-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NXEwmscxn1sAVHxL8K+nQIu7WkA5MvZsjnXhPj5P3vXOzwljZrmBn2NdUnjhgBOJ 8ewT0Lku2fH/dG/ej/zM5A== 0000713095-02-000005.txt : 20020415 0000713095-02-000005.hdr.sgml : 20020415 ACCESSION NUMBER: 0000713095-02-000005 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARMERS CAPITAL BANK CORP CENTRAL INDEX KEY: 0000713095 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 611017851 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-14412 FILM NUMBER: 02590617 BUSINESS ADDRESS: STREET 1: PO BOX 309 STREET 2: 202 W MAIN ST CITY: FRANKFORT STATE: KY ZIP: 40602 BUSINESS PHONE: 5022271668 MAIL ADDRESS: STREET 1: P O BOX 309 STREET 2: 202 WEST MAIN STREET CITY: FRANKFORT STATE: KY ZIP: 40602 10-K405 1 a10k123101.txt FORM 10-K 12/31/01 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-14412 Farmers Capital Bank Corporation (Exact name of registrant as specified in its charter) Kentucky 61-1017851 - -------------------------------------------- ------------------------ (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification Number) P.O. Box 309, 202 West Main St. Frankfort, Kentucky 40601 - -------------------------------------------- ------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (502) 227-1600 Securities registered pursuant to Section 12(b) of the Act: None None - ----------------------------- ------------------------------------------- (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: Common Stock - $ .125 per share Par Value ----------------------------------------- (Title of Class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of March 27, 2002 was $ 251,733,711. As of March 27, 2002 there were 6,896,814 shares outstanding. Documents incorporated by reference: Portions of the Registrant's 2001 Annual Report to Shareholders are incorporated by reference into Part II. Portions of the Registrant's Proxy Statement relating to the Registrant's 2002 Annual Meeting of Shareholders are incorporated by reference into Part III. An index of exhibits filed with this Form 10-K can be found on page 14. FARMERS CAPITAL BANK CORPORATION FORM 10-K INDEX Page Part I Item 1. Business 3 Item 2. Properties 7 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 9 Part II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 9 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 10 Item 8. Financial Statements and Supplementary Data 10 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 11 Part III Item 10. Directors and Executive Officers of the Registrant 11 Item 11. Executive Compensation 11 Item 12. Security Ownership of Certain Beneficial Owners and Management 11 Item 13. Certain Relationships and Related Transactions 11 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 12 Signatures 13 Index of Exhibits 14 PART I Item 1. Business - ---------------- Organization ------------ Farmers Capital Bank Corporation (the "Registrant" or the "Company") is a financial holding company. The Registrant was originally formed as a bank holding company under the Bank Holding Company Act of 1956, as amended, on October 28, 1982 under the laws of the Commonwealth of Kentucky. During 2000, the Registrant elected to change from a bank holding company to a financial holding company (see discussion in Supervision and Regulation section of this report). The Registrant's subsidiaries provide a wide range of banking and bank-related services to customers throughout Kentucky. The bank subsidiaries owned by the Registrant include Farmers Bank & Capital Trust Co. ("Farmers Bank"), Frankfort, Kentucky; United Bank & Trust Co. ("United Bank"), Versailles, Kentucky; Lawrenceburg National Bank ("Lawrenceburg Bank"), Harrodsburg, Kentucky; First Citizens Bank, Shepherdsville, Kentucky; Farmers Bank and Trust Company ("Farmers Georgetown Bank"), Georgetown, Kentucky; and Kentucky Banking Centers, Inc. ("Ky. Banking Centers"), Glasgow, Kentucky. The Registrant also owns FCB Services, Inc., ("FCB Services"), a nonbank data processing subsidiary located in Frankfort, Kentucky and Kentucky General Life Insurance Company, Inc., ("Kentucky General"), a nonbank insurance agency subsidiary located in Frankfort, Kentucky. The Registrant's banking operations are aggregated into one reportable operating segment. As of December 31, 2001, the Registrant had $1.2 billion in consolidated assets. Farmers Bank, originally organized in 1850, is a state chartered bank engaged in a wide range of commercial and personal banking activities, which include accepting savings, time and demand deposits; making secured and unsecured loans to corporations, individuals and others; providing cash management services to corporate and individual customers; issuing letters of credit; renting safe deposit boxes; and providing funds transfer services. The bank's lending activities include making commercial, construction, mortgage and personal loans and lines of credit. The bank serves as an agent in providing credit card loans. It acts as trustee of personal trusts, as executor of estates, as trustee for employee benefit trusts and as registrar, transfer agent and paying agent for bond issues. Farmers Bank also acts as registrar, transfer agent and paying agent for the Registrant's stock issue. Farmers Bank is the general depository for the Commonwealth of Kentucky and has been for more than 70 years. Farmers Bank is the largest bank chartered in Franklin County. It conducts business in its principal office and four branches within Frankfort, the capital of Kentucky. Franklin County is a diverse community, including government, commerce, finance, industry, medicine, education and agriculture. The bank also serves many individuals and corporations throughout Central Kentucky. On December 31, 2001, it had total consolidated assets of $568 million, including loans net of unearned income of $262 million. On the same date, total deposits were $353 million and shareholders' equity totaled $50 million. Farmers Bank had four subsidiaries during 2001: Farmers Bank Realty Co. ("Realty"), Leasing One Corporation ("Leasing One"), Farmers Capital Insurance Corporation ("Farmers Insurance"), and E Properties, Inc. ("E Properties"). Prior to 2001, Farmers Bank participated in a joint venture - Frankfort ATM, Ltd. ("ATM"). Realty was incorporated in 1978 for the purpose of owning certain real estate used by the Registrant and Farmers Bank in the ordinary course of business. Realty had total assets of $3.2 million on December 31, 2001. Leasing One was incorporated in August 1993 to operate as a commercial equipment leasing company. It is located in Frankfort and is currently licensed to conduct business in thirteen states. In 1997, it began to service leases for unaffiliated third parties. At year-end 2001 it had total assets of $24.5 million, including leases net of unearned income of $24.2 million. Farmers Insurance was organized in 1988 to engage in insurance activities permitted to the Registrant by federal and state law. Farmers Bank capitalized this corporation, which had no activity prior to 1998, in December 1998. Farmers Insurance acts as an agent for Commonwealth Land Title Co. At year-end 2001 it had total assets of $77 thousand. Farmers Insurance has a 50% interest in Farmers Fidelity Insurance Company, LLP ("Farmers Fidelity"). The Creech & Stafford Insurance Agency, Inc., an unrelated party to the Registrant, also has a 50% interest in Farmers Fidelity. E Properties was incorporated on May 5, 2000. This company was involved in real estate management and liquidation for properties repossessed by Farmers Bank. E Properties was effectively liquidated on December 31, 2001. Farmers Bank had a 50% interest in ATM, a joint venture for the purpose of ownership of automatic teller machines in the Frankfort area. State National Bank, a Frankfort bank not otherwise associated with the Registrant, also had a 50% interest in ATM. ATM was dissolved in December 2000, and the total remaining assets were distributed to its partners. On February 15, 1985, the Registrant acquired United Bank, a state chartered bank originally organized in 1880. It is engaged in a general banking business providing full service banking to individuals, businesses and governmental customers. It conducts business in its principal office and two branches in Woodford County, Kentucky. During 1997, it purchased a building in Midway for the purpose of moving its existing Midway branch. The new building allows the bank to offer drive thru services to its customers in Midway. United Bank is the largest bank chartered in Woodford County with total assets of $142 million and total deposits of $126 million at December 31, 2001. On June 28, 1985, the Registrant acquired Lawrenceburg Bank, a national chartered bank originally organized in 1885. It is engaged in a general banking business providing full service banking to individuals, businesses and governmental customers. During 1998, it was granted permission by the Office of the Comptroller of the Currency ("OCC") to move its charter and main office to Harrodsburg, Kentucky in Mercer County. Construction of the new site in Harrodsburg was completed and operations began there in July 1999. Lawrenceburg Bank conducts business at the Harrodsburg site and two branches in Anderson County, Kentucky. The Anderson County branches rank number one in size compared to all banks chartered in Anderson County. Total assets were $126 million and total deposits were $113 million at December 31, 2001. On March 31, 1986, the Registrant acquired First Citizens Bank, a state chartered bank originally organized in 1964. It is engaged in a general banking business providing full service banking to individuals, businesses and governmental customers. During 1997, it applied and was granted permission by the Kentucky Department of Financial Institutions ("KDFI") to move its charter and main office to Shepherdsville, Kentucky in Bullitt County. First Citizens Bank completed construction of the site and began operations in April 1998. During 1999, First Citizens Bank closed its South Dixie branch in Elizabethtown, Kentucky. It now conducts business in its four branches in Hardin County, Kentucky along with its principal office in Shepherdsville. First Citizens Bank's Hardin County branches rank number four in size compared to all banks chartered in Hardin County. Total assets were $145 million and total deposits were $121 million at December 31, 2001. 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 chartered in Scott County with total assets of $165 million and total deposits of $129 million at December 31, 2001. On June 15, 1987, the Registrant acquired Horse Cave State Bank, a state chartered bank originally organized in 1926. During 1997, it received approval from the KDFI to move its charter to Glasgow, Kentucky. Subsequent to that approval, Horse Cave State Bank changed its name to Kentucky Banking Centers, Inc. Ky. Banking Centers is engaged in a general banking business providing full service banking to individuals, businesses, and governmental customers. It conducts business in its principal office in Glasgow and two branches in Hart County, Kentucky. Ky. Banking Centers' Hart County branches rank number one in size compared to all banks chartered in Hart County. Total assets were $98 million and total deposits were $85 million at December 31, 2001. The Registrant's subsidiary banks make first and second residential mortgage loans secured by the real estate not to exceed 90% loan to value without seeking third party guarantees. Commercial real estate loans are made in the low to moderate range, secured by the real estate not exceeding 80% loan to value. Other commercial loans are asset based loans secured by equipment and lines of credit secured by receivables. Secured and unsecured consumer loans generally are made for automobiles and other motor vehicles. In most cases loans are restricted to the subsidiaries' general market area. FCB Services, organized in 1992, provides data processing services and support for the Registrant and its subsidiaries. It is located in Frankfort, Kentucky. During 1994, FCB Services began performing data processing services for nonaffiliated banks. FCB Services had total assets of $3.3 million at December 31, 2001. Kentucky General was incorporated on June 22, 2000 to engage in insurance activities permitted by federal and state law. This corporation was inactive as of December 31, 2001. Supervision and Regulation -------------------------- The Registrant originally registered as a bank holding company and was restricted to those activities permissible under the Bank Holding Company Act of 1956, as amended ("BHC Act"). The BHC Act provides for regulation, supervision, and examination by the Board of Governors of the Federal Reserve System ("FRB"). The Gramm-Leach-Bliley Act of 1999 ("GLB Act") signed into law on November 12, 1999 had a significant effect on Federal banking laws applicable to the Registrant and its subsidiary banks. The GLB Act permitted the Registrant to elect to become a financial holding company. The Registrant elected this option on June 9, 2000. In order to be granted status as a financial holding company, a bank holding company and each of its subsidiary depository institutions must be well capitalized, well managed, and have achieved at least a satisfactory record of meeting community credit needs at its most recent Community Reinvestment Act ("CRA") examination. A financial holding company is subject to corrective action by the FRB if any depository institution controlled by the company fails to maintain both well capitalized and well managed status. The GLB Act places limitations on a financial holding company's ability to engage in new financial activities and affiliations if the company fails to maintain its satisfactory CRA rating. The GLB Act amended the BHC Act to allow a bank holding company that has elected financial holding company status to engage in an expanded list of permissible activities, including insurance and securities underwriting, among others. The GLB Act includes a system of functional regulation in which the FRB serves as the umbrella regulator of the holding company. The FRB regulates the Registrant's business activities in a variety of ways including, but not limited to, requirements on acquiring control of other banks and bank holding companies, limitations on activities and investments, and regulatory capital requirements. State and other federal financial regulators, such as the KDFI, OCC, the Federal Deposit Insurance Corporation ("FDIC"), and the Securities and Exchange Commission also regulate either affiliates of the holding company or the holding company itself. The Registrant's state bank subsidiaries are subject to state banking law and regulation and periodic examinations by the KDFI. Lawrenceburg Bank, a national bank, is subject to similar regulation and supervision by the OCC under the National Banking Act and the Federal Reserve System under the Federal Reserve Act. Other regulations that apply to the Registrant's bank subsidiaries include, but are not limited to, insurance of deposit accounts, capital ratios, payment of dividends, liquidity requirements, the nature and amount of investments that can be made, transactions with affiliates, community and consumer lending, and internal policies and control. The operations of the Registrant and its subsidiary banks are also affected by other banking legislation and policies and practices of various regulatory authorities. Such legislation and policies include statutory maximum rates on loans, reserve requirements, domestic monetary and fiscal policy, and limitations on the kinds of services that may be offered. During 2000, the State Wide Branching Bill became effective, which allows banks to open a branch anywhere in the state of Kentucky. Previously, banks were limited to the county where the main office was located. The BHC Act formerly prohibited the Federal Reserve Board from approving an application from a bank holding company to acquire shares of another bank across its own state lines. However, effective September 1995, new legislation abolished those restrictions and now allows bank holding companies to acquire shares of out of state banks, subject to certain conditions. Currently, the Company has no plans to purchase an out of state bank. The GLB Act includes various extensive customer privacy protection provisions. The GLB Act requires a financial institution to clearly disclose its privacy policy to its customers regarding the sharing of non-public personal information with affiliates