bank ("Lawrenceburg Bank"), Lawrenceburg, Kentucky; First Citizens Bank, Hardin County, Incorporated ("First Citizens Bank"), Elizabethtown, Kentucky; Farmers Bank and Trust Company ("Farmers Georgetown Bank"), Georgetown, Kentucky; and Horse Cave State Bank ("Horse Cave Bank"), Horse Cave Kentucky. The Registrant also owns two non-bank subsidiaries; FCB Services, Inc. ("FCB Services"), Frankfort, Kentucky and Farmers Capital Insurance Company ("Farmers Insurance"), Frankfort, Kentucky. As of December 31, 1995, the Registrant has $906 million in consolidated assets.
Farmers Bank, originally organized in 1850, is a state chartered bank engaged in a wide range of commercial and personal banking activities, which include accepting savings, time and demand deposits; making secured and unsecured loans to corporations, individuals and others; providing cash management services to corporate and individual customers; issuing letters of credit; renting safe deposit boxes; and providing funds transfer services. The bank's lending activities include making commercial, construction, mortgage and personal loans and lines of credit. The bank serves as an agent in providing credit card loans. It acts as trustee of personal trusts, as executor of estates, as trustee for employee benefit trusts, as registrar, transfer agent and paying agent for bond issues. Farmers Bank also acts as registrar, transfer agent and paying agent for the Registrant's stock issue. Farmers Bank is the general depository for the Commonwealth of Kentucky and has been for more than 70 years.
Farmers Bank is the largest bank 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, 1995, it had total assets of $425 million, including loans of $244 million. On the same date, total deposits were $353 million and shareholders' equity totaled $36 million.
Farmers Bank has three subsidiaries: Farmers Bank Realty Company ("Realty"); Money One Credit of Kentucky, Inc. ("Money One"); and Leasing One Corporation ("Leasing One"). Farmers Bank, Realty and Money One, Inc. own a partnership - - Money One Credit Company ("MOCC"). Farmers Bank also participates in a joint venture - Frankfort ATM, Ltd. ("ATM").
Realty was incorporated in 1978 for the purpose of owning certain real estate used by the Registrant and Farmers Bank in the ordinary course of business. Realty had total assets of $3.6 million on December 31, 1995.
Money One was incorporated in 1989 and until January 1, 1993, was a direct subsidiary of the Registrant. It manages the consumer finance company, MOCC. At December 31, 1995 it had $1.2 million in assets.
MOCC was established on June 1, 1994. It is a partnership engaged in consumer lending activities under Chapter 288 of the Kentucky Revised Statutes. As stated earlier, the partners include Farmers Bank, Realty and Money One. MOCC has fourteen offices throughout Kentucky. At December 31, 1995 it had total assets of $15.0 million.
Leasing One was incorporated in August, 1993 to operate as a commercial equipment leasing company. It is located in Frankfort, but conducts business in Ohio, Indiana, Tennessee and Kentucky. At year end it had total assets of $11.3 million.
A fourth subsidiary, Farmers Financial Services Corporation ("FFSC"), was in existence for the first three quarters of 1995. FFSC was incorporated in 1985 in order to enter into a partnership with several other banks to form a statewide electronic network. The partnership, known as "Transaction Services Company", supported an automated teller machine network (Quest) with machines throughout Kentucky and Indiana as well as point-of-sale terminals in retail stores. With the termination of the "Quest" network, the partnership known as "Transaction Services Company" was also terminated. As a result, FFSC was dissolved as of September 27, 1995.
Farmers Bank has a 50% interest in ATM, a joint venture for the purpose of ownership of automatic teller machines in the Frankfort area. State National Bank, a Frankfort bank not otherwise associated with the Registrant, also has a 50% interest in ATM.
On February 15, 1985, the Registrant acquired United Bank, a state chartered bank originally organized in 1880. It is engaged in a general banking business providing full service banking to individuals, businesses and governmental customers. It conducts business in its principal office and two branches in Woodford County, Kentucky. United Bank is the second largest bank in Woodford County with total assets of $100 million and total deposits of $89 million at December 31, 1995.
On June 28, 1985, the Registrant acquired Lawrenceburg Bank, a national chartered bank originally organized in 1885. It is engaged in a general banking business providing full service banking to individuals, businesses and governmental customers. It conducts business in its principal office and one branch in Anderson County, Kentucky. Lawrenceburg Bank is the largest bank in Anderson County with total assets of $93 million and total deposits of $84 million at December 31, 1995.
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. It conducts business in its principal office and four branches in Hardin County, Kentucky. First Citizens Bank is the largest bank in Hardin County with total assets of $108 million and total deposits of $89 million at December 31, 1995.
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. Farmers Georgetown Bank is the largest bank in Scott County with total assets of $113 million and total deposits of $100 million at December 31, 1995.
On June 15, 1987, the Registrant acquired Horse Cave Bank, a state chartered bank originally organized in 1926. It is engaged in a general banking business providing full service banking to individuals, businesses and governmental customers. It conducts business in its principal office and one branch in Hart County, Kentucky. Horse Cave Bank is the largest bank in Hart County with total assets of $75 million and total deposits of $65 million at December 31, 1995.
Subsidiary banks make first and second residential mortgages secured by the real estate not exceeding 90% loan to value. 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.
The consumer finance subsidiary makes secured and unsecured installment loans for various purposes. The leasing subsidiary makes secured equipment leases to commercial and municipal entities in Kentucky, Indiana, Ohio and Tennessee.
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.
Farmers Insurance was organized in 1988 to engage in insurance activities permitted to the Registrant by federal and state law. This corporation has had no activity to date.
Supervision and Regulation
The Registrant, as a registered bank holding company, is restricted to those activities permissible under the Bank Holding Company Act of 1956, as amended, and is subject to actions of the Board of Governors of the Federal Reserve System thereunder. It is required to file various reports with the Federal Reserve Board, and is subject to examination by the Board.
The Registrant's state bank subsidiaries are subject to state banking law and to regulation and periodic examinations by the Kentucky Department of Financial Institutions. Lawrenceburg Bank, a national bank, is subject to similar regulation and supervision by the Comptroller of the Currency under the National Bank Act and the Federal Reserve System under the Federal Reserve Act.
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.
The operations of the Registrant and its subsidiary banks also are affected by other banking legislation and policies and practices of various regulatory authorities. Such legislation and policies include statutory maximum rates on some loans, reserve requirements, domestic monetary and fiscal policy, and limitations on the kinds of services which may be offered.
The Bank Holding Company Act formerly prohibited the Federal Reserve Board from approving an application from a bank holding company to acquire shares of another bank across its own state lines. However, effective September 1995, new legislation abolished those restrictions and now allows bank holding companies to acquire shares of out of state banks, subject to certain conditions. Currently, the Company has no plans to purchase shares of an out of state bank.
The Financial Reform, Recovery and Enforcement Act of 1989 (FIRREA) provides that a holding company's controlled insured depository institutions are liable for any loss incurred by the Federal Deposit Insurance Corporation in connection with the default of or any FDIC assisted transaction involving an affiliated insured bank.
Under the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), the FDIC was required to establish a risk-based assessment system for insured depository institutions which became effective January 1, 1994. The FDIC has adopted a risk-based deposit insurance assessment system under which the assessment rate for an insured depository institution depends on the assessment risk classification assigned to the institution by the FDIC which is determined by the institution's capital level.
Under FDICIA, the federal banking regulators are required to take prompt corrective action if an institution fails to satisfy certain minimum capital requirements, including a leverage limit, a risk-based capital requirement, and any other measure deemed appropriate by the federal banking regulators for measuring the capital adequacy of an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees that would cause the institution to become undercapitalized.
The purpose of the Community Reinvestment Act (CRA) is to encourage banks to respond to the credit needs of the communities they serve, including low and moderate income neighborhoods. CRA states that banks should accomplish this while still preserving the flexibility needed for safe and sound operations. It is designed to increase the bank's sensitivity to investment opportunities which will benefit the community. Of the Company's six subsidiary banks, two have an outstanding CRA rating and four have a satisfactory rating.
Competition
The Corporation and its subsidiaries compete for banking business with various types of businesses other than commercial banks and savings and loan associations. These include, but are not limited to, credit unions, mortgage lenders, finance companies, insurance companies, stock and bond brokers, financial planning firms, and department stores which compete for one or more lines of banking business. The banks also compete for commercial and retail business not only with banks in Central Kentucky, but with banking organizations from Ohio, Indiana, Tennessee and Pennsylvania which have banking subsidiaries located in Kentucky and may possess greater resources than the Corporation.
The primary areas of competition pertain to quality of services, interest rates and fees.
The business of the Registrant is not dependent upon any one customer or on a few customers, and the loss of any one or a few customers would not have a materially adverse effect on the Registrant.
No material portion of the business of the Registrant is seasonal. No material portion of the business of the Registrant is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government, though certain contracts are subject to such renegotiation or termination.
The Registrant is not engaged in operations in foreign countries.
Employees
As of December 31, 1995, the Registrant and its subsidiaries had 494 full-time equivalent employees. Employees are provided with a variety of employee benefits. A retirement plan, a profit-sharing (401K) plan, group life insurance, hospitalization, dental and major medical insurance are available to eligible personnel. The employees are not represented by a union. Management and employee relations are good.
Item 2

Item 2 - Properties
All of the Registrant's properties are owned or leased by the Banks or their subsidiaries.
Farmers Bank and its subsidiary, Realty, currently own or lease nine buildings. Farmers Bank operates five branches, two of which it owns and three of which it leases. United Bank owns its two branch offices and approximately 52% of a condominiumized building which houses its main office. Lawrenceburg Bank owns its main office and its branch office. 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 being located in a grocery store. Farmers Georgetown Bank owns its main office, another branch in downtown Georgetown and one in Stamping Ground, Kentucky. Farmers Georgetown Bank's third branch is located in a leased facility. Horse Cave Bank owns the building where it is headquartered. In the first quarter of 1991, Horse Cave Bank opened a branch in leased facilities in Munfordville, Kentucky.