and third parties. The financial institution's privacy policy must be disclosed at the time a customer relationship is established and not less than annually thereafter. The Financial Reform, Recovery and Enforcement Act of 1989 provides that a holding company's controlled insured depository institutions are liable for any loss incurred by the FDIC in connection with the default of, or any FDIC assisted transaction involving, an affiliated insured bank. Deposits of the Registrant's subsidiary banks are insured by the FDIC's Bank Insurance Fund, which subjects the banks to regulation and examination under the provisions of the Federal Deposit Insurance Act. Under the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), the FDIC established 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 CRA is to encourage banks to respond to the credit needs of the communities they serve, including low and moderate-income neighborhoods. CRA states that banks should accomplish this while still preserving the flexibility needed for safe and sound operations. It is designed to increase the bank's sensitivity to investment opportunities that will benefit the community. References under the caption "Supervision and Regulation" to applicable statutes and regulations are brief summaries of portions thereof which do not purport to be complete and which are qualified in their entirety by reference thereto. Competition ----------- The Registrant and its subsidiaries compete for banking business with various types of businesses other than commercial banks and savings and loan associations. These include, but are not limited to, credit unions, mortgage lenders, finance companies, insurance companies, stock and bond brokers, financial planning firms, and department stores which compete for one or more lines of banking business. The banks also compete for commercial and retail business not only with banks in Central Kentucky, but with banking organizations from Ohio, Indiana, Tennessee, Pennsylvania, and North Carolina which have banking subsidiaries located in Kentucky and may possess greater resources than the Corporation. The primary areas of competition pertain to quality of services, interest rates, and fees charged on loans and deposits. The business of the Registrant is not dependent upon any one customer or on a few customers, and the loss of any one or a few customers would not have a material 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, 2001, the Registrant and its subsidiaries had 468 full-time equivalent employees. Employees are provided with a variety of employee benefits. A retirement plan, a profit-sharing (401K) plan, group life insurance, hospitalization, dental, and major medical insurance are available to eligible personnel. Employees are not represented by a union. Management and employee relations are good. During 1997, the Registrant's Board of Directors approved its Stock Option Plan ("Plan"), which grants certain eligible employees the option to purchase a limited number of the Registrant's common stock. The Plan specifies the conditions and terms that the grantee must meet in order to exercise the options. The Plan was subsequently ratified by the Registrant's shareholders at its annual meeting held on May 12, 1998. Item 2. Properties - ------------------ The Registrant leases its main office from Realty. Farmers Bank and its subsidiaries currently own or lease nine buildings. Farmers Bank operates at five locations, two of which it owns and three of which it leases. United Bank owns its two branch offices and approximately 52% of a condominiumized building which houses its main office. Lawrenceburg Bank owns its main office in Harrodsburg and its two branch sites in Lawrenceburg. First Citizens Bank owns its main office and two of its four branches. The other two branch locations of First Citizens Bank are leased facilities, one of which is located in a grocery store. Farmers Georgetown Bank owns its main office, another branch in Georgetown, and one in Stamping Ground, Kentucky. Farmers Georgetown Bank's third branch is located in a leased facility. Ky. Banking Centers owns its main office in Glasgow, Kentucky and its branch site in Horse Cave, Kentucky. It leases its branch facilities in Munfordville, Kentucky. Item 3. Legal Proceedings - ------------------------- Farmers Bank was named, on September 10, 1992, as a defendant in Case No. 92CIO5734 in Jefferson Circuit Court, Louisville, Kentucky, Earl H. Shilling et al. v. Farmers Bank & Capital Trust Company. Details of this case have been disclosed in previous Annual Reports on Form 10-K and subsequent 10-Q filings. The named plaintiffs purported to represent a class consisting of all present and former owners of the County of Jefferson, Kentucky, Nursing Home Refunding Revenue Bonds (Filson Care Home Project) Series 1986A and County of Jefferson, Kentucky, Nursing Home Improvement Revenue Bonds (Filson Care Home Project) Series 1986B (collectively "the Bonds"). The plaintiffs alleged that the class had been damaged through a reduction in the value of the Bonds and a loss of interest on the Bonds because of the actions of the Bank in its capacity as indenture trustee for the Bondholders. The plaintiffs demanded compensatory and punitive damages. On July 6, 1993, the Court denied the plaintiffs' motion to certify the case as a class action. Subsequently, the plaintiffs amended their complaint to join additional Bondholders as plaintiffs. The plaintiffs claimed to hold Bonds in the aggregate principal amount of $480,000. Before trial, the Court dismissed thirty-nine of the plaintiffs because they were unable or unwilling to present testimony to support their claims. The case was tried to a jury beginning on March 28, 2000 on the claims of four plaintiffs holding Bonds in the aggregate principal amount of $80,000. The Court granted a directed verdict in favor of the Bank on the plaintiffs' claim that the Bank had engaged in commercial bribery and that the legal fees that were paid by the Bank should be disgorged because of an alleged conflict of interest of the Bank's counsel. The jury found for the plaintiffs on the claim that the Bank had breached its fiduciary duty and awarded the plaintiffs $99,875 in compensatory damages and $600,000 in punitive damages. The Bank filed a motion for judgment notwithstanding the verdict or, in the alternative, for a new trial, asserting that the jury's verdict that the Bank breached its fiduciary duty was not supported by sufficient evidence, that the jury's award of damages was speculative and was not supported by the evidence, and that the jury's award of punitive damages was not supported by sufficient evidence. The Bank also asserted that a new trial was warranted because of the erroneous admission of evidence concerning legal fees paid by the Bank. Plaintiffs filed an appeal contending that the denial of class certification was erroneous, that the individual plaintiffs should not have been dismissed from the lawsuit, that certain evidence was erroneously excluded, and that the directed verdict regarding the disgorgement of legal fees and the commercial bribery claims was erroneous. On August 1, 2000, the Kentucky Court of Appeals dismissed the appeal as having been prematurely filed. On January 3, 2001, the Jefferson Circuit Court entered judgment in favor of the Bank notwithstanding the jury's verdict in favor of the plaintiffs, holding that the Bank reasonably relied in good faith on the advice of its counsel, that there was no evidence that the Bank breached its fiduciary duty to the plaintiffs, and that there was no evidence that the Bank caused the plaintiffs' losses. On January 31, 2001, the plaintiff bondholders appealed, and on February 9, 2001, defendant Bank cross-appealed, the judgment of the Jefferson Circuit Court to the Kentucky Court of Appeals. In their appeal, the Bondholders claim that the trial court's denial of class certification was erroneous, that certain individual plaintiffs should not have been dismissed from the lawsuit, that the trial court erroneously directed a verdict against them on the issue of a conflict of interest, and that the judgment notwithstanding the verdict was erroneously granted because the evidence was sufficient to support the jury's verdict. In its cross-appeal, the Bank claims that the trial court erroneously bifurcated the trial on the issue of liability and damages, that certain witnesses should have been excluded from the trial, that the Bank should have been granted summary judgment, and that certain evidence and testimony regarding attorneys' fees should have been excluded. The Bank intends to vigorously pursue its pending motion and to defend plaintiffs' claims. It is not possible at this stage of the proceedings to make any prediction as to the outcome. As of December 31, 2001, there were various other pending legal actions and proceedings against the Company, including these above, arising from the normal course of business and in which claims for damages are asserted. Management, after discussion with legal counsel, believes that these actions are without merit and that the ultimate liability resulting from these legal actions and proceedings, if any, will not have a material adverse effect upon the consolidated financial statements of the Company. Item 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters - ----------------------------------------------------------------------------- The information set forth under the sections "Shareholder Information" and "Stock Prices" on pages 33 and 34 of the 2001 Annual Report to Shareholders is hereby incorporated by reference. Additional information set forth under Note 16 to the Registrant's Consolidated Financial Statements on pages 53 and 54 of the 2001 Annual Report to Shareholders is also hereby incorporated by reference. Stock Transfer Agent and Registrar: Farmers Bank & Capital Trust Co. P.O. Box 309 Frankfort, Kentucky 40602 The Registrant offers shareholders automatic reinvestment of dividends in shares of stock at the market price without fees or commissions. For a description of the plan and an authorization card, contact the Registrar above. NASDAQ Market Makers: Herzog, Heine, Geduld, Inc. Morgan, Keegan and Company (800) 221-3600 (800) 260-0280 J.J.B. Hilliard, W.L. Lyons, Inc. Spear, Leeds & Kellogg (502) 588-8400 or (800) 526-3160 (800) 444-1854 Knight Securities LP (888) 302-9197
Item 6. Selected Financial Data - ------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2001 2000 1999 1998 1997 (In thousands, except per share data) - ----------------------------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS Interest Income $ 77,039 $ 75,481 $ 69,034 $ 69,681 $ 67,360 Interest Expense 34,357 32,536 27,184 29,147 27,450 Net Interest Income 42,682 42,945 41,850 40,534 39,910 Provision for Loan Losses 2,448 2,472 2,863 1,134 1,830 Net Income 14,671 14,380 13,930 14,247 14,103 - ----------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net Income - Basic $ 2.10 $ 1.97 $ 1.86 $ 1.89 $ 1.86 Diluted 2.09 1.97 1.86 1.89 1.86 Cash Dividends Declared 1.21 1.17 1.13 1.00 .855 Book Value 17.89 17.49 16.82 16.47 15.48 - ----------------------------------------------------------------------------------------------------------------------------- SELECTED RATIOS Percentage of Net Income to: Average Shareholders' Equity (ROE) 11.93% 11.61% 11.20% 11.88% 12.50% Average Total Assets (ROA) 1.28 1.40 1.41 1.49 1.56 Percentage of Dividends Declared to Net Income 57.70 59.33 60.66 53.02 45.90 Percentage of Average Shareholders' Equity to Average Total Assets 10.75 12.06 12.58 12.55 12.46 - ----------------------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity $ 123,560 $ 125,461 $ 125,106 $ 123,839 $ 117,044 Total Assets 1,183,530 1,204,752 1,039,787 992,338 1,014,183 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 6,982 7,304 7,478 7,555 7,572 Diluted 7,025 7,307 7,478 7,555 7,572 - -------------------------------------------------------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operations ------------- The discussion on pages 22 through 35 of the 2001 Annual Report to Shareholders is hereby incorporated by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - -------- ---------------------------------------------------------- The information set forth under the item "Market Risk Management" on pages 31 and 32 of the 2001 Annual Report to Shareholders is hereby incorporated by reference. Item 8. Financial Statements and Supplementary Data - --------------------------------------------------- The information set forth below on pages 37 through 58, and the inside back cover of the 2001 Annual Report to Shareholders is hereby incorporated by reference: Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Shareholder Information Item 9. Changes in and Disagreements with Accountants on Accounting and - ----------------------------------------------------------------------- Financial Disclosure -------------------- The Registrant has had no disagreement on accounting and financial disclosure matters and has not changed accountants during the three year period ended December 31, 2001. PART III Item 10. Directors and Executive Officers of the Registrant - ----------------------------------------------------------- Positions and Years of Service Offices With With the Executive Officer1 Age the Registrant Registrant - ------------------------------------------------------------------------------- Charles S. Boyd2 60 President and CEO, 38* Director3 Allison B. Gordon 38 Senior Vice President4 15* 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, 2002 which will be filed with the Commission on or about April 1, 2002, pursuant to Regulation 14A. * Includes years of service with the Registrant and its subsidiaries. 1 For Regulation O purposes, Frank W. Sower, Jr., Chairman of the Registrant's board of directors, is considered an executive officer in name only. 2 Mr. Boyd died on March 8, 2002. Refer to Form 8-K dated March 13, 2002 for additional information. 3 Also a director of Farmers Bank, Ky. Banking Centers, Farmers Georgetown Bank, United Bank, Lawrenceburg Bank, First Citizens Bank, and FCB Services. 4 Also a director of Farmers Bank, Farmers Georgetown Bank, and FCB Services. Item 11. Executive Compensation - ------------------------------- Item 12. Security Ownership of Certain Beneficial Owners and Management - ----------------------------------------------------------------------- Item 13. Certain Relationships and Related Transactions - ------------------------------------------------------- The information required by Items 11 through 13 is hereby incorporated by reference from the Registrant's definitive proxy statement in connection with its annual meeting of shareholders scheduled for May 14, 2002 which will be filed with the Commission on or about April 1, 2002, pursuant to Regulation 14A. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - ------------------------------------------------------------------------- 2001 Annual Report To Shareholders (a)1. Financial Statements Page -------------------- Independent Auditors' Report 37 Consolidated Balance Sheets at December 31, 2001 and 2000 38 Consolidated Statements of Income for the years ended December 31, 2001, 2000, and 1999 39 Consolidated Statements of Comprehensive Income for the years ended December 31, 2001, 2000, and 1999 40 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2001, 2000, and 1999 41 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999 42 Notes to Consolidated Financial Statements 43 - 58 (a)2. Financial Statement Schedules ----------------------------- All schedules are omitted for the reason they are not required, or are not applicable, or the required information is disclosed elsewhere in the financial statements and related notes thereto. (a)3. Exhibits: --------- 13. 2001 Annual Report to Shareholders 21. Subsidiaries of the Registrant 23. Independent Auditors' Consent (b) Reports on Form 8-K ------------------- On March 13, 2002, the Registrant filed a report on Form 8-K regarding the March 8, 2002 death of Charles S. Boyd, President and Chief Executive Officer of the Registrant. On March 11, 2002, the Board of Directors of the Registrant elected G. Anthony Busseni as the permanent President and Chief Executive Officer to replace Mr. Boyd, effective immediately. There were no financial statements filed with this Form 8-K. (c) Exhibits -------- See Index of Exhibits set forth on page 14. (d) Separate Financial Statements and Schedules ------------------------------------------- None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FARMERS CAPITAL BANK CORPORATION By: /s/ G. Anthiny Busseni ------------------------------ G. Anthony Busseni President and Chief Executive Officer Date: March 11, 2002 ------------------------------ Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ G. Anthony Busseni President, Chief Executive Officer Mar-11-02 - ------------------------- and Director (principal executive ------------------- G. Anthony Busseni officer of the Registrant) /s/ Frank W. Sower, Jr. Chairman Mar-11-02 - ------------------------- ------------------- Frank W. Sower, Jr. Director - ------------------------- ------------------- Charles S. Boyd 1 /s/ Lloyd C. Hillard, Jr. Director Mar-11-02 - ------------------------- ------------------- Lloyd C. Hillard, Jr. Director - ------------------------- ------------------- W. Benjamin Crain /s/ Stokes A. Baird Director 3-21-02 - ------------------------- ------------------- Stokes A. Baird, IV /s/ Harold G. Mays Director Mar 12-02 - ------------------------- ------------------- Harold G. Mays /s/ E. Glenn Birdwhistell Director Mar 11, 02 - ------------------------- ------------------- E. Glenn Birdwhistell /s/ Michael M. Sullivan Director Mar 12 02 - ------------------------- ------------------- Michael M. Sullivan /s/ J. Barry Banker Director Mar 11, 2002 - ------------------------- ------------------- J. Barry Banker /s/ Robert Roach, Jr. Director March 11, 2002 - ------------------------- ------------------- Robert Roach, Jr. /s/ Shelley S. Sweeney Director March 11, 2002 - ------------------------- ------------------- Shelley S. Sweeney /s/ C. Douglas Carpenter Vice President, Secretary 3-11-02 - ------------------------- and CFO (principal financial ------------------- C. Douglas Carpenter and accounting officer) 1 Mr. Boyd died on March 8, 2002. INDEX OF EXHIBITS Page 13. 2001 Annual Report to Shareholders Enclosed 21. Subsidiaries of the Registrant 15 23. Independent Auditors' Consent 16 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, 2001 and the jurisdiction of incorporation in which each subsidiary was incorporated or organized. Percentage of Voting Jurisdiction Stock held by Subsidiaries of the Registrant of Incorporation Registrant - -------------------------------------------------------------------------------- Farmers Bank & Capital Trust Co. Kentucky 100% United Bank & Trust Company Kentucky 100% First Citizens Bank Kentucky 100% Lawrenceburg National Bank Kentucky 100% Farmers Bank and Trust Company Kentucky 100% Kentucky Banking Centers, Inc. Kentucky 100% FCB Services, Incorporated Kentucky 100% Kentucky General Life Insurance Company, Inc. Kentucky 1 Farmers Capital Insurance Corporation 2 Kentucky Farmers Fidelity Insurance Agency, LLP 3 Kentucky Farmers Bank Realty Co. 2 Kentucky Leasing One Corporation 2 Kentucky 1 None Issued 2 A wholly owned subsidiary of Farmers Bank & Capital Trust Co. 3 A fifty (50%) percent owned LLP of Farmers Capital Insurance Corporation Exhibit 23 Independent Auditors' Consent ----------------------------- The Board of Directors Farmers Capital Bank Corporation We consent to the incorporation by reference in the registration statement (No. 333-63037) on Form S-8 of Farmers Capital Bank Corporation of our report dated January 15, 2002, with respect to the consolidated balance sheets of Farmers Capital Bank Corporation and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001, which report appears in the December 31, 2001 annual report on Form 10-K of Farmers Capital Bank Corporation. /s/ KPMG LLP Louisville, Kentucky March 27, 2002 EX-13 3 a123101ar.txt ANNUAL REPORT WITH NARRATIVE EXHIBIT 13 2001 ANNUAL REPORT TO SHAREHOLDERS Charles S. Boyd, President and CEO of Farmers Capital Bank Corporation, enjoyed the Annual Report process more than anyone. Of course, the Managements Discussion and Analysis and the Financial Notes were the most important part - they were the black and white record of the progress and growth of the year. However, the narrative section was where he got to crow. In the past nine years, Farmers Capital Bank Corporation's annual reports focused on who we are. Charlie was keen on "telling our story" and, in the reading of our annual report narratives, you hear his voice. From our "different path" philosophy to our affiliates' community involvement, Charlie was involved. His input and point of view were never taken lightly. When we covered the topics Charlie liked the best - our growth into new markets and our insurance endeavors, his voice spoke the strongest. His vision was captured on the pages - both in word and image. This year we focus on another of Charlie's favorite topics, Correspondent Banking. He felt strongly about our serving the community banks of Kentucky with these services. Besides an area of growth for us, Correspondent Banking provided growth for our community bank partners. We miss you, Charles S. Boyd. This Annual Report is dedicated to your memory and your vision. Charles Scott Boyd August 14, 1941 - March 8, 2002
SELECTED FINANCIAL HIGHLIGHTS - --------------------------------------------------------------------------------------------------------------------------- December 31, 2001 2000 1999 1998 1997 (In thousands, except per share data) - --------------------------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS Interest income $ 77,039 $ 75,481 $ 69,034 $ 69,681 $ 67,360 Interest expense 34,357 32,536 27,184 29,147 27,450 Net interest income 42,682 42,945 41,850 40,534 39,910 Provision for loan losses 2,448 2,472 2,863 1,134 1,830 Net income 14,671 14,380 13,930 14,247 14,103 - --------------------------------------------------------------------------------------------------------------------------- Net income - Basic $ 2.10 $ 1.97 $ 1.86 $ 1.89 $ 1.86 Diluted 2.09 1.97 1.86 1.89 1.86 Cash dividends declared 1.21 1.17 1.13 1.00 0.855 Book value 17.89 17.49 16.82 16.47 15.48 - --------------------------------------------------------------------------------------------------------------------------- SELECTED RATIOS Percentage of net income to: Average shareholders' equity (ROE) 11.93% 11.61% 11.20% 11.88% 12.50% Average total assets (ROA) 1.28 1.40 1.41 1.49 1.56 Percentage of dividends declared to net income 57.70 59.33 60.66 53.02 45.90 Percentage of average shareholders' equity to average total assets 10.75 12.06 12.58 12.55 12.46 - --------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity $ 123,560 $ 125,461 $ 125,106 $ 123,839 $ 117,044 Total assets 1,183,530 1,204,752 1,039,787 992,338 1,014,183 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 6,982 7,304 7,478 7,555 7,572 Diluted 7,025 7,307 7,478 7,555 7,572 - ---------------------------------------------------------------------------------------------------------------------------
2 Letter to our Shareholders 3 Farmers Capital Bank Corporation Board of Directors and Officers 4 Correspondent Banking 16 Affiliates' Directors and Officers 21 Glossary of Financial Terms 22 Management's Discussion and Analysis of Financial Condition and Results of Operations 36 Management's Report on Responsibility for Financial Reporting 37 Independent Auditors' Report 38 Consolidated Balance Sheets 39 Consolidated Statements of Income 40 Consolidated Statements of Comprehensive Income 41 Consolidated Statements of Changes in Shareholders' Equity 42 Consolidated Statements of Cash Flows 43 Notes to Consolidated Financial Statements 59 Photograph Identification 61 Shareholder Information Letter to our Shareholders: Farmers Capital Bank Corporation ended 2001 with net income of $14,671,000, a 2.0% increase over the previous year. Basic and diluted net income per share for the year increased 6.6% and 6.1%, respectively. These are satisfactory results considering the challenging year, which included the Federal Reserve cutting the federal funds rate repeatedly and the recessionary environment of 2001. However, we focused on areas of growth and stability for us strengthening our position of a full service provider; our trust, insurance, and leasing interests combined with our full financial array of services all work to enhance our position. Correspondent Banking is a key growth area for Farmers Capital Bank Corporation and we pride ourselves on its success. Our strategy is based on the partnerships that are formed - partnerships that are often termed by our correspondent banks as friendships. The four main individuals involved - Critt Murphy, Tony Busseni, Jim Burkholder, and David Barnes, have over 70 years of experience in calling on bankers. Because they are community bankers, they understand the day-to-day difficulties a community banker faces and therefore, can take a proactive approach. They call on the correspondent banks with proven solutions as well as offer tailored solutions to specific needs. Our correspondent bank offerings are virtually unlimited and further our appeal as a correspondent service provider because of the strengths of our diversity. Within our organization are individuals who specialize in technical solutions for bankers such as Don Hughes, President and CEO of FCB Services, Inc. Trust services for banks and their customers are handled by Rick Harp, Senior Trust Officer and Senior Vice President of Farmers Bank & Capital Trust Co. Lending and leasing needs are met by Mike Schornick, Tom Porter, and Mike Easley - all lenders with extensive backgrounds in the field. Jamey Bennett, Vice President of Farmers Capital Insurance Corporation, aptly manages insurance services tailored for community banks, their employees, and their customers - both business and personal lines. Many times the ability to be a sounding board for community banks is a significant ingredient in an excellent correspondent partnership. The intrinsic knowledge and customer service abilities of our employees combined with the outstanding services and products offered by Farmers Capital Bank Corporation results in our unique but practical correspondent bank qualities. Jerry Carey, President and CEO of Union National Bank of Barbourville states it best: "AS BANKERS, WE TALK ABOUT PERSONAL RELATIONSHIPS WITH CUSTOMERS AND WE (UNION NATIONAL) FEEL WE DO THAT WITH FARMERS BANK. WE HAVE A LEVEL OF CONFIDENCE WITH FARMERS. IN SMALL COMMUNITIES, PEOPLE DON'T BANK WITH A BANK, THEY BANK WITH A BANKER. THERE ARE PEOPLE WHO BANK WITH ME; IT IS ONLY SECONDARY THAT I WORK FOR UNION NATIONAL BANK. OUR RELATIONSHIP WITH FARMERS? WE BANK WITH THE PEOPLE AT FARMERS, THE BANKERS." /s/ Charles S. Boyd /s/ Frank W. Sower, Jr. Charles S. Boyd Frank W. Sower, Jr. DIRECTORS Pictured from left Robert Roach, Jr. retired Teacher, City Commissioner Stokes A. Baird, IV Attorney, Chairman of the Board of Directors of Kentucky Banking Centers, Inc. Harold G. Mays President of H.G. Mays Corporation, an asphalt paving firm Charles T. Mitchell, CPA Advisory Director, Consultant, Charles T. Mitchell Co., LLP, CPA J. Barry Banker President of Stewart Home School E. Glenn Birdwhistell Realtor and Auctioneer, Chairman of the Board of Directors of Lawrenceburg National Bank Michael M. Sullivan retired Senior Vice President of FCB Services, Inc. E. Bruce Dungan Advisory Director, retired President and CEO of Farmers Capital Bank Corporation Charles S. Boyd President and CEO of the Corporation Dr. John P. Stewart Chairman Emeritus, retired Physician, Director of Stewart Home School Shelley S. Sweeney President of Swell Properties, Inc. Frank W. Sower, Jr. Chairman, retired Appeals Officer, Internal Revenue Service W. Benjamin Crain President of Fourth Street Tobacco Warehouse, Chairman of the Board of Directors of United Bank & Trust Co. G. Anthony Busseni President and CEO of Farmers Bank & Capital Trust Co. Lloyd C. Hillard, Jr. President and CEO of First Citizens Bank OFFICERS Charles S. Boyd President and CEO Allison B. Gordon Senior Vice President C. Douglas Carpenter Vice President, Secretary, and Chief Financial Officer Linda L. Faulconer, SPHR Vice President, Human Resources Jean T. Harrod Vice President, Legal Counsel Janelda R. Mitchell Vice President, Marketing Dawn M. Simpson, CPA Vice President, Auditing Anna Kaye Hall Assistant Vice President, Finance Mark A. Hampton, CPA Assistant Vice President, Finance Teresa Tipton Human Resources Officer More than correspondent services, Farmers Capital Bank Corporation offers strategic partnerships. As in any relationship, each participant brings something to the table. Correspondent Banking provides flexibility, asset strength and diversified products to our correspondent banks who help us to grow profitably. Our success? We understand banking and have the resources to meet practically any need a community bank may have. Added to that, commitment - to our customers. Let us show you a part of what we do in Correspondent Banking. PEOPLES BANK OF NORTHERN KENTUCKY Peoples Bank of Northern Kentucky is in an interesting situation; banks that are more than willing to participate loans surround them. However, John Finnan, President and CEO, sums it up this way: "We don't want to sell to our competition and have them attempt to steal those customers away. So Farmers, being out of our market and yet large enough to handle these type of loans, is really a great help for us." Respect of market is a major selling point for Correspondent Banking. They always remember whose customer it is while providing full service. Marc Menne, Executive Vice President of Peoples says he appreciates the work ethic of Farmers' correspondent bankers, "What's great is every time (we work on) a development, they come up, tour the site and ask questions. Then they get back to us in a timely manner; they get things done and they get to know the project." Recently, Peoples Bank has shifted their correspondent deposit relationships. John Finnan: "We used to have Fed Funds through a competitor up here and ... when we had the opportunity to leave, we thought immediately of Farmers because of the great job done on the participation (of loans) side." "They get things done and they get to know the project." OWINGSVILLE BANKING CO. Owingsville Banking Co. was the first independent bank to buy data processing services from Farmers - the test bank so to speak for offering technology services through Correspondent Banking. In 1994, Mike Shields, Chief Financial Officer of Owingsville Banking Company, was looking for a new data processing company. Knowing Critt Murphy from prior banking relationships, Mr. Shields took his advice seriously. However, Owingsville Banking Co. hired consultants to approach the search judiciously. The rationale was to find a software package that would satisfy the bank and then find a processor who ran that software. "The consultants led us through eleven different requests for proposals for data processors in the southeastern United States. We decided early on that ITI (software) was what we wanted," recounts Mr. Shields, "So eventually we contracted with Critt and FCB Services, Inc., and to make a long story short, we've been happy ever since." They did take a cautious approach, "we bought time on FCB's computer and kept running proof here within the bank. We felt if a good relationship was built we could switch over." Which they did when their contract came up for renewal. Mr. Shields continues, "I have many friends in the industry who have converted once, twice and three times and I'm not sure all of them are still happy. We have been pleasantly surprised at the service and quality of the product we receive. It's been much better than I even imagined." "We have been pleasantly surprised at the service and quality of the product we receive." CITIZENS NATIONAL BANK OF JESSAMINE COUNTY Citizens National Bank of Jessamine County began serving Nicholasville in 1998. Of course, Farmers Bank's Correspondent Banking Division was there to assist in any way, especially with data processing. Duane Flora, Operations Manager, says, "We looked at other data processing providers, but we went with FCB Services (Farmers data processing affiliate). The service is excellent and we couldn't be more pleased; they go out of their way to make sure we are happy." FCB Services has always worked under the philosophy of bankers providing data processing; bankers who not only know the technical side, but also know bank products and are able to set up proven financial product lines for a participating bank. That strength has held true for Citizens National. Mr. Flora affirms, "They understand what we need to run a bank. Also, if we need anything during (regulatory) examinations, or for management reports, they are very responsive and quick