Money One operates out of fourteen leased offices in fourteen cities within Kentucky.
Item 3

Item 3 - Legal Proceedings
Farmers was named, on September 10, 1992, as a defendant in Case No. 92CI05734 in Jefferson Circuit Court, Louisville, Kentucky, Earl H. Shilling et al. v. Farmers Bank & Capital Trust Company. The named plaintiffs purported to represent a class consisting of all present and former owners of the County of Jefferson, Kentucky Nursing Home Refunding Revenue Bonds (Filson Care Home Project) Series 1986A (the "Series A Bonds") and County of Jefferson, Kentucky Nursing Home Improvement Bonds (Filson Care Home Project) Series 1986B (the "Series B Bonds") (collectively the "Bonds"). The plaintiffs alleged that the class which they purported to represent has been damaged in the approximate amount of $2,000,000 through the reduction in value of the Bonds and the collateral security therefore, and through the loss of interest on the Bonds since June 1, 1989, as a result of alleged negligence, breach of trust, and breach of fiduciary duty on the part of Farmers Bank in its capacity as indenture trustee for the Bonds. A subsequent amendment to the complaint further alleges that Farmers Bank conspired with and aided and abetted the former management of the Filson Care Home in its misappropriation of the nursing home's revenues and assets to the detriment of the Bondholders and in order to unlawfully secure and benefit Farmers Bank. The amendment seeks unspecified punitive damages against Farmers Bank. On July 6, 1993, the Circuit Court denied the plaintiff's motion to certify the case as a class action on behalf of all present and former owners of the Bonds. Under that ruling, the action may be maintained only with respect to the individual claims of the named plaintiffs and any other Bondholders whom the court might allow to join in the action with respect to their own individual claims. Since the denial of class certifications, the complaint has been amended twice to join additional Bondholders as plaintiffs. The 42 existing plaintiffs claim to hold Bonds having an aggregate face value of $470,000. The case is presently in the process of discovery. Farmers Bank believes that the claims of the plaintiffs are unfounded and totally without merit, and Farmers Bank intends to vigorously contest any further proceedings in the case.
Two of the original named plaintiffs in the case before the Circuit Court filed a similar action, Earl H. Schilling et al v. Farmers Bank & Capital Trust Company, on July 7, 1992 in the United State District Court for the Western District of Kentucky at Louisville, Case No. C- 920399 L-M. That action has been dismissed without prejudice on the grounds that the plaintiffs did not appear to be able to establish federal jurisdiction.
On November 27, 1995, one of the Registrant's subsidiaries, Farmers Bank & Capital Trust Co. ("Farmers Bank") filed suit in the Circuit Court for Franklin County, Kentucky against Travel Professionals of Frankfort, Inc. and Travel Professionals of Scott County, Inc. (the "TPI Companies") to collect five (5) loans totaling approximately $1,158,572 plus interests, costs and attorney's fees. In addition to the TPI Companies, other named defendants were Charles O. Bush, Sr., a director of the bank (by virtue of certain guarantees) and two of his children, Charles O. Bush, Jr. and Karen Wilhelm and their respective spouses, Sandra Bush and David Wilhelm, (collectively, the "Bush Family Members"). In addition, Ray Godbey and Virginia Godbey, officers of the Corporation were joined as defendants. Each of the defendants has filed an answer and counterclaim denying liability to Farmers Bank and asserting various claims for damages against the Bank. The Registrant believes that the defenses and claims asserted by the defendants are without merit and Farmers Bank has denied any liability to the defendants. The litigation presently is in the discovery phase and is being vigorously defended. It is anticipated that Farmers Bank will amend its complaint to assert additional claims against the defendants in this case.
The Registrant's Georgetown, Kentucky affiliate, Farmers Georgetown Bank, and its Executive Vice President, have been named defendants in a civil action brought on August 1, 1994 by a loan customer of the Bank, in which the customer alleges (1) fraud, (2) breach of good faith and fair dealing, (3) disclosure of false credit information (defamation) and (4) outrageous conduct. As earlier reported, the initial amount in controversy for the first three counts was unspecified. The amount originally sought as punitive damages for outrageous conduct was $10,000,000. By order of the Scott County Circuit Court, Georgetown, Kentucky, the plaintiffs were recently required to quantify the amounts in controversy. For the count of fraud the plaintiffs seek $50,000; for the count of breach of good faith and fair dealing the plaintiff seeks $12,900,000; for the count of defamation the plaintiffs seek $14,800,000 plus an estimated $75,000 in legal costs. Further the amount now sought as punitive damages is $21,000,000.
The conduct complained about in counts 1 and 2 involves former officers of Farmers Georgetown Bank. The Bank at this time has had the opportunity to examine those former officers knowledge of the events alleged to have taken place and believes there is no merit to the allegations. The Farmers Georgetown Bank also believes that there is no merit to the allegations in counts 3 and 4 and intends to vigorously defend all claims.
The case has been set for trial in both November 1995 and February 1996, but has been recently continued once again. It is anticipated that the case will go to trial in either September 1996 or in the alternative November 1996. With respect to the issue of the count of defamation, the court at one point, granted the defendants a summary judgement, but has agreed to reconsider that action at some later time. Management believes the previously mentioned actions are without merit, that in certain instances its actions or omissions were pursuant to the advice of counsel, or that the ultimate liability, if any, resulting from one or more of the claims will not materially affect the Registrant's consolidated financial position, although resolution in any year or quarter could be material for that period.
Item 4

Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.
PART II
Item 5

Item 5 - Market for Registrant's Common Stock and Related Shareholders' Matters
The Registrant's stock is traded in the National Association of Security Dealers Automated Quotation System (NASDAQ) National Market System and the sales prices shown below are as reported by the National Association of Securities Dealers under the NASDAQ symbol: FFKT. The amount of dividends per share declared by the Registrant during the last two calendar years is also included below:
Dividends Stock Prices High Low Declared
4th Quarter, 1995 $43.50 $37.00 $0.36 3rd Quarter, 1995 39.50 33.00 0.33 2nd Quarter, 1995 37.00 32.50 0.33 1st Quarter, 1995 38.00 35.50 0.33
4th Quarter, 1994 $40.50 $36.50 $0.33 3rd Quarter, 1994 41.00 36.88 0.30 2nd Quarter, 1994 43.00 37.00 0.30 1st Quarter, 1994 39.50 33.00 0.30
As of January 1, 1996, there were 818 shareholders of record. This figure does not include individual participants in security position listings.
Payment of dividends by the Registrant's subsidiary banks is subject to certain regulatory restrictions as set forth in national and state banking laws and regulations. At December 31, 1995, combined retained earnings of the subsidiary banks were approximately $38,401,026 of which $4,519,000 was available for the payment of dividends in 1996 without obtaining prior approval from bank regulatory agencies.
Stock Transfer Agent and Registrar:
Farmers Bank & Capital Trust Co. P.O. Box 309 Frankfort, Kentucky 40602
The Registrant offers shareholders automatic reinvestment of dividends in shares of stock at the market price without fees or commissions. For a description of the plan and an authorization card, contact the Registrar above.
NASDAQ Market Makers:
J.J.B. Hilliard, W.L. Lyons, Inc. Herzog, Heine, Geduld, Inc. Phone: 502/588-8400 or Phone: 800/221-3600 800/444-1854
J.C. Bradford and Co., Inc. PaineWebber Incorporated Louisville 502/589-7760 or Phone: 800/222-1448 800/752-6093 Lexington 606/255-7353 or 800/522-7353
Item 6

Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Operating Results
Farmers Capital Bank Corporation (the "Company") finished 1995 with net income of $10.4 million, or $2.69 per share, up from $10.25 million, or $2.65 per share reported for 1994. This increase was realized even though the Company benefited during the second quarter of 1994 from a significant nonrecurring recovery of prior year losses amounting to $503 thousand after tax. Adjusting for the nonrecurring recovery, 1995 net income is $642 thousand, or 6.6% higher than net income for 1994. The performance ratios also increased after adjusting for the nonrecurring recovery. Return on assets increased 4.3% from 1.16% to 1.21%. Return on equity increased 2.1% from 9.99% to 10.20%.
The two items having the most beneficial impact on the Company during 1995 were the increase in net interest margin and the much publicized reduction in the FDIC insurance premium.
Interest Income
Total interest income, on a tax equivalent basis was $68.7 million, up $9.4 million, or 15.9% from 1994. Interest on taxable investment securities was up $1.8 million, or 29.8% from 1994. The yield was 5.8%, up from 4.8% in the previous year. Interest on nontaxable investment securities was stable at $3.4 million while the yield dropped 19 basis points to 6.6%. Interest on federal funds sold and securities purchased under agreement to resell was $3.0 million, up $644 thousand or 26.9%. The yield was up, due to rate, 160 basis points to 5.9%. Interest on loans was $54.4 million, up $7.0 million, or 14.9% over 1994. The yield was up 80 basis points to 10.0%.
The increase in loan and taxable investment securities interest was due primarily to changes in rates. The decline in nontaxable investment security interest was also due to rate. The yield on total earning assets increased from 8.0% to 8.8%. This was accomplished by increased loan volumes and by moving balances from lower yielding asset categories to higher earning loans.
Interest Expense
Total interest expense was $28.1 million, up $6.5 million, or 30.2%. Interest expense on interest bearing demand deposits was up $537 thousand, or 8.0% from 1994 due to the rate variance. Interest paid on savings accounts was $1.7 million, an increase of $91 thousand while the rate paid increased 30 basis points to 3.2% in 1995.
The largest interest expense impact came from those on time deposits which had increases in both rate and volume. Interest expense on time deposits increased $5.5 million, or 46.3% while the rate increased 125 basis points to 5.6%. Interest paid on securities sold under agreement to repurchase was $1.6 million, up $375 thousand, or 31.0% due to rate. The rate paid on total interest bearing liabilities was 4.36%, an increase of 85 basis points.