about getting it done for us. And able to accommodate any special requests." Because of Citizens National's proximity to Lexington, Kentucky, they were one of the first partners in Bluegrass Cash. This service provides the banks' customers access to over 17 cash dispensers in Lexington. Mr. Flora says, "This is another way we have benefited in the Farmers' partnership. It allowed our customers access to Lexington without a lot of cost on our part. It was a way to combat a Lexington bank that came into our market. We needed an inroad to Lexington, but we didn't want to open a branch. Bluegrass Cash was our way to get there. Also our customers are happy." Farmers Bank also manages Citizens National Bank's credit cards. Mr. Flora is pleased with the personalized service of this often-overlooked product. "They understand what we need to run a bank." FARMERS STATE BANK, BOONEVILLE Farmers State Bank understands the benefits of a correspondent relationship that matches the needs of a bank. When Critt Murphy made a cold call on Nelson Bobrowski, President of Middlefork Financial Group and Executive Vice President of Farmers State Bank, he found they were ready to make a change. Farmers State Bank in Booneville, Kentucky is one of three banking affiliates of Middlefork Financial Group, a bank holding company, which also includes Hyden Citizens Bank and Farmers & Traders Bank. The similarities to our own structure include the banks retaining their names and charters and their commitment to their communities. "While we do realize the efficiencies of same named banks, our forte is to capitalize on our markets by retaining the commitment to our communities. That is the focus of our major shareholders and our board," states Mr. Bobrowski. In addition to correspondent services, they participate in "reality simulation" with Farmers. Mr. Bobrowski describes it as "... studying your procedures and ideas; we have members of our staff who periodically attend asset and liability management meetings at Farmers Bank so that we can model ours after them. Anything we can learn from you, we are embracing it. Your seminars, training, and the annual Bankers Network Conference have all helped us tremendously." Mr. Bobrowski is very pleased with the service he receives from the Correspondent Banking Division; besides participating loans and a fed funds line, they have a holding company loan with us. "Critt (Murphy) takes an interest in us. We bankers talk about personal service to our customers. We get the same with our correspondent bank - Farmers Bank." "(The) seminars, training and the annual Bankers Network Conference have helped us tremendously." KENTUCKY HOME BANK, BARDSTOWN Kentucky Home Bank opened their doors for business in September 1997. However, the Correspondent Banking Division was already calling. Mr. Murphy knew Gary Clifton, Kentucky Home Bank's President and CEO, from prior banking relationships and was eager to help Mr. Clifton and his new bank. As a de novo bank, it was logical to utilize proven correspondent services such as credit card processing, commercial leasing, fed funds, wire transfers and onsite employee training to name a few. Jerri Riney, Executive Vice President says, "We have found that (Farmers) employees are very knowledgeable in their respective areas. We call upon that expertise often. What is so unique is the friendly and sincere manner in which their employees treat us as a correspondent bank." Ms. Riney has also been impressed with the operational controls that are in place in the correspondent services such as wire transfers. "One thing we have not seen in the past (from other correspondent providers) is the audit and control feature that Farmers has in place. These make our job easier by being automated and safer by the quality control." Kentucky Home Bank is one of our correspondent banks to utilize the commercial leasing service. Ms. Riney: "An assisted living facility here in Bardstown has recently been built. We were able to provide them the leasing for their equipment and furnishings through our relationship with Farmers Bank and Leasing One." In summary, Mr. Clifton describes the correspondent relationship, "Farmers is not the typical correspondent bank. In this day of large regional banking centers, we are fortunate to have a true correspondent bank relationship with people we call friends." "(Farmers) employees are very knowledgeable in their respective areas. We call upon that expertise often." UNION NATIONAL BANK AND TRUST CO. Critt Murphy and Tony Busseni credit Jerry Carey, President and CEO of Union National Bank in Barbourville, as an instrumental player to our involvement with correspondent banking. At his encouragement and support, the idea of providing correspondent services began to evolve into a reality. In spite of the demise and acquisition of regional banks which provided correspondent services, community banks still had a need for participating large loans and other related services. Mr. Carey remembers it this way: "During a meeting with Critt and Tony, we talked about correspondent services, or the lack of. We felt there was a need, and that it would be mutually beneficial for many. Our area is growing, and new employers bring jobs into this community. Banks of our size sometimes can't make loans of an amount (that these companies need); Farmers finds a way to work with us." More than a loan participator, Union National is a partner in our latest correspondent service - insurance services. Through the Farmers Capital Insurance Group, the bank has become a charter member of our multiple employer trust. This allows banks to increase their buying power by joining with other banks in the purchase of group long-term disability and life insurance protection. Union National was able to increase coverages, enhance current benefits, and reduce expenses by becoming a member of this trust. "Farmers finds ways to work with us." FARMERS BANK & CAPITAL TRUST CO. MEMBER FDIC DIRECTORS Dr. John D. Sutterlin, Chairman C. Gary Adkinson Clyde P. Baldwin Charles S. Boyd G. Anthony Busseni Michael A. Fields Don C. Giles Allison B. Gordon Robert W. Kellerman David R. Lee Marvin E. Strong, Jr. William R. Sykes John J. Hopkins, Advisory Director Frank W. Sower, Advisory Director Joseph C. Yagel, Jr., Advisory Director OFFICERS G. Anthony Busseni, President and CEO Bruce W. Brooks, Executive Vice President, Chief Lending Officer and Environmental Officer Elizabeth D. Hardy, Senior Vice President, Retail Rickey D. Harp, Senior Vice President, Senior Trust Officer Fontaine Banks, III, Vice President, Investments George Burgess, Vice President, Commercial Loans Gregory S. Burton, Vice President, Commercial Loans L. Hobbs Cheek, CPA, Vice President, Chief Financial Officer Barbara Conway, Vice President, Main Office Manager Jack Diamond, Vice President, Trust Investment Officer Bruce G. Dungan, Vice President, Retail, Security Officer, Compliance Officer, Bank Secrecy Act Officer Nancy Gatewood, Vice President, West Branch Manager Richard Gobber, Vice President, Retail Sarah Gowins, Vice President, Commercial Loans Lydwina Napier, Vice President, Commercial Loans Jane Sweasy, Vice President, East Branch Manager Brenda Y. Rogers, Executive Secretary Bonnie Adams, Assistant Vice President, East Branch Patsy Briscoe, Assistant Vice President, Loan Administration Gail Combs, Assistant Vice President, Franklin Square Branch Manager Bobby Hall, Assistant Vice President, Trust Officer Judy Isaacs, Assistant Vice President Elizabeth Johns, Assistant Vice President, Trust Officer Joan Lee, Assistant Vice President, Franklin Square Branch Patricia Norris Peavler, Assistant Vice President, Marketing Jo Ann Reynolds, Assistant Vice President, Investments Deborah West, Assistant Vice President, Assistant Manager, Main Office Karen DiRaimo, Trust Officer Kay Henninger, Trust Officer Wesley Stivers, Investment Officer Margaret Colston, Assistant Cashier, Retail Services Jennifer Parrish, Assistant Cashier, Retail Services Julie Riggs, Assistant Cashier, Retail Services Mary Jo Verhey, Assistant Cashier, Internet Banking C. Ray Baldwin, Property Management Director Sally L. Bell, Assistant Trust Operations Manager Leigh Ann Young, Assistant Trust Operations Officer Dorothy H. Switzer, Director of Capital First Travelers John Senter, Director of Human Resources UNITED BANK & TRUST CO. MEMBER FDIC DIRECTORS W. Benjamin Crain, Chairman Charles S. Boyd Bobby G. Dotson Michael L. Lawson J. C. Moraja Denny Nunnelley Leighton Riddle James E. Staples Shannon Greely Totty Hampton H. Henton, Advisory Director J. Stephen Hogg, Advisory Director Howard B. Montague, Advisory Director Ben F. Roach, MD, Advisory Director OFFICERS J. C. Moraja, President and CEO Paul A. Edwards, Executive Vice President Linda C. Bosse, Vice President, Cashier Joyce L. Eaves, Vice President Bruce Marshall, Vice President Spencer A. Wall, Vice President, Branch Manager Cornelia T. Ethington, Assistant Vice President Rita Green, Assistant Vice President Leisa M. Newton, Assistant Vice President, Compliance Officer Betty K. Poynter, Assistant Vice President, Human Resources Rick Roberts, Assistant Vice President John R. Thompson, Assistant Vice President Evie P. Knight, Assistant Cashier, Security Officer Carolyn F. Patterson, Assistant Cashier Sherry T. Reynolds, Assistant Cashier Patricia R. Stokley, Executive Secretary LAWRENCEBURG NATIONAL BANK MEMBER FDIC DIRECTORS E. Glenn Birdwhistell, Chairman WIlliam T. Bond Charles S. Boyd Charles L. Cammack C. Douglas Carpenter Keith Freeman Tom D. Isaac James McGlone Donald F. Peach Oneita M. Perry Paul Vaughn, Jr. OFFICERS Charles L. Cammack, President and CEO Paul Vaughn, Jr., Executive Vice President, Senior Trust Officer Gail Gottshall, Executive Vice President Bob Baughman, Vice President Ben Birdwhistell, Vice President Timothy A. Perry, Vice President, Compliance Bonnie S. Childs, Assistant Vice President, Marketing Representative Clark Gregory, Assistant Vice President Linda B. Hahn, Assistant Vice President Barbara Markwell, Assistant Vice President, Cashier Warren R. Leet, Assistant Vice President Chris Thompson, Branch Manager, Loan Officer Libby Goodlett, Accounting Officer Chandra Ennis, Assistant Branch Manager Teresa Higginbotham, Assistant Branch Manager Robin Miller, Operations Officer Sarah Grace, Administrative Assistant FIRST CITIZENS BANK MEMBER FDIC DIRECTORS James E. Bondurant, Chairman R. Terry Bennett Charles S. Boyd Laymon Byers R. T. Clagett, DMD Patricia V. Durbin William Godfrey, MD Gerald R. Hignite Lloyd C. Hillard, Jr. Ray Mackey Janelda R. Mitchell Virgil T. Price, DMD George Roederer Martha G. Davis, Director Emeritus OFFICERS Lloyd C. Hillard, Jr., President and CEO Scott T. Conway, Senior Vice President, Senior Loan Administrator Marilyn B. Ford, Senior Vice President, Cashier and Bank Secrecy Officer Patricia J. Paris, Senior Vice President, Controller David P. Tackett, Senior Vice President, Trust Investment Center Director Richard E. Clements, Vice President, Bullitt County Office Manager Pamela deRoche, Vice President, Radcliff Office Manager David E. Hunt, Vice President, Commercial Loan Officer Marquetta L. Lively, Vice President, Loan Officer Mary Lou Mobley, Vice President, CRA Officer and Compliance Officer Brenda Fullerton, Assistant Vice President, Members First Coordinator Jeffrey S. Pendleton, Assistant Vice President, Allotment Department Ronald G. Penwell, Assistant Vice President, Mulberry Office Manager Diana Byers, Assistant Cashier, Main Office Branch Manager Mary P. Edlin, Assistant Cashier, Deposit Processing Phyllis Higdon, Assistant Cashier, Office Manager Cheryl Jessup, Assistant Cashier, Marketing Director Connie Kersey, Assistant Cashier, Operations Officer Kelly B. Vick, Assistant Cashier, Director of Human Resources Debbie Roberts, Assistant Office Manager, Bullitt County Office Leda Kay Pack, Assistant Trust Officer Elizabeth A. Larrington, Operations Officer, Allotment Department FARMERS BANK AND TRUST COMPANY MEMBER FDIC DIRECTORS Cecil D. Bell, Jr., Chairman Charles S. Boyd Allison B. Gordon Frank R. Hamilton, Jr. Vivian M. House Robert Sharon McMillin Joseph C. Murphy Gervis C. Showalter Kenneth M. Sturgill Glenn M. Williams Rollie D. Graves, Director Emeritus Dr. Horace T. Hambrick, Director Emeritus W. Carrick James, Director Emeritus Bobby Vance, Director Emeritus OFFICERS Joseph C. Murphy, President and CEO Thomas P. Porter, Executive Vice President Lynn C. McKinney, Senior Vice President and Cashier Michael E. Schornick, Jr., Senior Vice President James R. Burkholder, Vice President, Manager of Correspondent Banking Division David C. Barnes, Vice President, Correspondent Banking Division J. Michael Easley, Vice President James L. Ewbank, Vice President Tina M. Johnston, Vice President, Chief Financial Officer Deborah L. Marshall, Vice President Susan K. Tackett, Vice President Kimberly T. Thompson, Vice President Wanda C. Wilson, Vice President Bonnie M. Glass, Assistant Vice President Gregory L. Howard, Assistant Vice President Karen K. Jarvis, Assistant Vice President Paula S. Moran, Assistant Vice President Linda F. Muszynski, Assistant Vice President Carole S. Wagoner, Assistant Vice President Lorraine B. Baldwin, Assistant Cashier Phyllis True, Assistant Cashier KENTUCKY BANKING CENTERS, INC. MEMBER FDIC DIRECTORS Stokes A. Baird, IV, Chairman Charles S. Boyd Sue Bunnell Anna Kaye Hall Steve Hayes Larry Jewell Odell Martin Phillip Patton David Shadburne, CPA Terry Smith W. T. Austin, Director Emeritus OFFICERS Sue Bunnell, President and CEO David Shadburne, CPA, Executive Vice President and COO Lewis Bauer, Senior Vice President Vanessa Puckett, Senior Vice President Jeffrey Edwards, Vice President Linda Forbes, Vice President Cindy Atwell, Assistant Vice President Karisa Clark, Assistant Vice President Jane T. Howell, Assistant Vice President Greg Isenberg, Assistant Vice President Patty J. Wright, Assistant Vice President Daryl Lowe, Cashier and Head Teller Ramona Fancher, Assistant Cashier Carolyn Russell, Assistant Cashier Melissa Sturgeon, Loan Officer Sharon Williams, Loan Officer Debra Willis, Loan Officer Mellyn Church, Compliance Officer Angie Bybee, Marketing Officer FCB SERVICES, INC. DIRECTORS E. Bruce Dungan, Chairman Charles S. Boyd Sue Bunnell G. Anthony Busseni Charles L. Cammack Allison B. Gordon Lloyd C. Hillard, Jr. Donald R. Hughes, Jr. J. C. Moraja Joseph C. Murphy Michael M. Sullivan Karen R. Wade, Secretary OFFICERS Donald R. Hughes, Jr., President and CEO Karen R. Wade, Executive Vice President Bill Ballinger, Vice President William Bell, Vice President Michael Hedges, Vice President Rita Kennedy, Vice President Martin Serafini, Vice President Steve Bolin, Assistant Vice President Jeffrey S. Brewer, Assistant Vice President James F. Palmer, Assistant Vice President Jason M. Purcell, Assistant Vice President LEASING ONE CORPORATION DIRECTORS G. Anthony Busseni, Chairman C. Douglas Carpenter L. Hobbs Cheek, CPA Charles J. Mann Marvin E. Strong Bruce W. Brooks David Lee OFFICERS Charles J. Mann, President and CEO Mark Lester, Vice President Jim Morris, Vice President Eddie Miller, Assistant Vice President FARMERS CAPITAL INSURANCE CORPORATION DIRECTORS G. Anthony Busseni, Chairman Charles S. Boyd Jamey Bennett Sue Coles OFFICERS G. Anthony Busseni, Chairman Charles S. Boyd, President Jamey Bennett, Vice President Sue Coles, Secretary doing business as: Capital Insurance Group Farmers Title Company GLOSSARY OF FINANCIAL TERMS ALLOWANCE FOR LOAN LOSSES A valuation allowance to offset credit losses specifically identified in the loan portfolio, as well as management's best estimate of probable losses inherent in the remainder of the portfolio at the balance sheet date. The allowance is determined by management as the result of the assessment of the risks in the loan portfolio based on past experience. This assessment includes, but is not limited to, consideration of the current economic conditions, changes in mix and volume of the loan portfolio and historical net loan charge off experience. Actual losses could differ significantly from the amounts estimated by management. DIVIDEND PAYOUT Cash dividends paid on common shares, divided by net income. BASIS POINTS Each basis point is equal to one hundredth of one percent. Basis points are calculated by multiplying percentage points times 100. For example: 3.7 percentage points equals 370 basis points. INTEREST RATE SENSITIVITY The relationship between interest sensitive earning assets and interest bearing liabilities. NET CHARGE OFFS The amount of total loans charged off net of recoveries of loans which have been previously charged off. NET INTEREST INCOME Total interest income less total interest expense. NET INTEREST MARGIN Net interest income expressed as a percentage of average earning assets. NET INTEREST SPREAD The difference between the yield on earning assets and the rate paid on interest bearing funds. OTHER REAL ESTATE OWNED Real estate not used for banking purposes. For example, real estate acquired through foreclosure. PROVISION FOR LOAN LOSSES The charge against current income needed to maintain an adequate allowance for loan losses. RETURN ON AVERAGE ASSETS (ROA) Net income divided by average total assets. Measures the relative profitability of the resources utilized by the Company. RETURN ON AVERAGE EQUITY (ROE) Net income divided by average shareholders' equity. Measures the profitability of the shareholders' investment in the Company. TAX EQUIVALENT BASIS (TE) Income from tax-exempt loans and investment securities has been increased by an amount equivalent to the taxes which would have been paid if this income was taxable at statutory rates. WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING The number of shares determined by relating (a) the portion of time within a reporting period that common shares have been outstanding to (b) the total time in that period. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following pages present management's discussion and analysis of the consolidated financial condition and results of operations of Farmers Capital Bank Corporation (the "Company"), which includes both its banking and nonbanking subsidiaries. Banking subsidiaries include Farmers Bank & Capital Trust Co. ("Farmers Bank") in Frankfort, KY and its insurance and leasing company subsidiaries; Farmers Bank and Trust Company in Georgetown, KY; First Citizens Bank in Shepherdsville, KY; United Bank & Trust Co. in Versailles, KY; Lawrenceburg National Bank in Harrodsburg, KY; and Kentucky Banking Centers, Inc. in Glasgow, KY. The Company's only nonbank subsidiary is FCB Services, Inc., a data processing subsidiary located in Frankfort, KY. The following discussion should be read in conjunction with the audited consolidated financial statements and related footnotes that follow. FORWARD-LOOKING STATEMENTS This report contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Although management of the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which the Company and its subsidiaries operate); competition for the Company's customers from other providers of financial services; government legislation and regulation (which changes from time to time and over which the Company has no control); changes in interest rates; material unforeseen changes in the liquidity, results of operations, or financial condition of the Company's customers; and other risks detailed in the Company's filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company. RESULTS OF OPERATIONS Consolidated net income for 2001 was $14.7 million compared to $14.4 million for 2000, a 2.0% increase. Diluted net income per share for 2001 was $2.09, an increase of 6.1% from $1.97 reported for 2000. The earnings per share growth was 410 basis points higher than the net income growth for the year ended December 31, 2001. This is primarily the result of the share buy back program that has been in effect for several years. The company purchased 293,000 shares of its common stock at a total price of $10.3 million during 2001. As a result, the diluted weighted average shares outstanding for 2001 totaled 7.0 million and were 3.9% less than the weighted average shares outstanding of 7.3 million for 2000. Other items of significance that were viewed positively for the Company during the year include the following: >> Net interest income decreased a very modest $263 thousand or 0.6% compared to the prior year. This is significant given the drastic decline in market interest rates during the current year. The Federal Reserve Board's ("Fed") Federal Open Market Committee ("FOMC") decreased the federal funds rate eleven times during 2001. Three of those decreases came outside regular scheduled meetings of the FOMC. The eleven rate decreases totaled 475 basis points and resulted in a federal funds rate decreasing from 6.50% at the beginning of the year to 1.75% at year-end 2001. The effect on the Company from the Fed's actions has generally led to interest rates on earning assets declining more rapidly than rates paid on interest bearing liabilities. During a falling rate environment, the challenge is to reduce the rates paid on interest bearing liabilities (primarily deposits) to offset the decline in the yield on variable rate assets (primarily loans) while remaining competitive in our markets. >> The provision for loan losses decreased a modest 1.0% in comparison to the prior year. >> An increase in noninterest income of $2.4 million or 19.5%. The increase is primarily attributable to management's efforts to seek additional fee-based revenue and thereby decrease the Company's reliance on interest income. Service charges and fees on deposits increased $1.7 million or 31.9% in 2001 compared to 2000. The Company realized $465 thousand of net gains on the sale of available for sale investment securities during 2001. There were no gains or losses realized during 2000 on the sale of investment securities. The return on assets was 1.28% in 2001 compared to 1.40% reported in the prior year. The return on equity increased 32 basis points to 11.93% compared to 11.61% in the prior year. This is another positive result of the share buy back program. INTEREST INCOME Interest income results from interest earned on earning assets, which primarily includes loans and investment securities. Interest income is affected by volume (average balance), composition of earning assets, and the related rates earned on those assets. Total interest income for 2001 was $77.0 million, an increase of $1.6 million or 2.1% from the previous year. The increase in interest income was due primarily to an increase in volume of taxable investment securities of $43.4 million or 29.9% and federal funds sold and securities purchased under agreements to resell of $45.2 million or 120.2%. The impact from the increase in volume offset the decrease in yield of 81 basis points for taxable investment securities and 219 basis points for federal funds sold and securities purchased under agreements to resell. The volume of all interest earning assets increased $118.5 million or 12.8% while the tax equivalent yield on all interest earning assets declined 79 basis points to 7.56% compared to 8.35% in the prior year. Interest income on loans declined $585 thousand or 1.0% mainly due to a 48 basis point decline in the average rate earned. The average balance of loans increased $31.5 million or 4.7% compared to the prior year, thereby mitigating the magnitude of the results of the decline in rates. Most of this increase occurred in mortgage lending and was attributable to customer refinancing activity, as well as the continued development of our correspondent banking initiative. The tax equivalent rate earned on loans was 8.64% for 2001 compared to 9.12% for 2000. Interest income on taxable investment securities increased $1.2 million or 13.4%. The increase is due to a $43.4 million or 29.9% increase in volume, which offset a decline in the average rate earned of 81 basis points to 5.54%. The Company capitalized on the lower interest rate environment during 2001 to fund additional purchases of investment securities that helped to contain the Company's falling interest margin. The maturity of the funding source and the maturities of the securities purchased were carefully selected to benefit net interest income without incurring undue risk in the current period or future periods. Interest on nontaxable investment securities decreased $87 thousand or 2.5%. The decrease was due primarily to a 2.2% reduction in volume and a slight decline in the tax equivalent rate of 1 basis point to 6.53%. Interest income on temporary investments increased $996 thousand or 42.6% during 2001 compared to the prior year. Temporary investments consist of federal funds sold, securities purchased under agreements to resell and, to a lesser extent, deposits in other banks. A $45.2 million increase in volume offset a decrease in the average rate earned of 219 basis points to 4.02%. INTEREST EXPENSE Interest expense results from incurring interest on interest bearing liabilities, which primarily include interest bearing deposits, securities sold under agreements to repurchase, and other borrowed funds. Interest expense is affected by volume, composition of interest bearing liabilities and the related rates paid on those liabilities. Total interest expense was $34.4 million for 2001, an increase of $1.8 million or 5.6% from the prior year. Consistent with the decrease in general market interest rates throughout the year, the Company experienced a 39 basis point reduction in the overall cost of funds for 2001. However, the additional expense derived from the increase in the volume of interest bearing liabilities of $118.4 million outweighed the reduced cost of funds and resulted in a net increase in interest expense compared to the prior year. The average rate paid on total interest bearing liabilities was 3.97% in 2001 compared to 4.36% the prior year. Interest expense on time deposits, the largest component of total interest expense, increased $3.2 million or 16.8%. Both the average rate and volume contributed to the increase. The average rate paid increased 13 basis points to 5.77% and the average balance increased $48.0 million or 14.2%. Interest expense on interest bearing demand deposits decreased $1.2 million or 26.9% due almost entirely to a 67 basis point decline in the average rate paid of 1.66%. Interest expense on savings deposits decreased $1.2 million or 21.9%. This decrease was also due primarily to a decrease in the average rate paid of 91 basis points to 2.55%. The average balance of savings deposits increased $9.1 million or 5.9%. Interest expense on securities sold under agreements to repurchase increased $808 thousand or 25.9% primarily due to an increase in volume of $50.5 million or 95.8%. The increase in volume more than offset a decrease in the average rate paid of 211 basis points to 3.80%. Interest expense on other borrowed funds increased $197 thousand, up 38.1%. Interests on other borrowed funds consist primarily of Federal Home Loan Bank ("FHLB") borrowings, a funding source that was more greatly utilized during 2001 than in previous years. NET INTEREST INCOME Net interest income is the most significant component of the Company's earnings. Net interest income is the excess of the interest income earned on assets over the interest paid for funds to support those assets. The table on the following page represents the major components of the interest earning assets and interest bearing liabilities on a tax equivalent basis where tax exempt interest income is adjusted upward by an amount equivalent to the federal income taxes that would have been paid if the income had been fully taxable (assuming a 35% tax rate). Tax equivalent net interest income was $44.7 million for 2001, a modest decrease of $165 thousand or less than 1.0% compared to 2000. The net interest margin was 4.28%, decreasing 56 basis points from the prior year. A 40 basis point decrease to the spread between the average interest earned and average interest paid accounted for most of the decrease in margin. Changes in net interest income and margin result from the interaction between the volume and the composition of earning assets, the related yields, and the associated cost and composition of the interest bearing liabilities. Accordingly, portfolio size, composition, and the related yields earned and the average rates paid can have a significant impact on net interest and margin. During 2001, the tax equivalent yield on total earning assets decreased 79 basis points to 7.56% while the cost of funds decreased only 39 basis points to 3.97%, resulting in the 40 basis point decrease in spread noted above. The increase in volume of interest paying liabilities coupled with earning asset rates declining faster than rates paid on interest paying liabilities are responsible for the slight decrease in net interest income. The tax equivalent spread between rates earned on earning assets and rates paid on interest bearing liabilities totaled 3.59% for 2001 compared to 3.99% a year earlier. The proactive management of the rate sensitive components of both the assets and liabilities helped to minimize the decline in net interest income during 2001. This task was much more difficult in 2001 than in recent history due to the sharply falling rate environment. Not only was it difficult, it was absolutely necessary for the continued good health and viability of the Company. The steps taken in 2001 benefited the current period and laid the groundwork for positive future periods.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL - ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Average Average Average Average Average Average (In thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------------ EARNING ASSETS Investment securities Taxable $188,927 $10,466 5.54% $145,479 $9,232 6.35% $163,077 $9,191 5.64% Nontaxable1 74,225 4,845 6.53 75,918 4,967 6.54 83,211 5,499 6.61 Time deposits with banks, federal funds sold and securities purchased under agreements to resell 82,801 3,332 4.02 37,595 2,336 6.21 30,902 1,446 4.68 Loans 1,2,3 698,758 60,382 8.64 667,241 60,834 9.12 618,860 55,036 8.89 - ------------------------------------------------------------------------------------------------------------------------------------ Total earning assets 1,044,711 $79,025 7.56% 926,233 $77,369 8.35% 896,050 $71,172 7.94% - ------------------------------------------------------------------------------------------------------------------------------------ Allowance for loan losses (10,585) (10,092) (9,272) - ------------------------------------------------------------------------------------------------------------------------------------ Total earning assets, net of allowance for loan losses 1,034,126 916,141 886,778 - ------------------------------------------------------------------------------------------------------------------------------------ NONEARNING ASSETS Cash and due from banks 70,916 66,706 64,464 Premises and equipment, net 25,151 24,659 24,985 Other assets 13,434 20,242 12,821 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $1,143,627 $1,027,748 $989,048 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST BEARING LIABILITIES Deposits Interest bearing demand $199,067 $3,312 1.66% $193,982 $4,528 2.33% $192,695 $3,977 2.06% Savings 162,665 4,153 2.55 153,574 5,319 3.46 158,501 4,557 2.88 Time 385,620 22,251 5.77 337,667 19,053 5.64 322,616 16,527 5.12 Securities sold under agreements to repurchase 103,320 3,927 3.80 52,773 3,119 5.91 41,741 1,926 4.61 Other borrowed funds 13,698 714 5.21 7,979 517 6.48 3,634 197 5.45 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest bearing liabilities 864,370 $34,357 3.97% 745,975 $32,536 4.36% 719,187 $27,184 3.78% - ------------------------------------------------------------------------------------------------------------------------------------ NONINTEREST BEARING Liabilities Commonwealth of Kentucky deposits 32,935 32,621 30,329 Other demand deposits 115,821 113,271 110,299 Other liabilities 7,512 11,977 4,839 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 1,020,638 903,844 864,654 - ------------------------------------------------------------------------------------------------------------------------------------ Shareholders' equity 122,989 123,904 124,394 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $1,143,627 $1,027,748 $989,048 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 44,668 44,833 43,988 TE basis adjustment (1,986) (1,888) (2,138) - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $42,682 $42,945 $41,850 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest spread 3.59% 3.99% 4.16% Net interest margin 4.28% 4.84% 4.91% - ------------------------------------------------------------------------------------------------------------------------------------ 1 Income and yield stated at a fully tax equivalent basis using a 35% tax rate. 2 Loan balances include principal balances on nonaccrual loans. 3 Loan fees included in interest income amounted to $1.7 million, $1.7 million, and $1.8 million in 2001, 2000, and 1999, respectively.