Net interest income is the most significant component of the Company's earnings. Net interest income is the excess of the interest income earned on assets over the interest paid for funds to support those assets. The following table represents the major components of interest earning assets and interest bearing liabilities on a tax equivalent basis (TE) where tax exempt income is adjusted upward by an amount equivalent to the federal income taxes that would have been paid if the income had been fully taxable (assuming a 34% tax rate).
1 Income and yield stated at a fully tax equivalent basis (TE), using a 34% tax rate. 2 Loan balances include principal balances on non-accrual loans. 3 Loan fees included in interest income amounted to $1,781,000, $1,731,000 and $1,302,000 in 1995, 1994 and 1993, respectively.
Net interest income (TE) increased $2.9 million during 1995 to $40.6 million. The change in the spread between rates earned and paid and the net interest margin are summarized below:
1995 1994 % change
Spread between rates earned and paid 4.45% 4.45% Net interest margin 5.21% 5.06% 3%
The following table is an analysis of the change in net interest income and the attributable factors.
1 Income stated at fully tax equivalent basis using a 34% tax rate. 2 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.
As the table indicates, the $2.9 million increase for 1995 in net interest income (TE) is nearly equally attributed to rate and volume variance.
Asset Quality
The provision for loan losses represents charges made to earnings to maintain an adequate Allowance. Each subsidiary determines its level for the Allowance and maintains it at an amount believed to be sufficient to absorb possible losses that may be experienced in the credit portfolio. The following factors are used in establishing an appropriate Allowance:
A careful assessment of the financial condition of individual borrowers
A realistic determination of the value and adequacy of underlying collateral
A thorough review of historical loss experience
The condition of the local economy
A comprehensive analysis of the levels and trends of loan categories
A review of delinquent and criticized loans
The provision for loan losses increased $1.6 million compared to 1994. The Company had net charge-offs of $4.1 million compared to $1.8 million the prior year. The Allowance was 1.56% of net loans, down from 1.67% at the end of 1994. Management feels the current reserve is adequate to cover any potential future losses within the loan portfolio. Management also continues to emphasize collection efforts and evaluation of risks within the portfolio.
Several loans to one borrower (an entity controlled by relatives of a director), totaling $1.4 million were charged off during 1995. Remaining loans with this borrower have been addressed in determining the current amount of reserve necessary to cover potential future losses.
The table below summarizes the loan loss experience for the past five years.
Year Ended December 31, (In thousands) 1995 1994 1993 1992 1991
Average loans net of unearned income $540,632 $511,492 $467,738 $473,271 $482,355
Balance of allowance for loan losses at beginning of period $ 8,889 $ 8,547 $ 8,261 $ 7,917 $ 7,947 Loans charged off: Commercial, financial and agricultural 2,390 741 1,826 2,427 2,126 Real estate 118 416 638 611 2,213 Installment loans to individuals 2,376 1,467 1,483 1,233 1,460
Total loans charged off 4,884 2,624 3,947 4,271 5,799
Recoveries of loans previously charged off: Commercial, financial and agricultural 192 193 343 651 329 Real estate 146 230 5,409 371 354 Installment loans to individuals 402 418 507 357 268
Total recoveries 740 841 6,259 1,379 951
Net loans charged off/ (recovered) 4,144 1,783 (2,312) 2,892 4,848 Additions to allowance charged (credited) to expense 3,727 2,125 (2,026) 3,236 4,818
Balance at end of period $ 8,472 $ 8,889 $ 8,547 $ 8,261 $ 7,917
Ratio of net charge offs (recoveries) during period to average loans, net of unearned income .77% .35% (.49)% .61% 1.01%
Noninterest Income
Noninterest income for 1995 totaled $11.9 million. Compared with 1994, noninterest income increased $384 thousand; however, after considering that in 1994 noninterest income was inflated by a $758 thousand nonrecurring recovery, the actual increase is $1.1 million. The majority of the improvement came from increased nonsufficient funds and overdraft fees. Trust income, totalling $1.2 million was unchanged from the previous year. The rest of the increase was made up from various unrelated service charges and fees.
Noninterest Expense
Noninterest expense, excluding the provision for loan losses, increased $1.5 million, or 4.9% to $32.6 million despite the significant reduction in FDIC insurance premiums. FDIC premiums decreased $686 thousand, or 45.4% and will be even lower in 1996. The premium rate declined during the third quarter of 1995 from $.23 per $100 to $.04 per $100. No premium will be collected in the first six months of 1996 before returning to the $.04 per $100 rate.
Salaries and benefits were up $835 thousand, or 5.2% to $16.8 million. The full time equivalent number of employees did not change during the last year; the increase is due to rising health insurance premiums. Management has addressed rising health insurance costs by adopting a self-insured medical plan effective January 1, 1996. It is anticipated that the new self-funded plan will help control rising costs. Occupancy expense is up $163 thousand, or 8.2% and equipment expense is up $158 thousand, or 6.2%.
Other noninterest expense is up $1.1 million, a 14.4% increase to $9.1 million. Expense related to other real estate owned is $292 thousand. The rest of the increase in other noninterest expense consists of various unrelated service charges, and operating expenses.
Income Tax
Income tax expense increased $108 thousand or 2.5% which correlates to the increase in income before tax. The effective tax rate for 1995 was 29.6%, up 20 basis points from last year.
Financial Condition
On December 31, 1995 assets were $906 million, an increase of $54 million or 6.4% from year end 1994. Average assets for 1995 increased $23 million, or 2.7% to $862 million. Earning assets, primarily loans and investments, averaged $779 million, up $34 million or 4.6%.
Loans
Average loans increased $29 million, or 5.7% in 1995 to $541 million and represented 69.4% of total earning assets, up 7 basis points from 1994. The average yield on the entire loan portfolio was 10.05% in 1995 compared to 9.25% in 1994.
On average, real estate mortgage loans are up $15.6 million, or 5.7%, direct lease financing is up $8.7 million, or 86.7% while the other categories experienced nominal fluctuations. Leasing One, our commercial leasing subsidiary, has now completed its second full year of operations and will continue to provide increased volume in the near future. The outlook for increased volumes of other types of loans is not as favorable.
The composition of the loan portfolio is summarized in the table below:
The following table indicates the amount of loans (excluding real estate mortgages, consumer loans and direct lease financing) outstanding at December 31, 1995, which, based on remaining scheduled repayments of principal, are due in the periods indicated.
Maturing Within After One But After (In thousands) One Year Within Five Years Five Years Total
Commercial, financial and agricultural $ 92,699 $20,585 $1,128 $114,412 Real estate - Construction 23,354 3,002 24 26,380
Total $116,053 $23,587 $1,152 $140,792
The table below shows the amount of loans (excluding real estate mortgages, consumer loans and direct lease financing) outstanding at December 31, 1995, 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 $23,240 $347 Due after five years 1,090 62
$24,330 $409
Temporary Investments
Federal funds sold and securities purchased under agreement to resell are the primary components of temporary investments. These funds help in the management of liquidity and interest rate sensitivity. In 1995, temporary investments averaged $52 million, a decrease of $4.3 million, or 7.7% from year end 1994. Temporary investment funds are reallocated as loan demand presents the opportunity.
Investment Securities
The majority of the investment security portfolio is comprised of U.S. Treasury securities, Federal agency securities, tax-exempt securities, and mortgage-backed securities. Total investment securities were $227 million on December 31, 1995 an increase of $34 million, or 17.6% from year end 1994.
Obligations of other U.S. Government agencies are currently providing the best opportunities. New funds and the reinvestment of called or matured securities are typically being used to acquire agency bonds without lowering the current level of tax free obligations. Obligations of states and political subdivisions are the primary means of managing the Company's tax position. The alternative minimum tax is not expected to impact our ability to acquire tax free obligations in the near future as they become available at an attractive yield.
Available for sale securities and held to maturity securities were $106 million and $121 million, respectively. Total investment securities averaged $187 million, an increase of $9.6 million, or 5.4% from year end 1994. Net unrealized losses, net of tax effect, on available for sale securities, was $826 thousand on December 31, 1995.
The following table summarizes the carrying values of investment securities on December 31, 1994 and 1995. 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.
1995 1994
Available Held to Available Held to December 31, (In thousands) for sale maturity for sale maturity
U.S. Treasury securities $ 16,668 $ 15,994 $ 8,745 $ 45,559 Obligations of other U.S. Government agencies 77,624 34,732 55,855 18,192 Obligations of states and political subdivisions 54,696 51,095 Mortgage-backed securities 10,251 13,151 4,819 5,131 Other securities 1,390 2,418 3,047 500
Total $105,933 $120,991 $72,466 $120,477
During 1993, investment securities were carried at amortized cost. The following table summarizes the carrying values on December 31, 1993.
December 31, (In thousands) 1993
U.S. Treasury securities $ 67,355 Obligations of other U.S. Government agencies 68,529 Obligations of states and political subdivisions 46,081 Mortgage-backed securities 5,792 Other securities 1,109
Total $188,866
The following is an analysis of the maturity distribution and weighted average interest rates of investment securities at December 31, 1995. For purposes of this analysis, available for sale securities are stated at fair value and held to maturity securities are valued at amortized cost.
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 state and political subdivisions is computed on a taxable equivalent basis using a 34% tax rate.
Deposits
On December 31, 1995, deposits totaled $755 million, an increase of $58 million, or 8.3% from year end 1994. Deposits averaged $722 million, an increase of $22 million, or 3.1% from 1994.
During 1995 the total average interest bearing deposits increased $33 million, or 5.7% to $611 million while average noninterest bearing deposits decreased $11 million, or 8.8% to $111 million. On average, interest bearing demand deposits make up 34.1% of the total deposit base and have fluctuated less than 1% from last year. Average savings accounts have declined 4.4% to a total of $53 million.