The following table is an analysis of the change in net interest income.
ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX EQUIVALENT BASIS) - ------------------------------------------------------------------------------------------------------------------------------------ Variance Variance Attributed to Variance Variance Attributed to (In thousands) 2001/20001 Volume Rate 2000/19991 Volume Rate - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Taxable investment securities $ 1,234 $ 2,516 $ (1,282) $ 41 $(1,050) $ 1,091 Nontaxable investment securities2 (122) (114) (8) (532) (475) (57) Time deposits with banks, federal funds sold and securities purchased under agreements to resell 996 2,043 (1,047) 890 354 536 Loans2 (452) 2,816 (3,268) 5,798 4,357 1,441 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 1,656 7,261 (5,605) 6,197 3,186 3,011 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Interest bearing demand deposits (1,216) 115 (1,331) 551 27 524 Savings deposits (1,166) 300 (1,466) 762 (144) 906 Time deposits 3,199 2,752 447 2,526 795 1,731 Securities sold under agreements to repurchase 807 2,211 (1,404) 1,193 578 615 Other borrowed funds 197 314 (117) 320 276 44 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 1,821 5,692 (3,871) 5,352 1,532 3,820 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $ (165) $ 1,569 $ (1,734) $ 845 $1,654 $ (809) - ------------------------------------------------------------------------------------------------------------------------------------ Percentage change 100.0% (950.9)% 1050.9% 100.0% 195.7% (95.7%) - ------------------------------------------------------------------------------------------------------------------------------------ 1 The changes which are not solely due to rate or volume are allocated on a percentage basis using the absolute values of rate and volume variances as a basis for allocation. 2 Income stated at fully tax equivalent basis using a 35% tax rate.
NONINTEREST INCOME Total noninterest income increased $2.4 million or 19.5% to $14.9 million for 2001. Service charges and fees on deposits, the largest component of noninterest income, increased $1.7 million or 31.9% primarily due to the implementation of a new overdraft policy and related NSF fee structure. The Company allows checking account customers meeting specific criteria to overdraw their checking account up to a predetermined limit. The customer is charged a standard fee for each check paid that creates or increases the overdraft balance. Guidelines have been established addressing the time frame that repayment of the overdraft and related fees are to be made. Other service charges, commissions, and fees declined $160 thousand or 4.0% due primarily to a decrease in custodial safekeeping fees from the Commonwealth of Kentucky. Data processing income increased $71 thousand or 5.4%. Trust fee income increased $211 thousand or 12.3%, primarily due to the recognition of several large nonrecurring estate fees. Net gains on sales of investment securities, which were zero during 2000, were $465 thousand in 2001 and consisted primarily of equity investments in unaffiliated financial institutions. Net gains on the sale of mortgage loans, included as a component of other noninterest income, totaled $262 thousand, an increase of $212 thousand resulting from the increase in the amount of mortgage loans originated for sale of $29.7 million or 277%. NONINTEREST EXPENSE Total noninterest expense was $34.9 million for 2001, an increase of $1.9 million or 5.7% compared to 2000. Salaries and employee benefits accounted for more than half of the total noninterest expense and the majority of the increase from 2000. During 2001, salaries and benefits increased $1.3 million or 7.2% to $19.7 million, the result of nominal salary increases and an increase in health insurance costs of $743 thousand. Noncash compensation related to the Company's nonqualified stock option plan was $877 thousand, a decrease of $90 thousand or 9.3% from 2000. As of December 31, 2001, the Company had 468 full time equivalent employees, an increase of 12 from the prior year-end. Net occupancy expense increased $124 thousand or 5.5% compared to the prior year due to higher depreciation, janitorial, and utility costs. Equipment expenses increased $466 thousand or 16.1% due to increased depreciation and maintenance on new asset purchases. Other noninterest expense, including bank franchise tax, remained relatively unchanged at $9.5 million. INCOME TAX Income tax expense for 2001 was $5.5 million, relatively unchanged from the previous year. The effective tax rate decreased 39 basis points to 27.27% from 27.66% in 2000. The change in the effective tax rate is primarily related to the decline in nondeductible goodwill amortization expense. During 2001, the proportionate composition of earning assets between taxable and nontaxable did not significantly change compared to the prior year. Future investments will continue to be made in tax-exempt alternatives when the yield and credit quality is more attractive than those of the available taxable opportunities. FINANCIAL CONDITION On December 31, 2001, total assets were $1.2 billion, a decrease of $21.2 million or 1.8% from the prior year-end. While core assets and liabilities did grow, a large deposit by the Commonwealth of Kentucky increased prior year assets and liabilities significantly at year-end 2000. In general, the increase in 2000 was due to the relationship between the Company's principal subsidiary, Farmers Bank & Capital Trust Co., and the Commonwealth of Kentucky. Farmers Bank provides various services to state agencies of the Commonwealth. As the depository for the Commonwealth, these agencies issue checks drawn on Farmers Bank, including paychecks and state income tax refunds. Farmers Bank also processes vouchers of the WIC (Women, Infants and Children) program for the Cabinet for Human Resources. The Bank's investment department also provides services to the Teacher's Retirement System. As the depository for the Commonwealth, large fluctuations in deposits are likely to occur on a daily basis. On an average basis, total assets were $1.1 billion for 2001, an increase of $115.9 million or 11.3% from the prior year. Earning assets, primarily loans and investment securities, increased $118.5 million on average or 12.8% to $1.04 billion. LOANS Loans, net of unearned income, totaled $701.9 million, an increase of $18.5 million or 2.7% from 2000. Most of the increase was in real estate lending and lease financing. Real estate mortgage loans make up 62% of the total loans outstanding at December 31, 2001 and increased $6.6 million or 1.6% compared to a year earlier. Real estate construction loans increased $937 thousand or 2.3%. Lease financing increased $6.6 million or 19.2%. The outstandings for commercial, financial, and agriculture loans grew 3.3% to $108.5 million while installment loans grew $1.1 million or 1.4%. On average loans represented 66.9% of earning assets during 2001 compared to 72.0% for 2000. As loan demand fluctuates, the available funds are redirected between either temporary investments or investment securities. The composition of the loan portfolio is summarized in the table below.
- ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) December 31, 2001 % 2000 % 1999 % 1998 % 1997 % - ------------------------------------------------------------------------------------------------------------------------------------ Commercial, financial, and agriculture $108,516 15.4% $105,248 15.4% $105,064 16.3% $116,625 19.3% $114,377 19.5% Real estate - construction 41,930 6.0 40,993 6.0 38,471 6.0 24,770 4.1 26,299 4.5 Real estate - mortgage 432,168 61.6 425,555 62.3 390,598 60.7 352,033 58.2 334,612 57.1 Installment 78,399 11.2 77,284 11.3 77,051 12.0 81,254 13.4 83,368 14.2 Lease financing 40,856 5.8 34,269 5.0 32,379 5.0 30,155 5.0 27,284 4.7 - ------------------------------------------------------------------------------------------------------------------------------------ Total $701,869 100.0% $683,349 100.0% $643,563 100.0% $604,837 100.0% $585,940 100.0% - ------------------------------------------------------------------------------------------------------------------------------------
The following table presents commercial, financial, and agricultural loans and real estate construction loans outstanding at December 31, 2001 which, based on remaining scheduled repayments of principal, are due in the periods indicated.
LOAN MATURITIES - ----------------------------------------------------------------------------------------------------------------------------- Within After One But After (In thousands) One Year Within Five Years Five Years Total - ----------------------------------------------------------------------------------------------------------------------------- Commercial, financial, and agricultural $71,085 $26,533 $10,898 $108,516 Real estate - construction 37,091 4,784 55 41,930 - ----------------------------------------------------------------------------------------------------------------------------- Total $108,176 $31,317 $10,953 $150,446 - -----------------------------------------------------------------------------------------------------------------------------
The table below presents commercial, financial, and agricultural loans and real estate construction loans outstanding at December 31, 2001 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 $18,821 $12,496 Due after five years 758 10,195 - -------------------------------------------------------------------------------- Total $19,579 $22,691 - -------------------------------------------------------------------------------- ASSET QUALITY The Company maintains policies and procedures to ensure that the granting of credit is done in a sound and consistent manner. This includes policies on a company-wide basis that require certain minimum standards to be maintained. However, the policies also permit the individual subsidiary companies authority to adopt standards that are no less stringent than those included in the company-wide policies. Credit decisions are made at the subsidiary bank level under the guidelines established by policy. The Company's internal audit department performs a loan review at each subsidiary bank during the year. This loan review evaluates loan administration, credit quality, documentation, compliance with Company loan standards, and the adequacy of the allowance for loan losses on a consolidated and subsidiary basis. The provision for loan losses represents charges made to earnings to maintain an allowance for loan losses at an adequate level based on credit losses specifically identified in the loan portfolio, as well as management's best estimate of probable loan losses inherent in the remainder of the portfolio at the balance sheet date. Many factors are considered when establishing an adequate allowance. Those factors include, but are not limited to, the following: an assessment of the financial condition of individual borrowers, a determination of the value and adequacy of underlying collateral, a review of historical loss experience, the condition of the local economy, an analysis of the levels and trends of the loan composition, and a review of delinquent and classified loans. Actual losses could differ significantly from the amounts estimated by management. In addition, borrowers may experience difficulty in periods of economic deterioration, and the level of nonperforming loans, charge offs, and delinquencies could rise and require additional increases in the provision. Also, regulatory agencies, as an integral part of their examinations, periodically review the allowance for loan losses. These reviews could result in additional adjustments to the provision based upon their judgments about relevant information available during their examination. The provision for loan losses totaled $2.4 million in 2001, a decrease of $24 thousand or 1.0% compared to 2000. The Company had $2.1 million in net charge offs, a 14.1% increase from $1.9 million in the prior year. Real estate lending accounted for $1.1 million of the net charge offs for 2001. Net charge offs equaled 0.31% of average loans for 2001, an increase of 3 basis points compared to the prior year. A significant portion of the $2.9 million loans charged off during 2001 relates to two individual credits. The allowance for loan losses was $10.5 million at year-end 2001. The allowance for loan losses was 1.50% of loans net of unearned income at year-end 2001 and year-end 2000. Management continues to emphasize collection efforts and evaluation of risks within the portfolio. The composition of the Company's loan portfolio continues to be diverse with no significant concentration to any individual or industry. The table below summarizes the loan loss experience for the past five years.
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, (In thousands) 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Balance of Allowance for Loan Losses at $ 10,249 $ 9,659 $ 9,048 $ 9,114 $ 8,741 Beginning of Year Loans charged off: Commercial, financial, and agricultural 600 1,336 1,590 716 720 Real estate 1,476 369 79 386 465 Installment loans to individuals 762 857 1,209 1,061 1,133 Lease financing 87 97 64 109 433 - ------------------------------------------------------------------------------------------------------------------------------------ Total loans charged off 2,925 2,659 2,942 2,272 2,751 - ------------------------------------------------------------------------------------------------------------------------------------ Recoveries of loans previously charged off: Commercial, financial, and agricultural 157 313 249 383 437 Real estate 371 132 172 345 527 Installment loans to individuals 247 310 267 341 330 Lease financing 2 22 2 3 - ------------------------------------------------------------------------------------------------------------------------------------ Total recoveries 777 777 690 1,072 1,294 - ------------------------------------------------------------------------------------------------------------------------------------ Net loans charged off 2,148 1,882 2,252 1,200 1,457 - ------------------------------------------------------------------------------------------------------------------------------------ Additions to allowance charged to expense 2,448 2,472 2,863 1,134 1,830 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of year $ 10,549 $ 10,249 $ 9,659 $ 9,048 $ 9,114 - ------------------------------------------------------------------------------------------------------------------------------------ Average loans net of unearned income $ 698,758 $ 667,241 $ 618,860 $ 589,714 $ 566,033 Ratio of net charge offs during year to average loans, net of unearned income .31% .28% .36% .20% .26% - ------------------------------------------------------------------------------------------------------------------------------------
The following table presents an estimate of the allocation of the allowance for loan losses by type for the date indicated. Although specific allocations exist, the entire allowance is available to absorb losses in any particular category.
ALLOWANCE FOR LOAN LOSSES - ------------------------------------------------------------------------------------------------------------------------------------ December 31, (In thousands) 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Commercial, financial, and agricultural $ 3,492 $ 4,050 $ 3,649 $ 2,536 $ 2,942 Real estate 4,135 3,835 3,807 4,637 4,324 Installment loans to individuals 2,208 1,861 1,829 1,450 1,417 Lease financing 714 503 374 425 431 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 10,549 $ 10,249 $ 9,659 $ 9,048 $ 9,114 - ------------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS Nonperforming assets for the Company include nonperforming loans, other real estate owned, and other foreclosed assets. Nonperforming loans consist of nonaccrual loans, loans past due ninety days on which interest is still accruing, and restructured loans. Generally, the accrual of interest on loans is discontinued when it is determined that the collection of interest or principal is doubtful, or when a default of interest or principal has existed 90 days or more, unless such loan is well secured and in the process of collection. Total nonperforming assets totaled $6.3 million at year-end 2001, an increase of $967 thousand or 18.2% compared to 2000. The increase is primarily due to a $769 thousand or 26.7% increase in nonaccrual loans. Nonperforming loans represent 0.74% of loans net of unearned income at year-end 2001, an increase from 0.67% for 2000. Information pertaining to nonperforming loans and assets is presented in the table below.