The primary increase in the deposit base has been with time deposits. Average time deposits have increased $37 million, or 13.4% to $312 million due to the creation of a new flexible rate certificate of deposit product ("FlexSaver") introduced during the fourth quarter of 1994. The increase is the result of both new deposits and the migration of existing accounts into the FlexSaver.
The decline in noninterest bearing deposits can be attributed to the introduction of the FlexSaver and the unpredictable fluctuation in activity from the Commonwealth of Kentucky deposits. Farmers Bank & Capital Trust Co., a subsidiary of the Company, is the general depository for the Commonwealth of Kentucky and has been for more than 70 years.
A summary of average balances and rates paid on deposits follows:
1995 1994 1993
Average Average Average Average Average Average (In thousands) Balance Rate Balance Rate Balance Rate
Noninterest demand deposits $110,759 0.00% $121,492 0.00% $110,721 0.00% Interest bearing demand deposits 245,926 2.96 247,554 2.72 221,086 2.73 Savings deposits 53,417 3.19 55,853 2.89 55,697 2.83 Time deposits 311,668 5.55 274,812 4.30 295,883 4.44
$721,770 $699,711 $683,387
Maturities of time deposits of $100,000 or more outstanding at December 31, 1995 are summarized as follows:
Time Deposits (In thousands) >$100,000
3 months or less $13,286 Over 3 through 6 months 13,632 Over 6 through 12 months 15,506 Over 12 months 16,217
$58,641
Short-term Borrowings
Securities sold under agreement to repurchase: (In thousands) 1995 1994 1993
Amount outstanding at year-end $34,638 $43,525 $22,372 Maximum outstanding at any month-end 55,929 43,525 36,058 Average outstanding 28,889 33,348 30,590 Weighted average prime rate during the year 8.83% 7.14% 6.00% Weighted average interest rate at year-end 5.48 3.63 2.89
Such borrowings are generally on an overnight basis.
Nonperforming Assets
Nonperforming assets decreased $1.9 million, or 21.7% to $7.0 million at year end 1995. As a percentage of loans and other real estate owned, nonperforming assets were 1.3% in 1995, 1.7% in 1994, 1.6% in 1993, 3.7% in 1992, and 4.7% in 1991. Since 1991, nonperforming assets have decreased $15.9 million, or 69.6%. The largest reductions have been in other real estate owned and restructured loans. This trend is the result of management's continued efforts to improve the quality of the loan portfolio. The Company's loan policy includes strict guidelines for approving and monitoring loans. The table below is a five year summary of nonperforming assets.
Year Ended December 31, (In thousands) 1995 1994 1993 1992 1991
Loans accounted for on non-accrual basis $2,897 $ 3,913 $ 1,565 $ 3,981 $ 5,479 Loans contractually past due ninety days or more 1,713 1,056 1,402 2,730 3,275 Restructured loans 1,571 3,538 3,734 5,266 5,247 Other real estate owned 776 380 1,169 5,541 8,865
Total nonperforming assets $6,957 $ 8,887 $ 7,870 $17,518 $22,866
Liquidity and Interest Rate Sensitivity
The liquidity of the Company is dependent on the receipt of dividends from its subsidiary banks (see Note 17 to the financial statements). Management expects that in the aggregate, its subsidiary banks will continue to have the ability to dividend adequate funds to the Company.
The Company's objective as it relates to liquidity is to insure that subsidiary banks have funds available to meet deposit withdrawals and credit demands without unduly penalizing profitability. In order to maintain a proper level of liquidity, the banks have several sources of funds available on a daily basis which can be used for liquidity purposes. Those sources of funds are:
The banks' core deposits consisting of both business and non-business deposits
Cash flow generated by repayment of loan principal and interest
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.
Interest Rate Sensitivity
In that it is extremely difficult to accurately predict interest rate movements, it is management's intention to maintain the cumulative interest sensitivity gap at the one year time frame between plus or minus 10% as a percent of total assets. The gap position may be managed by (1) purchasing investment securities with a maturity date within the desired time frame, (2) offering interest rate incentives to encourage loan customers to choose the desired maturity, and (3) offer interest rate incentives to encourage deposit customers to choose the desired maturity.
The following chart illustrates interest rate sensitivity at December 31, 1995 for various time periods. The purpose of this GAP chart is to measure interest rate risk utilizing the repricing intervals of the interest sensitive assets and liabilities. Rising interest rates are likely to increase net interest income in a positive GAP position while falling interest rates are beneficial in a negative GAP position. The Company has a negative GAP position through three months, but then shifts to a nearly neutral GAP position at twelve months. This positioning is due to management's anticipated economic outlook and other competitive factors.
After Three After Months But One Year But Within Within Twelve Within Five After (In millions) Three Months Months Years Five Years Total
Interest earning assets: Investment securities $ 81.1 $ 28.4 $ 89.8 $ 27.6 $226.9 Federal funds sold 68.4 68.4 Loans, net of unearned income 218.7 167.1 147.2 10.1 543.1
Total $368.2 $195.5 $237.0 $ 37.7 $838.4 Percentage of total interest earning assets 43.9% 23.3% 28.3% 4.5% 100.0%
Rate sensitive sources of funds used to finance interest earning assets: Interest bearing deposits $379.5 $141.4 $119.5 $ 5.0 $645.4 Other borrowed funds 34.5 1.0 3.0 38.5
Total $414.0 $141.4 $120.5 $ 8.0 $683.9 Percent of total rate sensitive sources of funds 60.5% 20.7% 17.6% 1.2% 100.0%
Interest sensitivity gap (45.8) 54.1 116.5 29.7 154.5
Cumulative interest sensitivity gap (45.8) 8.3 124.8 154.5
Interest sensitive assets to interest sensitive liabilities .89:1 1.38:1 1.97:1 4.71:1 1.23:1
Cumulative ratio of interest sensitive asset to interest sensitive liabilities .89:1 1.01:1 1.18:1 1.23:1
Effects of Inflation
Since most of the assets and liabilities are monetary in nature, inflation has a minor effect on banking concerns. Personnel costs, occupancy expenses and equipment costs all tend to reflect the inflation rate as measured by the consumer price index. The Company continues to attempt to offset such increases by raising noninterest income fees.
Shareholders' Equity
Shareholders equity was $105 million on December 31, 1995, increasing $4.9 million, or 4.9% from year end 1994. Dividends of $5.2 million were declared during 1995. The Company's Board of Directors approved a 9.1% increase in the quarterly dividend rate in the fourth quarter of 1995 from $.33 per share to $.36 per share. The Company's capital ratios as of December 31, 1995 and the regulatory minimums are as follows:
Farmers Capital Regulatory Bank Corporation Minimum
Tier 1 risk based 18.29% 4.00%
Total risk based 19.54 8.00
Leverage 11.73 3.00
The capital ratios of all the subsidiary banks, on an individual basis, were well in excess of the applicable minimum regulatory capital ratio requirements at December 31, 1995.
The table below is an analysis of dividend payout ratios and equity to asset ratios for five years.
December 31, 1995 1994 1993 1992 1991
Percentage of dividends declared to net income 50.24% 46.40% 39.78% 66.26% 98.18%
Percentage of average shareholders' equity to average total assets 11.81 11.57 11.22 10.85 10.64
Shareholder Information
As of January 1, 1996, there were 818 shareholders of record. This figure does not include individual participants in security position listings.
Stock Prices
Farmers Capital Bank Corporation's stock is traded in the National Association of Security Dealers Automated Quotation System (NASDAQ) National Market System, with sales prices reported by the National Association of Securities Dealers, under the NASDAQ symbol: FFKT. The table below is an analysis of the stock prices and dividends declared for 1995 and 1994.
Stock Prices Dividends High Low Declared
Fourth Quarter $43.50 $37.00 $0.36 Third Quarter 39.50 33.00 0.33 Second Quarter 37.00 32.80 0.33 First Quarter 38.00 35.50 0.33
Fourth Quarter $40.50 $36.50 $0.33 Third Quarter 41.00 36.88 0.30 Second Quarter 43.00 37.00 0.30 First Quarter 39.50 33.00 0.30
Dividends declared per share increased $.12, or 9.8% and $.12 or 10.8%, for the years 1995 and 1994, respectively.
Accounting Requirements
In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no be recoverable. If the sum of the expected future cash flows resulting from an asset's use and disposition is less than the carrying amount of the asset, an impairment loss is recognized.
This Statement if effective for fiscal years beginning after December 15, 1995. The Company does not expect the implementation of this Statement to have a material effect on the financial statements.
In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage Servicing Rights". This Statement amends FASB Statement No. 65, "Accounting for Certain Mortgage Banking Activities", to require that a mortgage banking enterprise recognize as separate assets rights to service mortgage loans for others, however those servicing rights are acquired. The total cost of the mortgage loans should be allocated between the mortgage servicing rights and the loans based on their relative fair values if it is practicable to estimate those fair values. If not, the entire cost should be allocated to the mortgage loans.
This Statement applies prospectively in fiscal years beginning after December 15, 1995. The Company does not expect the implementation of this Statement to have a material affect on the financial statements.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation". The Statement establishes financial accounting and reporting standards for stock-based employee compensation plans. This Statement also applies to transactions in which an entity issues its equity instruments to acquire goods or services from nonemployees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
The accounting requirements of this Statement are effective for transactions entered into in fiscal years that begin after December 15, 1995. The Company does not expect this Statement to have an effect on the financial statements in that the Company is not involved with any stock-based employee compensation plans or transactions to acquire goods or services from nonemployees in exchange for equity.
1994 Compared with 1993
Net income was $10.25 million in 1994 compared to $10.8 million in 1993, a decrease of $550 thousand, or 5.0%. Net income per share decreased to $2.65 from $2.79, or 5.0%. The decrease resulted from three nonrecurring events: (1)nonrecurring recovery of prior year losses increased 1994 net income by $503 thousand; (2) settlement of a bond claim increased 1993 net income by $3.5 million; (3) adoption of SFAS No. 109 "Accounting for Income Taxes" increased 1993 net income by $380 thousand. Adjusting each year for these items, net income would increase 40.7% to $9.7 million or $2.52 per share in 1994, from $6.9 million or $1.79 per share in 1993. Also after adjustment, return on average assets and average equity would increase to 1.16% and 9.99% in 1994 compared to 0.85% and 7.58% in 1993.
Net interest income on a tax equivalent basis increased 11% to $37.7 million. The growth was due to the $31.0 million increase in average earning assets. The spread between rates earned and paid and the net interest margin both increased in 1994 to 4.45% and 5.06%, respectively compared to 4.19% and 4.73% in 1993.
Noninterest income increased $876 thousand, or 8.2% in 1994. The majority of the increase can be attributed to the $758 thousand nonrecurring recovery of prior year losses. Third party brokerage income, service charges and fees and trust income contributed to the remaining part of the increase.
Noninterest expense increased $1.0 million to $31.1 million in 1994. Salaries and benefits, the largest component, increased $793 thousand. Occupancy expenses were up $56 thousand and equipment expenses were down $113 thousand. FDIC insurance premiums were down $61 thousand. Other real estate expenses decreased $97 thousand.
Income tax expense was $4.3 million in 1994, a decrease of $802 thousand from 1993, which correlates to the decrease in income before taxes and the higher percentage of tax free income. The effective tax rate for 1994 was 29.4% compared to 32.7% in 1993.
On December 31, 1994, the allowance for loan losses totaled $8.9 million, or 1.7% of loans, net of unearned, down slightly from 1993. The provision for loan losses increased $4.2 million in 1994, which can be directly attributed to the bond claim settlement received in 1993. Nonperforming assets increased $1.0 million, or 12.9% in 1994 although they have otherwise steadily decreased over the previous four years.
Average assets, average earning assets, average loans, and average deposits increased between 1994 and 1993 by 3.5%, 4.3%, 9.4% and 2.4% respectively.
Stockholders' equity was $100.1 million on December 31, 1994, an increase of $5 million, or 5.2% from 1993.
Item 8

Item 8 - Financial Statements and Supplementary Data
Report of Independent Accountants
To the Board of Directors and Shareholders Farmers Capital Bank Corporation
We have audited the accompanying consolidated balance sheets of Farmers Capital Bank Corporation and Subsidiaries as of December 31, 1995 and 1994 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Farmers Capital Bank Corporation and Subsidiaries as of December 31, 1995 and 1994 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 5 to the consolidated financial statements, in 1995 the Company changed its method of accounting for impaired loans. Also, as discussed in Notes 3, 10, and 12 to the consolidated financial statements, in 1994, the Company changed its method of accounting for certain investments in debt and equity securities and in 1993 the Company changed its method of accounting for income taxes and other postretirement benefits.
Coopers & Lybrand L.L.P.
Louisville, Kentucky January 16, 1996
Consolidated Balance Sheets
December 31, (In thousands, except share figures) 1995 1994
Assets Cash and cash equivalents: Cash and due from banks $ 41,126 $ 56,304 Interest bearing deposits in other banks 688 577 Federal funds sold and securities purchased under agreement to resell 68,370 43,670
Total cash and cash equivalents 110,184 100,551 Investment securities: Available for sale 105,933 72,466 Held to maturity 120,991 120,477 Loans 554,942 544,566 Less: Allowance for loan losses (8,472) (8,889) Unearned income (11,762) (11,376)
Loans, net 534,708 524,301 Bank premises and equipment 19,916 20,588 Interest receivable 7,889 6,778 Deferred income taxes 1,363 1,867 Other assets 5,129 4,675
Total Assets $906,113 $851,703
Liabilities Deposits: Noninterest bearing $109,490 $103,933 Interest bearing 645,371 592,762
Total deposits 754,861 696,695 Other borrowed funds 38,524 48,392 Dividends payable 1,392 1,276 Interest payable 2,370 1,715 Other liabilities 4,037 3,561
Total liabilities 801,184 751,639
Commitments and contingencies Shareholders' equity Common stock, par value $.25 per share, 4,804,000 shares authorized; 3,866,382 shares issued and outstanding at December 31, 1995 and 1994 967 967 Capital surplus 9,094 9,094 Retained earnings 95,694 90,524 Net unrealized loss on securities available for sale, net of tax (826) (521)
Total shareholders' equity 104,929 100,064
Total liabilities and shareholders' equity $906,113 $851,703
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Income
For the years ended December 31, (In thousands, except per share data) 1995 1994 1993
Interest income Interest and fees on loans $ 53,965 $ 46,951 $ 43,291 Interest on investment securities: Taxable 7,923 6,106 7,539 Nontaxable 2,331 2,295 1,510 Interest on deposits in other banks 116 122 37 Interest on federal funds sold and securities purchased under agreement to resell 2,926 2,276 2,235
Total interest income 67,261 57,750 54,612
Interest expense Interest on deposits 26,274 20,171 20,737 Interest on other borrowed funds 1,841 1,415 1,031
Total interest expense 28,115 21,586 21,768
Net interest income 39,146 36,164 32,844 Provision (credit) for loan losses 3,727 2,125 (2,026)
Net interest income after provision (credit) for loan losses 35,419 34,039 34,870
Noninterest income Service charges and fees on deposits 5,425 4,743 4,615 Trust income 1,176 1,202 1,157 Other 5,314 5,586 4,883
Total noninterest income 11,915 11,531 10,655
Noninterest expense Salaries and employee benefits 16,788 15,953 15,160 Occupancy expenses, net 2,154 1,991 1,935 Equipment expenses 2,712 2,554 2,667 Bank shares tax 1,000 1,097 1,011 Deposit insurance expense 826 1,512 1,573 Other 9,093 7,949 7,689
Total noninterest expense 32,573 31,056 30,035
Income before income taxes and cumulative effect of change in accounting principle 14,761 14,514 15,490 Income tax expense 4,372 4,264 5,066
Income before cumulative effect of change in accounting principle 10,389 10,250 10,424 Cumulative effect of change in accounting principle 380
Net income $10,389 $ 10,250 $ 10,804
Per common share: Income before cumulative effect of change in accounting principle $ 2.69 $ 2.65 $ 2.69 Cumulative effect of change in accounting principle .10
Net income $ 2.69 $ 2.65 $ 2.79
Weighted average shares outstanding 3,866 3,866 3,866
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, 1995, 1994 and 1993 (In thousands, except per share data) Net Unrealized Gain(Loss) on Total Common Capital Retained Securities Shareholders' Stock Surplus Earnings Available for Sale Equity
Balance at January 1, 1993 $967 $9,094 $78,518 $88,579 Cash dividends declared (4,292) (4,292) Net income 10,804 10,804
Balance at December 31, 1993 967 9,094 85,030 95,091 Cumulative effect of net unrealized gain on securities available for sale, net of tax $182 182 Cash dividends declared, $1.23 per share (4,756) (4,756) Net income 10,250 10,250 Net unrealized loss on securities available for sale, net of tax (703) (703)
Balance at December 31, 1994 967 9,094 90,524 (521) 100,064
Cash dividends declared, $1.35 per share (5,219) (5,219) Net income 10,389 10,389 Net unrealized loss on securities available for sale, net of tax (305) (305)
Balance at December 31, 1995 $ 967 $ 9,094 $95,694 $(826) $104,929
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Cash Flows
For the Years Ended December 31, (In thousands) 1995 1994 1993
Cash flows from operating activities: Net income $ 10,389 $ 10,250 $ 10,804 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,634 2,553 2,775 Net amortization of investment security premiums and discounts: Available for sale (818) 117 Held to maturity 238 326 Carried at amortized cost 893 Provision (credit) for loan losses 3,727 2,125 (2,026) Loans originated for sale (14,730) (3,840) (5,035) Sale of loans 14,730 3,840 5,035 Deferred income tax expense (benefit) 732 (18) (430) Loss on sale of fixed assets 32 19 Investment security (gains) losses: Available for sale 74 Carried at amortized cost (4) Changes in: Interest receivable (1,111) (358) 408 Other assets (1,078) 785 4,265 Interest payable 655 240 (477) Other liabilities 476 589 (4,040)
Net cash provided by operating activities 15,844 16,715 12,187
Cash flows from investing activities: Proceeds from maturities of investment securities: Available for sale 84,897 73,841 Held to maturity 51,855 21,609 Carried at amortized cost 84,743 Proceeds from sales of investment securities: Available for sale 11,603 Carried at amortized cost 7,989 Purchases of investment securities: Available for sale (118,004) (77,005) Held to maturity (52,607) (35,431) Carried at amortized cost (121,643) Net increase in loans (14,134) (53,336) (16,851) Purchases of bank premises and equipmen (1,413) (921) (1,649) Proceeds from sale of equipment 6 16
Net cash used in investing activities (49,406) (59,634) (47,395)
Cash flows from financing activities: Net increase (decrease) in deposits 58,166 39,262 (27,096) Dividends paid (5,103) (4,640) (4,176) Net increase (decrease) in other borrowed funds (9,868) 11,064 (1,737)
Net cash provided by (used in) financing activities 43,195 45,686 (33,009)
Net change in cash and cash equivalents 9,633 2,767 (68,217) Cash and cash equivalents at beginning of year 100,551 97,784 166,001
Cash and cash equivalents at end of year $110,184 $100,551 $ 97,784
Supplemental disclosures: Cash paid during the year for: Interest $ 27,460 $ 21,346 $ 22,245 Income taxes 3,730 4,255 5,337 Cash dividend declared and unpaid 1,392 1,276 1,160
The accompanying notes are an integral part of the consolidated financial statements.