- ------------------------------------------------------------------------------------------------------------------------------ December 31, (In thousands) 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ Loans accounted for on nonaccrual basis $ 3,621 $ 2,852 $ 2,767 $ 1,286 $ 3,137 Loans past due 90 days or more 1,593 1,739 2,102 1,645 2,196 Restructured loans 1,285 - ------------------------------------------------------------------------------------------------------------------------------ Total nonperforming loans 5,214 4,591 4,869 2,931 6,618 Other real estate owned 715 598 734 1,671 29 Other foreclosed assets 363 136 95 69 - ------------------------------------------------------------------------------------------------------------------------------ Total nonperforming assets $ 6,292 $ 5,325 $ 5,698 $ 4,671 $ 6,647 - ------------------------------------------------------------------------------------------------------------------------------
TEMPORARY INVESTMENTS Federal funds sold and securities purchased under agreements to resell are the primary components of temporary investments. The Company uses these funds in the management of liquidity and interest rate sensitivity. In 2001, temporary investments averaged $82.8 million, an increase of $45.2 million or 120.2%. This increase is primarily a result of the relationship between the Company's principal subsidiary and the Commonwealth of Kentucky as described in preceding sections of this annual report. Temporary investments are reallocated as loan demand and other investment alternatives present the opportunity. INVESTMENT SECURITIES The majority of the investment securities portfolio is comprised of U.S. Government agency securities, mortgage-backed securities, and tax-exempt securities of states and political subdivisions. Total investment securities were $346 million on December 31, 2001, an increase of $84.7 million or 32.5% from year-end 2000 The funds made available from maturing or called bonds have been redirected as necessary to fund loan growth or reinvested to purchase additional investment securities. The purchase of nontaxable obligations of states and political subdivisions is the primary means of managing the Company's tax position. The alternative minimum tax is not expected to impact the Company's ability to acquire tax-free obligations in the near future as they become available at an attractive yield. Investment securities averaged $263 million in total for the year, an increase of $41.8 million or 18.9%. The majority of the purchases during 2001 were U.S. Government agencies and mortgage-backed securities classified as available for sale. On December 31, 2001, available for sale securities made up 89% of the total investment securities, as opposed to 81% a year earlier. U.S. Government agencies made up 50.5% of the total available for sale securities and 45.1% of the total portfolio at year-end. A year ago, U.S. Government agencies made up 53% of the total available for sale securities and 43% of the total portfolio. Mortgage-backed securities in the available for sale portfolio increased significantly to $99.8 million at year-end 2001 as compared to $52.9 million at year-end 2000. The increase in investment securities resulted from the Company's efforts to manage its net interest margin during a volatile market interest rate environment. The Company took advantage of lower borrowing costs during 2001 to fund the purchase of investment securities with attractive returns within our risk guidelines. This action served to mitigate the severity of the falling market interest rates during the year. The Company realized $465 thousand in net gains on the sale of available for sale securities during 2001 and none in 2000. The net unrealized gain on available for sale securities included as a component of shareholders' equity was $1.2 million at year-end 2001 compared to $557 thousand at the end of 2000. Typically, the value of a bond portfolio and market interest rates have an inverse relationship; therefore, in the current falling interest rate environment, the value of the available for sale portfolio has increased. The following table summarizes the carrying values of investment securities on December 31, 2001, 2000, and 1999. The investment securities are divided into available for sale and held to maturity securities. Available for sale securities are carried at the estimated fair value and held to maturity securities are carried at amortized cost.
- -------------------------------------------------------------------------------------------------------------------------------- December 31, 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- Available Held to Available Held to Available Held to (In thousands) for Sale Maturity for Sale Maturity for Sale Maturity - -------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury securities $ 1,250 $ 3,748 Obligations of U.S. Government agencies $ 155,693 $ 100 113,033 $ 100 75,997 $ 2,600 Obligations of states and political subdivisions 41,791 37,055 22,804 48,895 21,152 58,562 Mortgage-backed securities 99,819 306 52,941 395 50,889 734 Corporate debt 4,873 13,904 11,969 Equity securities 5,905 7,487 4,189 - -------------------------------------------------------------------------------------------------------------------------------- Total $ 308,081 $ 37,461 $ 211,419 $ 49,390 $ 167,944 $ 61,896 - --------------------------------------------------------------------------------------------------------------------------------
The following table presents an analysis of the contractual maturity distribution and tax equivalent weighted average interest rates of investment securities at December 31, 2001. For purposes of this analysis, available for sale securities are stated at fair value and held to maturity securities are stated at amortized cost. Equity securities in the available for sale portfolio consist primarily of FHLB stock and investments in unrelated financial institution stocks, which have no stated maturity and are not included in the maturity schedule that follows.
AVAILABLE FOR SALE - -------------------------------------------------------------------------------------------------------------------------------- After One But After Five But Within One Year Within Five Years Within Ten Years After Ten Years - -------------------------------------------------------------------------------------------------------------------------------- (In thousands) Amount Rate Amount Rate Amount Rate Amount Rate - -------------------------------------------------------------------------------------------------------------------------------- Obligations of U.S. Government agencies $ 92,909 2.1% $ 49,934 5.0% $ 11,848 5.9% $ 1,002 6.2% Obligations of states and political subdivisions 6,971 6.0 21,414 6.2 13,406 8.9 Mortgage-backed securities 6,887 6.3 50,259 6.4 42,673 6.4 Corporate debt 4,350 6.2 523 5.7 - -------------------------------------------------------------------------------------------------------------------------------- Total $ 97,259 2.3% $ 64,315 5.3% $ 83,521 6.3% $ 57,081 7.0% - --------------------------------------------------------------------------------------------------------------------------------
HELD TO MATURITY - -------------------------------------------------------------------------------------------------------------------------------- After One But After Five But Within One Year Within Five Years Within Ten Years After Ten Years - -------------------------------------------------------------------------------------------------------------------------------- (In thousands) Amount Rate Amount Rate Amount Rate Amount Rate - -------------------------------------------------------------------------------------------------------------------------------- Obligations of U.S. Government agencies $ 100 6.0% Obligations of states and political subdivisions $6,908 6.6% 19,306 6.8 $10,244 7.0% $597 6.8% Mortgage-backed securities 306 7.2 - -------------------------------------------------------------------------------------------------------------------------------- Total $6,908 6.6% $19,406 6.8% $10,550 7.0% $597 6.8% - --------------------------------------------------------------------------------------------------------------------------------
The calculation of the weighted average interest rates for each category is based on the weighted average costs of the securities. The weighted average tax rates on exempt states and political subdivisions are computed on a tax equivalent basis using a 35% tax rate. DEPOSITS The Company's primary source of funding for its lending and investment activities result from its customer deposits, which consist of noninterest and interest bearing demand, savings, and time deposits. On December 31, 2001, deposits totaled $913 million, a decrease of $55.7 million or 5.7% from year-end 2000. A significant deposit received from the Commonwealth of Kentucky at year-end 2000 is responsible for the reported decrease in deposits in the current period. Deposits averaged $896 million in 2001, an increase of $65.0 million or 7.8%. During 2001, total average interest bearing deposits increased $62.1 million or 9.1% to $747 million, while average noninterest bearing deposits increased $2.9 million or 2.0% to $149 million. A summary of average balances and rates paid on deposits follows.
- -------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average (In thousands) Balance Rate Balance Rate Balance Rate - -------------------------------------------------------------------------------------------------------------------------------- Noninterest bearing demand $148,756 $145,892 $140,628 Interest bearing demand 199,067 1.66% 193,982 2.33% 192,695 2.06% Savings 162,665 2.55 153,574 3.46 158,501 2.88 Time 385,620 5.77 337,667 5.64 322,616 5.12 - -------------------------------------------------------------------------------------------------------------------------------- Total $896,108 3.32% $831,115 3.47% $814,440 3.08% - --------------------------------------------------------------------------------------------------------------------------------
Maturities of time deposits of $100,000 or more outstanding at December 31, 2001 are summarized as follows. - ----------------------------------------------------------------------------- (In thousands) Amount - ----------------------------------------------------------------------------- 3 months or less $16,140 Over 3 through 6 months 10,857 Over 6 through 12 months 25,244 Over 12 months 32,691 - ----------------------------------------------------------------------------- Total $84,932 - ----------------------------------------------------------------------------- SHORT-TERM BORROWINGS Short-term borrowings primarily consist of securities sold under agreements to repurchase with year-end balances of $113.8 million, $90.0 million, and $41.2 million in 2001, 2000, and 1999, respectively. Such borrowings are generally on an overnight basis. Other short-term borrowings consist of FHLB borrowings in the amount of $12.0 million at year-end 2001 and demand notes issued to the U.S. Treasury under the treasury tax and loan note option account totaling $800 thousand, $1.1 million, and $771 thousand in 2001, 2000, and 1999, respectively. A summary of short-term borrowings is as follows. - -------------------------------------------------------------------------------- (In thousands) 2001 2000 1999 - -------------------------------------------------------------------------------- Amount outstanding at year-end $ 126,600 $ 91,181 $ 41,971 Maximum outstanding at any month-end 165,678 91,181 101,359 Average outstanding 108,091 53,315 42,442 Weighted average rate during the year 3.80% 5.91% 4.61% - -------------------------------------------------------------------------------- LONG-TERM BORROWINGS Substantially all of the Company's long-term borrowings consist of FHLB advances to the Company's subsidiary banks. These advances are secured by FHLB stock that the banks are required to own as well as certain mortgage loans as required by the FHLB. Such advances are made pursuant to several different credit programs, which have their own interest rates and range of maturities. FHLB advances are generally used to increase the Company's lending activities and to aid the efforts of asset and liability management by utilizing various repayment options offered by the FHLB. Long-term advances from the FHLB totaled $10.6 million at year-end 2001, an increase of $708 thousand or 7.2% compared to $9.8 million for the prior year-end. EFFECTS OF INFLATION The majority of the Company's assets and liabilities are monetary in nature. Therefore, the Company differs greatly from most commercial and industrial companies that have significant investments in nonmonetary assets, such as fixed assets and inventories. However, inflation does have an important impact on the growth of assets in the banking industry and on the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation also affects other noninterest expense, which tends to rise during periods of general inflation. Management believes the most significant impact on financial and operating results is the Company's ability to react to changes in interest rates. Management seeks to maintain an essentially balanced position between interest sensitive assets and liabilities in order to protect against the effects of wide interest rate fluctuations. MARKET RISK MANAGEMENT Market risk is the risk of loss arising from adverse changes in market prices and rates. The Company's market risk is comprised primarily of interest rate risk created by its core banking activities of extending loans and receiving deposits. The Company's success is largely dependent upon its ability to manage this risk. Interest rate risk is defined as the exposure of the Company's net interest income to adverse movements in interest rates. Although the Company manages other risks, such as credit and liquidity risk, management considers interest rate risk to be its most significant risk, which could potentially have the largest and a material effect on the Company's financial condition and results of operations. A sudden and substantial change in interest rates may adversely impact the Company's earnings to the extent that the interest rates earned on assets and paid on liabilities do not change at the same speed, to the same extent, or on the same basis. Other events that could have an adverse impact on the Company's performance include changes in general economic and financial conditions, general movements in market interest rates, and changes in consumer preferences. The Company's primary purpose in managing interest rate risk is to effectively invest the Company's capital and to manage and preserve the value created by its core banking business. The Company has a Corporate Asset and Liability Management Committee ("ALCO"). ALCO monitors the composition of the balance sheet to ensure comprehensive management of interest rate risk and liquidity. ALCO also provides guidance and support to each ALCO of the Company's subsidiary banks and is responsible for monitoring risks on a company-wide basis. ALCO has established minimum standards in its asset and liability management policy that each subsidiary bank must adopt. However, the subsidiary banks are permitted to deviate from these standards so long as the deviation is no less stringent than that of the Corporate policy. The Company uses a simulation model as a tool to monitor and evaluate interest rate risk exposure. The model is designed to measure the sensitivity of net interest income and net income to changing interest rates during the next twelve months. Forecasting net interest income and its sensitivity to changes in interest rates requires the Company to make assumptions about the volume and characteristics of many attributes, including assumptions relating to the replacement of maturing earning assets and liabilities. Other assumptions include, but are not limited to, projected prepayments, projected new volume, and the predicted relationship between changes in market interest rates and changes in customer account balances. These effects are combined with the Company's estimate of the most likely rate environment to produce a forecast for the next twelve months. The forecasted results are then adjusted for the effect of a gradual 200 basis point increase and decrease in market interest rates on the Company's net interest income and net income. Because assumptions are inherently uncertain, the model cannot precisely estimate net interest income or net income or the effect of interest rate changes on net interest income and net income. Actual results could differ significantly from simulated results. At December 31, 2001, the model indicated that if rates were to gradually increase by 200 basis points over the next twelve months, then net interest income (TE) and net income would increase 2.1% and 4.1%, respectively. The model indicated that if rates were to gradually decrease by 200 basis points over the next twelve months, then net interest income (TE) and net income would decrease 2.6% and 5.3%, respectively. LIQUIDITY The liquidity of the Parent Company is primarily affected by the receipt of dividends from its subsidiary banks (see footnote 16 in the notes to the audited consolidated financial statements) and cash balances maintained. As of December 31, 2001, combined retained earnings of the subsidiary banks were $61.5 million, of which $14.6 million was available for the payment of dividends to the Parent Company without obtaining prior approval from bank regulatory agencies. As a practical matter, payment of future dividends is also subject to the maintenance of other capital ratio requirements. Management expects that in the aggregate, its subsidiary banks will continue to have the ability to dividend adequate funds to the Parent Company. The Parent Company had cash balances of $14.4 million at year-end 2001. The Company's objective as it relates to liquidity is to ensure that the 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 subsidiary banks have several sources of funds available on a daily basis that can