1. Summary of Significant Accounting Policies The accounting and reporting policies of Farmers Capital Bank Corporation and Subsidiaries conform to generally accepted accounting principles and general practices applicable to the banking industry. The more significant accounting policies are summarized below:
Basis of Presentation and Organization: The consolidated financial statements include the accounts of Farmers Capital Bank Corporation (the "Company"), a bank holding company, and its subsidiaries, including its principal subsidiary, Farmers Bank & Capital Trust Company. All significant intercompany transactions and accounts have been eliminated in consolidation.
The Company is predominantly engaged in the business of receiving deposits from and making real estate, commercial and consumer loans to businesses and consumers in central Kentucky.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect 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 effect 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 1995 presentation. These reclassifications do not affect net income or shareholders' equity as previously reported.
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: All investments in debt securities and all investments in equity securities that have readily determinable fair values are classified into three categories. Securities that management has 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 as a separate component of stockholders' equity 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: 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. Accrual of interest is adjusted or discontinued on a loan when, in the opinion of management, its collection becomes doubtful.
Provision for Loan Losses: The provision for loan losses charged to operating expenses is an amount that is sufficient to maintain the allowance for loan losses at an adequate level based on management's best estimate of possible future loan losses. Management's determination of the adequacy of the allowance is based on such considerations as the current condition and volume of the Company's loan portfolios, economic conditions within the Company's service areas, review of specific problem loans, and any other factors influencing the collectibility of the loan portfolios.
Other Real Estate: Other real estate owned and held for sale included with other assets on the accompanying consolidated balance sheets includes properties acquired by the Company through actual loan foreclosures. Other real estate owned is carried at 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 are measured by their market value based on comparable sales. Any reduction to fair value from the fair value recorded at the time of acquisition is accounted for as a valuation reserve.
Bank Premises and Equipment: Bank 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.
Earnings Per Share: Earnings per share is calculated on the basis of the weighted average number of common shares outstanding.
2. Restrictions on Cash and Due From Banks 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 average balance requirements specified by the Federal Reserve Board of Governors. The total average balances maintained in accordance with such requirements as of December 31, 1995 and 1994 were $8,988,000 and $6,449,000, respectively.
3. Investment Securities Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires investments in equity securities that have a readily determinable fair value and investments in debt securities to be classified into three categories, as follows: held to maturity debt securities, trading securities, and available for sale securities. Investments categorized as available for sale had an estimated fair value in excess of carrying value of $276,000 at January 1, 1994, and had the effect of increasing stockholders' equity by $182,000 (net of tax effect of $94,000). There was no impact on the Company's consolidated net income as a result of the adoption of SFAS No. 115.
The following summarizes the amortized cost and estimated fair values of the securities portfolio at December 31, 1995. The summary is divided into available for sale and held to maturity securities.
December 31, 1995 Gross Gross Estimated (In thousands) Amortized Unrealized Unrealized Fair Available for Sale Cost Gains Losses Value
U.S. Treasury $ 16,609 $ 70 $ 11 $ 16,668 Obligations of U.S. Government agencies 78,992 52 1,420 77,624 Mortgage-backed securities 10,210 41 10,251 Other securities 1,372 18 1,390
Total securities - available for sale $107,183 $181 $1,431 $105,933
Held to Maturity
U.S. Treasury $ 15,994 $ 79 $ 6 $ 16,067 Obligations of U.S. Government agencies 34,732 192 176 34,748 Obligations of states and political subdivisions 54,696 721 256 55,161 Mortgage-backed securities 13,151 214 31 13,334 Other securities 2,418 24 8 2,434
Total securities - held to maturity $120,991 $1,230 $477 $121,744
The following summarizes the amortized cost and estimated fair values of the securities portfolio at December 31, 1994.
December 31, 1994 Gross Gross Estimated (In thousands) Amortized Unrealized Unrealized Fair Available for Sale Cost Gains Losses Value
U.S. Treasury $ 8,991 $ 246 $ 8,745 Obligations of U.S. Government agencies 56,308 $ 1 454 55,855 Mortgage-backed securities 4,910 91 4,819 Other securities 3,046 1 3,047
Total securities - available for sale $73,255 $ 2 $ 791 $72,466
Held to Maturity
U.S. Treasury $ 45,559 $ 2 $ 699 $44,862 Obligations of U.S. Government agencies 18,192 1,045 17,147 Obligations of states and political subdivisions 51,095 333 1,835 49,593 Mortgage-backed securities 5,131 228 4,903 Other securities 500 10 490
Total securities - held to maturity $120,477 $335 $3,817 $116,995
The amortized cost and estimated fair value of the securities portfolio at December 31, 1995, by contractual maturity, are shown below. The summary is divided into available for sale and held to maturity securities.
Available for Sale Held to Maturity
December 31, 1995 Amortized Estimated Amortized Estimated (In thousands) Cost Fair Value Cost Fair Value
Due in one year or less $ 46,430 $ 46,415 $ 29,203 $ 29,208 Due after one year through five years 57,277 56,017 65,387 65,854 Due after five years through ten years 194 195 24,466 24,730 Due after ten years 3,282 3,306 1,935 1,952
$107,183 $105,933 $120,991 $121,744
Proceeds from sales and maturities of investments in debt securities during 1995, 1994 and 1993 were $136,752,000, $107,053,000 and $92,732,000, respectively. Gross gains of $2,000, $3,000 and $48,000 and gross losses of $0, $77,000 and $44,000 for 1995, 1994 and 1993, respectively, were realized on those sales and maturities.
The amortized cost and estimated fair value of investment securities which were pledged as collateral for public deposits, treasury deposits, trust funds, customer repurchase agreements, and other purposes as required by law at December 31, 1995 and 1994 are shown below. The securities are divided into available for sale and held to maturity.
1995 1994
Available Held to Available Held to December 31, (In thousands) for sale maturity for sale maturity
Amortized cost $51,077 $67,903 $31,224 $80,557 Estimated fair value 50,217 68,496 30,673 78,104
4. Loans Major classifications of loans are summarized as follows:
December 31, (In thousands) 1995 1994
Commercial, financial and agricultural $114,412 $115,068 Real estate - construction 26,380 28,755 Real estate - mortgage 292,913 279,264 Consumer loans 99,571 107,450 Lease financing 21,666 14,029
Total loans 554,942 544,566 Less unearned income (11,762) (11,376)
Total loans, net of unearned income $543,180 $533,190
Loans to directors, executive officers, principal shareholders, including loans to affiliated companies of which directors, executive officers and principal shareholders are principal owners, and loans to members of the immediate family of such persons, were approximately $12,602,000 and $14,908,000 at December 31, 1995 and 1994, respectively. An analysis of the activity with respect to these loans follows:
(In thousands)
Balance, December 31, 1994 $14,908 Additions, including loans now meeting disclosure requirements 12,077 Amounts collected, including loans no longer meeting disclosure requirements (12,965) Amounts charged off related to director loans (1,418)
Balance, December 31, 1995 $12,602
5. Allowance for Loan Losses On January 1, 1995, the Company implemented SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" which amends SFAS No. 114. The two Statements address the following:
1. The accounting by creditors for impairment of a loan.
2. The accounting by creditors for loans that are restructured in a troubled debt restructuring involving a modification of terms of a receivable.
3. The elimination of the categories of loans classified as in-substance foreclosures.
SFAS No. 114 requires the measurement of impaired loans based on the present value of expected future cash flows using the loan's effective interest rate or, as a practical expedient, it may be measured on the fair market value of the loan if the loan is collateral dependent. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. If the measure of the impaired loan is less than the recorded investment, an impairment will be recognized by creating a valuation allowance with a corresponding charge to the provision for loan loss. The adoption of SFAS No. 114 did not result in additional provisions for loan losses or changes in previously reported net earnings due to the fact that the Company's existing methods of measuring loan impairment are consistent with the methods prescribed by the Statement.
SFAS No. 114 does not apply to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment. The Company has identified these loans as credit card loans and home mortgages, and all other loans less than $500,000.
The factors considered by management in determining if a loan is impaired include, but are not limited to, the following: length of delinquency, past history with the borrower, financial condition of the borrower, ability of the borrower to repay the debt based upon cash flow information, intentions of the borrower, and value of the collateral. Impairment is not necessarily determined by a minimum delay in payment. A minimum delay in payment is when the exact terms of the loan agreement have not been met by the borrower; however, the Company believes that contractual interest and principal payments will still be received These loans are considered non-accrual loans because the timing of interest payments is unknown; however, it is still likely that interest will be received. Payments received while a loan is on non-accrual status are applied against principal only.
All of the loans of the Company to which SFAS No. 114 applies are classified as commercial loans. Due to the size of the Company and the few loans that meet the criteria for application of SFAS No. 114, no further risk classification is necessary. On December 31, 1995, the recorded investment in loans for which impairment has been recognized in accordance with the SFAS No. 114 total $2.0 million and the total allowance related to such loans was $785 thousand. Of the $2.0 million recorded investment, $1.1 million was measured using the present value of future cash flows method and $.9 million was measured using the fair value of collateral method. The recorded investment averaged $2.6 million for the year ended December 31, 1995. The amount of interest earned on these loans during 1995 was $113 thousand. If the Company had used a cash-based method of accounting for the interest on these loans, the interest earned would have been $114 thousand.
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 there is a valid reason for the delinquency and 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, 1995 1994 1993 (In thousands) Regular SFAS 114 Total Regular Regular Allowance Allowance Allowance Allowance Allowance
Balance, beginning of year $ 8,889 None $ 8,889 $ 8,547 $ 8,261 Provisions (credit) for loan losses 3,727 3,727 2,125 (2,026) Recoveries 740 740 841 6,259 Loans charged off (3,666) $(1,218) (4,884) (2,624) (3,947) Amount transferred to SFAS 114 allowance (2,003) (2,003) Amount transferred from regular allowance 2,003 2,003
Balance, end of year $7,687 $ 785 $8,472 $ 8,889 $ 8,547
The following is an estimate of the breakdown of the allowance for loan losses by type for the date indicated:
Year Ended December 31, (In thousands) 1995 1994
Commercial, financial and agricultural $4,138 $6,427 Real estate 1,928 1,027 Installment loans to individuals 2,176 1,264 Direct leasing financing 230 171
Total $8,472 $8,889
6. Nonperforming Assets
(In thousands) 1995 1994 1993
Non-accrual loans $2,897 $ 3,913 $ 1,565 Loans past due 90 days or more 1,713 1,056 1,402 Restructured loans 1,571 3,538 3,734
Total nonperforming loan balances at December 31, 6,181 8,507 6,701 Other real estate owned 776 380 1,169
Total nonperforming assets at December 31, $6,957 $ 8,887 $ 7,870
Nonperforming loans as a percentage of loans - net of unearned interest 1.1% 1.6% 1.4% Nonperforming assets as a percentage of loans and other real estate owned 1.3% 1.7% 1.6% Interest income that would have been recognized under original terms for the year on nonperforming loans $ 731 $ 576 $ 698 Amount of interest income recognized for the year on nonperforming loans $ 133 $ 117 $ 431
7. Bank Premises and Equipment Bank premises and equipment consist of the following:
December 31, (In thousands) 1995 1994
Land, building and leasehold improvement $22,566 $21,769 Furniture and equipment 17,919 17,616
40,485 39,385 Less accumulated depreciation and amortization 20,569 18,797
$19,916 $20,588
Depreciation and amortization of bank premises and equipment was $2,082,000, $1,973,000 and $2,197,000 in 1995, 1994 and 1993, respectively.
8. Interest Bearing Deposits Time deposits of $100,000 or more at December 31, 1995 and 1994 were $58,641,000 and $54,951,000, respectively.
9. Other Borrowed Funds Other borrowed funds are comprised primarily of securities sold under agreement to repurchase with balances of $34,638,000 and $43,525,000 at December 31, 1995 and 1994, respectively. The weighted average interest rates for 1995 and 1994 were 5.48% and 3.63%, respectively.
10. Income Taxes In February 1992, the Financial Accounting Standards Board (FASB) issued SFAS No. 109, "Accounting for Income Taxes". The Statement requires a change from the deferred method to the asset and liability method of computing deferred income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences on future years of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.
Effective January 1, 1993, the Company adopted the Statement. The cumulative effect of this adoption was an increase in net income of $380,000 ($.10 per share).
The components of income tax expense are as follows:
(In thousands) 1995 1994 1993
Currently payable $ 3,640 $ 4,282 $ 5,116 Deferred income taxes 732 (18) (50)
$ 4,372 $ 4,264 $ 5,066
An analysis of the difference between the effective income tax rates and the statutory federal income tax rate follows:
(In thousands) 1995 1994 1993
Federal statutory rate 35.0% 35.0% 34.0% Changes from statutory rates resulting from: Tax exempt interest (7.4) (7.0) (4.3) Nondeductible interest to carry municipal obligations .9 .7 .4 Amortization of intangibles 1.2 1.3 1.2 Other, net (.1) (.6) 1.4
29.6% 29.4% 32.7%
The tax effects of the significant temporary differences which comprise deferred tax assets and liabilities at December 31, 1995 and 1994 follows:
1995 1994
Assets: Loan loss reserve $3,000 $3,022 Deferred directors' fees 145 125 Postretirement benefit obligation 257 164 Investment securities 425 268 Other 260 224
4,087 3,803 Liabilities: Depreciation 1,643 1,589 Deferred loan fees 228 125 Lease financing operations 752 163 Other 101 59
2,724 1,936
Net assets $1,363 $1,867
11. Retirement Plans The Company maintains a defined contribution-money purchase pension plan which covers substantially all employees. The Company's contributions under the plan are based upon a percentage of covered employees' salaries.
The Company has established a stock bonus/employee stock ownership plan for the benefit of substantially all employees of the Company. The Company's contributions under the plan are based upon a percentage of covered employees' salaries, and are paid at the discretion of the Board of Directors of the Company. The Company contributes cash to the plan and Company shares are purchased with the cash in the open market. Cash contributed to the plan was $0, $100,265 and $0 respectively for the years ended December 31, 1995, 1994 and 1993. No stock was contributed to the plan for the years ended December 31, 1995, 1994 and 1993, respectively.
The Company has also established a profit-sharing (401K) 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 plans' expense for 1995, 1994 and 1993 was $857,000, $820,000, and $741,000, respectively.
12. 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 as incurred and totaled $131,000, $86,000 and $104,000, respectively, for the years ended December 31, 1995, 1994 and 1993. The plan is unfunded.
In December of 1990, the FASB issued SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", which requires that all such benefits be accounted for on an accrual basis rather than the prevalent cash basis. Management determined that the accumulated postretirement benefit obligation at January 1, 1993 was approximately $2,029,000. Management implemented this statement in the first quarter of 1993 and is amortizing the transition obligation over 20 years.
The following table sets forth the plan's status reconciled with the amount shown in the Company's balance sheets at December 31, 1995 and 1994.
(In thousands) 1995 1994
Accumulated postretirement benefit obligation Retirees and dependents $3,367 $2,065 Fully eligible active plan participants 671 545 Other active plan participants 684 513
Total accumulated postretirement benefit obligation 4,722 3,123 Unrecognized net loss (1,768) (266) Unamortized transition obligation (1,725) (1,826) Unrecognized prior service cost (551) (594)
Accrued postretirement benefit cost $ 678 $ 437
The components of the net periodic postretirement benefit cost at December 31, 1995 and 1994 are as follows:
(In thousands) 1995 1994
Service cost $ 19 $ 20 Interest on accumulated benefit obligation 243 213 Amortization of transition obligation and other 144 147
Total $ 406 $ 380
Major assumptions: Discount rate 7.0% 8.0%
For measurement purposes, a 13% annual rate of increase in the per capita cost of covered health care benefits for those below the age of 65 and 11% for those over 65 was assumed. The rate was assumed to decrease gradually to 6% by 2012 and remain at that level thereafter. The health care cost trend rate assumption has a significant affect on the amounts reported.
If the health care cost trend rate were to increase 1%, the service and interest cost would be $296,000 and the accumulated benefit obligation would be $5,328,000.
13. 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.
14. 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 at December 31, 1995, were $79,609,000. 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, property, plant 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 using letters of credit is essentially the same as that received when extending credit to customers. The Company had approximately $4,652,000 in irrevocable letters of credit outstanding at December 31, 1995.
15. 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.
16. Contingencies The Company's bank subsidiaries are defendants in legal actions arising from normal business activities. Management believes these actions are without merit, that in certain instances its actions or omissions were pursuant to the advice of counsel, or that the ultimate liability, if any, resulting from them will not materially affect the Company's consolidated financial position, although resolution in any year or quarter could be material for that period.
17. Dividend Limitations 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, 1995, combined retained earnings of the subsidiary banks were approximately $38,401,000 of which $4,519,000 is available for the payment of dividends in 1996 without obtaining prior approval from bank regulatory agencies.
18. Bond Claim During 1991, First Citizens Bank, Hardin County (the "Bank"), a subsidiary of the Company, filed a bond claim for $6,800,000 with its bonding company to recover loan losses incurred in 1990 resulting from an apparent scheme to defraud the Bank. The original losses were recorded as loan losses. After exhaustive efforts to settle the claim with the bonding company, the Bank initiated litigation during the first quarter of 1992 against the bonding company. During the third quarter of 1993, the Company reached a settlement in the amount of $5,279,000, which was accounted for as a loan loss recovery. Loan loss recoveries result in an increase in the allowance for loan losses ("Allowance"). The Allowance was subsequently adjusted to the amount necessary, as determined by management, to absorb possible future losses on the total loans currently outstanding. The adjustment resulted in a reduction in the provision for loan losses to the extent that the provision for the year was negative.
19. Effect of Implementing SFAS No. 116 In June 1993, the FASB issued SFAS No. 116 "Accounting for Contributions Received and Contributions Made". This Statement required that contributions made, including unconditional promises to give, be recognized as expenses in the period made at their fair values. This Statement is effective for fiscal years beginning after December 15, 1994. The Company implemented this Statement on January 1, 1995 with no impact on the financial statements.
20. Effect of Implementing SFAS No. 121 In March, 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows resulting from an asset's use and disposition is less than the carrying amount of the asset, an impairment loss is recognized.
This Statement is effective for fiscal years beginning after December 15, 1995. The Company does not expect the implementation of this Statement to have a material effect on the financial statements.
21. Effect of Implementing SFAS No. 122 In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage Servicing Rights". This Statement amends FASB Statement No. 65, "Accounting for Certain Mortgage Banking Activities", to require that a mortgage banking enterprise recognize as separate assets the rights to service mortgage loans for others, however those servicing rights are acquired. The total cost of the mortgage loans should be allocated between the mortgage servicing rights and the loans based on their relative fair values if it is practicable to estimate those fair values. If not, the entire cost should be allocated to the mortgage loans.
This Statement applies prospectively in fiscal years beginning after December 15, 1995. The Company does not expect the implementation of this Statement to have a material affect on the financial statements.
22. Effect of Implementing SFAS No. 123 In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation". The Statement establishes financial accounting and reporting standards for stock-based employee compensation plans. This Statement also applies to transactions in which an entity issues its equity instruments to acquire goods or services from nonemployees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
The accounting requirements of this Statement are effective for transactions entered into in fiscal years that begin after December 15, 1995. The Company does not expect this Statement to have an effect on the financial statements in that the Company is not involved with any stock-based employee compensation plans or transactions to acquire goods or services from nonemployees in exchange for equity.
23. Disclosures About Fair Value of Financial Instruments 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 held for investment purposes, fair values are based on quoted market prices or dealer quotes. For other securities held as investments, 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.
Loan Receivables: For variable rate loans that reprice frequently with no significant change in credit risk, fair values are based upon carrying amounts.
For certain homogeneous categories of loans, such as credit card receivables, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using a discount rate that has been adjusted for credit risk and the 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 carrying amount for variable rate and fixed maturity money market accounts and certificates of deposit approximates fair value at the reporting date. The fair value of fixed rate and fixed maturity certificates of deposit is estimated using a discounted cash flow method that applies interest 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 market value are both zero.
Other Borrowed Funds: The fair value of 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:
1995 1994
December 31, Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value
Assets: Cash and cash equivalents $110,184 $110,184 $100,551 $100,551 Investments securities: Available for sale 105,933 105,933 72,466 72,466 Held to maturity 120,991 121,744 120,477 116,995 Loans, net 534,708 528,749 524,301 518,356
Liabilities: Deposits 754,861 757,771 697,377 695,348 Other borrowed funds 38,524 37,362 47,710 46,489
24. Quarterly Financial Data Quarters Ended 1995 Unaudited (In thousands, except per share data) March 31, June 30, Sept. 30, Dec. 31,
Interest income $16,148 $16,596 $16,972 $17,545 Interest expense 6,584 6,988 7,162 7,381
Net interest income 9,564 9,608 9,810 10,164 Provision for loan losses 713 1,048 945 1,021
Net interest income after provision for loan losses 8,851 8,560 8,865 9,143 Other income 2,562 3,213 3,008 3,132 Other expense 8,057 8,667 7,727 8,122
Income before income taxes 3,356 3,106 4,146 4,153 Income tax 1,011 920 1,272 1,169
Net income $ 2,345 $ 2,186 $ 2,874 $ 2,984
Net income per common share $ 0.61 $ 0.57 $ 0.74 $ 0.77
Weighted average shares outstanding 3,866 3,866 3,866 3,866
Quarters Ended 1994 Unaudited (In thousands, except per share data) March 31, June 30, Sept. 30, Dec. 31,
Interest income $13,354 $13,863 $14,765 $15,768 Interest expense 5,035 5,104 5,546 5,901
Net interest income 8,319 8,759 9,219 9,867 Provision for loan losses 646 419 498 562
Net interest income after provision for loan losses 7,673 8,340 8,721 9,305 Other income 2,495 3,342 2,799 2,895 Other expense 7,501 7,478 7,883 8,194
Income before income taxes 2,667 4,204 3,637 4,006 Income tax 797 1,260 1,059 1,148
Net Income $ 1,870 $ 2,944 $ 2,578 $ 2,858
Net income per common share $ 0.48 $ 0.76 $ 0.67 $ 0.74
Weighted average shares outstanding 3,866 3,866 3,866 3,866
25. Parent Company Financial Statements
Condensed Balance Sheets
December 31, (In thousands) 1995 1994
Assets Cash on deposit with subsidiaries $ 24,598 $ 21,969 Investment in subsidiaries 81,349 78,577 Other assets 1,581 1,723
Total assets $107,528 $102,269
Liabilities Dividends payable $ 1,392 $ 1,276 Other liabilities 1,207 929
Total liabilities 2,599 2,205
Shareholders' Equity Common stock 967 967 Capital surplus 9,094 9,094 Retained earnings 95,694 90,524 Net unrealized loss on securities available for sale, net of tax (826) (521)
Total shareholders' equity 104,929 100,064
Total liabilities and shareholders' equity $107,528 $102,269
25. Parent Company Financial Statements (cont.)
Condensed Statements of Income
December 31, (In thousands) 1995 1994 1993
Income Dividends from subsidiaries $ 7,756 $ 24,090 $ 4,038 Interest income 101 72 48 Other income 724 740 388
Total income 8,581 24,902 4,474 Expense Other expense 1,556 1,526 1,579
Total expense 1,556 1,526 1,579
Income before income tax benefit, cumulative effect of change in accounting principle and equity in income of subsidiaries less amounts distributed to parent 7,025 23,376 2,895 Income tax benefit 288 154 378
Income before cumulative effect of change in accounting principle and equity in income of subsidiaries less amounts distributed to parent 7,313 23,530 3,273 Cumulative effect of change ccounting principle 1,237
Income before equity in income of subsidiaries less amounts distributed to parent 7,313 23,530 4,510 Equity in income of subsidiaries less amounts distributed to parent 3,076 (13,280) 6,294
Net income $ 10,389 $ 10,250 $ 10,804
25. Parent Company Financial Statements (cont.)
Condensed Statements of Cash Flows
December 31, (In thousands) 1995 1994 1993
Cash flows from operating activities: Net income $ 10,389 $ 10,250 $ 10,804 Adjustments to reconcile net income to net cash provided by operating activities: Equity in income of subsidiaries less amounts distributed to parent (3,076) 13,280 (6,294) Deferred income tax expense (benefit) 3 22 (1,237) Change in other assets and liabilities, net 417 526 (723)
Net cash provided by operating activities 7,733 24,078 2,550
Cash flows from financing activities: Cash dividends (5,104) (4,640) (4,176)
Net cash used in financing activities (5,104) (4,640) (4,176)
Net increase (decrease) in cash and cash equivalents 2,629 19,438 (1,626) Cash and cash equivalents at beginning of year 21,969 2,531 4,157
Cash and cash equivalents at end of year $ 24,598 $ 21,969 $ 2,531
Supplemental disclosures: Cash paid during the year for: Income taxes $ 3,730 $ 4,255 $ 5,337 Cash dividend declared and unpaid 1,392 1,276 1,160
PART II
Item 9

Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no disagreements with or changes in accountants during the three month period ended December 31, 1995.
PART III
Item 10

Item 10 - Directors and Executive Officers of the Registrant
Positions and Years of Service Offices With With the Executive Officer Age Registrant Registrant
Charles S. Boyd 54 Director 1, President 32* and CEO
James H. Childers 53 Executive Vice President 26* Director 2
Additional information required by Item 10 is hereby incorporated by reference from the Registrant's definitive proxy statement in connection with its annual meeting of shareholders scheduled for May 14, 1996 which will be filed with the Commission in April 1996 pursuant to Regulation 14A.
* Includes years of service with the Registrant and Farmers Bank & Capital Trust Co.
1 Also a director of Farmers Bank, Horse Cave Bank, Farmers Georgetown Bank, United Bank, Lawrenceburg Bank, First Citizens Bank, FCB Services and Money One.
2 A director of Farmers Georgetown Bank.
Item 11

Item 11 - Executive Compensation
Item 12

Item 12 - Security Ownership of Certain Beneficial Owners and Management
Item 13

Item 13 - Certain Relationships and Related Transactions
The information required by Items 11 through 13 is hereby incorporated by reference from the Registrant's definitive proxy statement in connection with its annual meeting of shareholders scheduled for May 14, 1996 which will be filed with the Commission in April, 1996 pursuant to Regulation 14A.
PART IV
Item 14

Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List of documents and exhibits
1 & 2 Financial Statements and Schedules Reference (page)
Report of Independent Accountants 28
Consolidated Balance Sheets at December 31, 1995 and 1994 29
Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993 30
Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 1995, 1994 and 1993 31
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 32
Notes to the Consolidated Financial Statements 33 - 49
All schedules are omitted for the reason they are not required, or are not applicable, or the required information is disclosed elsewhere in the financial statements and related notes thereto.
3. Exhibits:
21. Subsidiaries of the Registrant
27. Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Registrant during the three month period ended December 31, 1995.
(c) Exhibits
See list of exhibits set forth on page 54.
(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: Charles S. Boyd Charles Scott Boyd President and Chief Executive Officer
Date: 3/21/96
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.
Charles S. Boyd President, Chief Executive Charles Scott Boyd Officer and Director (principal executive officer of the Registrant) 3/21/96
Chairman John Poage Stewart
Michael Meagher Sullivan Director 3/21/96 Michael Meagher Sullivan
Director Joseph Charles Yagel
Warner Underwood Hines Director 3/22/96 Warner Underwood Hines
Director John James Hopkins II
J.D. Sutterlin Director 3/21/96 John Douglas Sutterlin
William Ray Sykes Director 3/21/96 William Ray Sykes
Director Charles Owen Bush
E. Bruce Dungan Director 3/22/96 Ellwood Bruce Dungan
C. Douglas Carpenter Vice President and CFO 3/21/96 Cecil Douglas Carpenter (principal financial and accounting officer)
FARMERS CAPITAL BANK CORPORATION INDEX OF EXHIBITS
21. Subsidiaries of the Registrant
27. Financial Data Schedule
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, 1995 and the jurisdiction or organization in which each subsidiary was incorporated or organized.
Percentage of Voting Jurisdiction Stock held by Subsidiaries of the Registrant of Organization Registrant
Farmers Bank & Capital Trust Co. Kentucky 100%
United Bank & Trust Company Kentucky 100%
First Citizens Bank, Hardin County, Inc. Kentucky 100%
Lawrenceburg National Bank Kentucky 100%
Farmers Bank and Trust Company Kentucky 100%
Horse Cave State Bank Kentucky 100%
FCB Services, Incorporated Kentucky 100%
Farmers Capital Insurance Company 1 Kentucky 100%
Farmers Bank Realty Company 2 Kentucky
Frankfort ATM Ltd. 3 Kentucky
Money One Credit of Kentucky. Inc. 2 Kentucky
Money One Credit Company 4 Kentucky
Leasing One Corporation 2 Kentucky
1 Dormant company, no activity to date.
2 A wholly-owned subsidiary of Farmers Bank & Capital Trust Company.
3 A fifty (50%) percent owned joint venture of Farmers Bank & Capital Trust Company.
4 A partnership of which ninety-eight (98%) is owned by Farmers Bank & Capital Trust Company, one (1%) percent is owned by Money One Credit of Kentucky, Inc. and one (1%) percent is owned by Farmers Bank Realty Company.