be used for liquidity purposes. Those sources of funds include the subsidiary banks' core deposits, consisting of both business and nonbusiness deposits; cash flow generated by repayment of loan principal and interest; and federal funds purchased and securities sold under agreements to repurchase. For the longer term, the liquidity position is managed by balancing the maturity structure of the balance sheet. This process allows for an orderly flow of funds over an extended period of time. Liquid assets consist of cash, cash equivalents, and available for sale investment securities. At December 31, 2001, liquid assets totaled $414 million, a $26.8 million or 6.1% decrease compared to the prior year-end. Net cash provided by operating activities was $20.2 million in 2001, relatively unchanged from $20.0 million from the prior year. Net cash used in investing activities was $105.7 million during 2001, an increase of $35.1 million or 49.7% from the prior year due primarily to increased purchases of available for sale investment securities. Net cash used in financing activities totaled $38.0 million for the year 2001. In the prior year, financing activities provided $145 million, a difference of $184 million in the comparison. The difference primarily relates to deposit activity; in 2000, deposits provided $107.0 million in cash flow while during 2001 the decrease in deposits was a use of cash in the amount of $55.7 million. Commitments to extend credit as disclosed in footnote 13 in the notes to the audited consolidated financial statements are considered in addressing our liquidity management. The Company does not expect these commitments to significantly effect the liquidity position in future periods. CAPITAL RESOURCES Shareholders' equity was $123.6 million on December 31, 2001. This represents a decrease of $1.9 million or 1.5% from year-end 2000. During 2001, the Company purchased 293,000 shares of its outstanding common stock for a total cost of $10.3 million. Favorable results of the share buy back program are reflected in the growth in earnings per share, which outpaced the growth in net income, and in the improvement in the return on equity. The Company issued 26,000 shares of common stock during 2001 pursuant to its nonqualified employee stock option plan. Dividends of $8.5 million or $1.21 per share were declared during the year. The dividends declared during 2001 represent a 3.4% increase on a per share basis. Accumulated other comprehensive income, consisting of the unrealized holding gain on available for sale securities (net of tax), increased $667 thousand from year-end 2000. Consistent with the objective of operating a sound financial organization, the Company's goal is to maintain capital ratios well above the regulatory minimum requirements. The Company's capital ratios as of December 31, 2001, the regulatory minimums, and the regulatory standard for a well capitalized institution are as follows. - -------------------------------------------------------------------------------- Farmers Capital Regulatory Well Bank Corporation Minimum Capitalized - -------------------------------------------------------------------------------- Tier 1 risk based 16.50% 4.00% 6.00% Total risk based 17.76 8.00 10.00 Leverage 10.70 4.00 5.00 - -------------------------------------------------------------------------------- The capital ratios of each subsidiary bank were in excess of the applicable minimum regulatory capital ratio requirements at December 31, 2001. The table below is an analysis of dividend payout ratios and equity to asset ratios for the previous five years. - -------------------------------------------------------------------------------- Years Ended December 31, 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------- Percentage of dividends declared to net income 57.70% 59.33% 60.66% 53.02% 45.90% Percentage of average shareholders' equity to average total assets 10.75 12.06 12.58 12.55 12.46 - -------------------------------------------------------------------------------- SHARE BUY BACK PROGRAM In July 2000, the Company announced that it intended to purchase up to 500,000 shares of its outstanding common stock. This is in addition to the stock purchase plan announced in November 1998 to purchase 400,000 shares. The purchases are dependent on market conditions and there is no guarantee as to the exact number of shares to be purchased by the Company. Shares would be used for general corporate purposes. Consistent with the objective of maximizing shareholder value, the Company considers the purchase of its outstanding shares in a given price range to be a good investment of the Company's available funds. As of December 31, 2001, 193,082 additional shares could be purchased under the existing program. SHAREHOLDER INFORMATION As of January 1, 2002, there were 822 shareholders of record. This figure does not include individual participants in security position listings. STOCK PRICES Farmers Capital Bank Corporation's stock is traded on the National Association of Security Dealers Automated Quotation System (NASDAQ) SmallCap Market tier of The NASDAQ Stock Market, with sales prices reported under the symbol: FFKT. The table below lists the stock prices and dividends declared for 2001 and 2000. STOCK PRICES - -------------------------------------------------------------------------------- High Low Dividends Declared - -------------------------------------------------------------------------------- 2001 Fourth Quarter $ 37.750 $ 34.250 $ 0.31 Third Quarter 41.150 32.510 0.30 Second Quarter 40.950 30.000 0.30 First Quarter 35.984 29.188 0.30 2000 Fourth Quarter $ 37.500 $ 27.000 $ 0.30 Third Quarter 37.500 29.250 0.29 Second Quarter 34.000 28.500 0.29 First Quarter 34.000 27.250 0.29 - -------------------------------------------------------------------------------- Dividends declared per share increased $0.04 or 3.4% and $0.04 or 3.5% for the years 2001 and 2000, respectively. EFFECT OF IMPLEMENTING RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. The Company is required to adopt the provisions of SFAS No. 141 immediately and SFAS No. 142 effective January 1, 2002. As of the date of adoption, the Company will have no unamortized goodwill or other unamortized identifiable intangible assets. Amortization expense related to goodwill was $271 thousand and $495 thousand for the twelve months ended December 31, 2001 and 2000, respectively. In October 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, it retains many of the fundamental provisions of that Statement. SFAS No. 144 also supersedes the accounting and reporting provisions of Accounting Principles Board Opinion ("APB") No. 30, REPORTING THE RESULTS OF OPERATIONS--REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. By broadening the presentation of discontinued operations to include more disposal transactions, the FASB has enhanced management's ability to provide information that helps financial statement users to assess the effects of a disposal transaction on the ongoing operations of an entity. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. Early application is encouraged. The Company does not expect the implementation of this Statement to have a material effect on the consolidated financial statements. 2000 COMPARED TO 1999 Net income was $14.4 million in 2000 compared to $13.9 million in 1999, an increase of $450 thousand or 3.2%. Basic and diluted net income per share increased $0.11 or 5.9% from $1.86 to $1.97 in 2000. The earnings per share growth was 268 basis points higher than the net income growth for the year ended December 31, 2000. This is the positive impact of the share buy back program that has been in effect for several years. The Company purchased 278,000 shares of common stock at a total price of $9.3 million during 2000. As a result, the diluted weighted average shares outstanding for 2000 totaled 7.3 million and were 2.3% less than the weighted average of 7.5 million for 1999. Other major components of the improvement in earnings are as follows: >> Net interest income increased $1.1 million or 2.6%. >> The provision for loan losses decreased $391 thousand or 13.7%. >> The increase in noninterest expenses was held to $600 thousand, which was only 1.8%. The return on assets was 1.40% in 2000 compared to 1.41% reported in the prior year. The return on equity increased 41 basis points to 11.61% from 11.20% in 1999. This is another positive reflection of the share buy back program. Total interest income on a tax equivalent basis was $77.4 million in 2000, an increase of $6.2 million or 8.7% compared to 1999. The increase in interest income was due to an increase in the volume of total earning assets and an increase in the rates earned on those assets in almost identical proportions. The average tax equivalent yield on total interest earning assets was 8.35%, up 41 basis points from 1999. The Company accomplished three goals concerning interest income - 1) increased interest from growth in loans without sacrificing credit quality standards, 2) maintained an appropriate interest rate for the level of risk assumed, and 3) reallocated funds supporting lower earning asset alternatives to higher earning loans. Total interest expense was $32.5 million for 2000, an increase of $5.4 million or 19.7% from the prior year. This increase is primarily due to increases in rate with volume increases contributing to a lesser degree. The average rate paid on total interest bearing liabilities was 4.36% in 2000, up 58 basis points from 1999. The Company had to cope with three factors that had a large influence on the cost of funds during 2000 - 1) additional borrowings were needed to fund the growth in loan demand, 2) the Federal Reserve Board raised interest rates several times during the year, and 3) increased competition in our local market places. The spread between rates earned and paid was 3.99% in 2000, a 17 basis point decrease from 1999. This decrease was the result of a 58 basis point increase in the average rate paid on interest bearing liabilities, which offset a 41 basis point increase in the average rate earned on earning assets. The net interest margin declined 7 basis points to 4.84% for 2000. Total noninterest income increased $160 thousand or 1.3%, to $12.4 million for 2000. Service charges and fees on deposits, the largest component of noninterest income, were relatively unchanged compared to the prior year. Other service charges, commissions, and fees increased $165 thousand or 4.3%, mainly from insurance commissions. Data processing income declined $66 thousand or 4.8%. Trust income increased $252 thousand or 17.2%, primarily due to changing from the cash method of accounting to an accrual method. Net gains on sales of investment securities were $49 thousand in 1999, with none in 2000. Other noninterest income decreased $151 thousand in 2000, primarily due to less gains on the sale of fixed assets and less income from a low-income housing partnership venture. Total noninterest expense increased $600 thousand or 1.8% to a total of $33.0 million for the year. Salaries and employee benefits account for more than half of the total noninterest expense and all of the increase in cost from 1999. During 2000, salaries and benefits increased $784 thousand or 4.5% to $18.4 million. Noncash compensation related to the Company's nonqualified stock option plan was $967 thousand, a decrease of $102 thousand from 1999. As of December 31, 2000, the Company had 456 full time equivalent employees, an increase of 13 from the prior year-end. Income tax expense for 2000 was $5.5 million, an increase of $596 thousand or 12.2%. The effective tax rate increased to 27.7% from 26.0% in 1999. The change in the effective tax rate is primarily related to the level of tax-exempt investment securities and tax-exempt loans in the Company's portfolio. During 2000, the growth in earning assets was predominately in taxable investments and loans. The available tax-exempt alternatives were not sufficiently attractive to warrant significant investment. MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING The management of Farmers Capital Bank Corporation has the responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The statements were prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements include amounts that are based on management's best estimates and judgments. Management also prepared other information in the annual report and is responsible for its accuracy and consistency with the financial statements. Farmers Capital Bank Corporation's 2001 consolidated financial statements have been audited by KPMG LLP independent accountants. Management has made available to KPMG LLP all financial records and related data, as well as the minutes of Boards of Directors' meetings. Management believes that all representations made to KPMG LLP during the audit were valid and appropriate. Management of Farmers Capital Bank Corporation has established and maintains a system of internal control that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and the prevention and detection of fraudulent financial reporting. The system of internal control provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees with significant roles in the financial reporting process and updated as necessary. Management continually monitors the system of internal control for compliance. Farmers Capital Bank Corporation maintains an internal auditing program that independently assesses the effectiveness of the internal controls and recommends possible improvements thereto. Management has considered the recommendations of the internal audit staff and KPMG LLP and has taken actions that we believe respond appropriately to these recommendations. Management believes that, as of December 31, 2001, the system of internal control was adequate to accomplish the objectives discussed herein. /s/ Charles S. Boyd /s/ C. Douglas Carpenter Charles S. Boyd C. Douglas Carpenter President and CEO Vice President, Secretary, and CFO INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Farmers Capital Bank Corporation We have audited the accompanying consolidated balance sheets of Farmers Capital Bank Corporation and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Farmers Capital Bank Corporation and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Louisville, Kentucky January 15, 2002
CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------------------------------------------------------ December 31, (In thousands, except share data) 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and cash equivalents: Cash and due from banks $ 55,977 $ 162,034 Interest bearing deposits in other banks 3,090 1,912 Federal funds sold and securities purchased under agreements to resell 47,318 65,925 - ------------------------------------------------------------------------------------------------------------------------------ Total cash and cash equivalents 106,385 229,871 - ------------------------------------------------------------------------------------------------------------------------------ Investment securities: Available for sale, amortized cost of $306,197 (2001) and $210,575 (2000) 308,081 211,419 Held to maturity, fair value of $38,505 (2001) and $50,013 (2000) 37,461 49,390 - ------------------------------------------------------------------------------------------------------------------------------ Total investment securities 345,542 260,809 - ------------------------------------------------------------------------------------------------------------------------------ Loans, net of unearned income 701,869 683,349 Allowance for loan losses (10,549) (10,249) - ------------------------------------------------------------------------------------------------------------------------------ Loans, net 691,320 673,100 - ------------------------------------------------------------------------------------------------------------------------------ Premises and equipment, net 24,800 24,916 Other assets 15,483 16,056 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $1,183,530 $1,204,752 - ------------------------------------------------------------------------------------------------------------------------------ LIABILITIES Deposits: Noninterest bearing $ 136,001 $ 231,483 Interest bearing 777,484 737,714 - ------------------------------------------------------------------------------------------------------------------------------ Total deposits 913,485 969,197 - ------------------------------------------------------------------------------------------------------------------------------ Securities sold under agreements to repurchase 113,792 90,004 Other borrowed funds 23,721 11,678 Dividends payable 2,152 2,155 Other liabilities 6,820 6,257 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 1,059,970 1,079,291 - ------------------------------------------------------------------------------------------------------------------------------ Commitments and contingencies SHAREHOLDERS' EQUITY Common stock, par value $.125 per share; 9,608,000 shares authorized; 8,058,244 and 8,031,552 shares issued at December 31, 2001 and 2000, respectively 1,007 1,004 Capital surplus 15,179 13,634 Retained earnings 137,227 131,021 Treasury stock, at cost, 1,152,978 and 859,898 shares at December 31, 2001 and 2000, respectively (31,077) (20,755) Accumulated other comprehensive income 1,224 557 - ------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 123,560 125,461 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $1,183,530 $1,204,752 - ------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME - ------------------------------------------------------------------------------------------------------------------------------ (In thousands, except per share data) Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Interest and fees on loans $ 59,873 $ 60,458 $ 54,616 Interest on investment securities: Taxable 10,466 9,232 9,191 Nontaxable 3,368 3,455 3,781 Interest on deposits in other banks 92 68 79 Interest on federal funds sold and securities purchased under agreements to resell 3,240 2,268 1,367 - ------------------------------------------------------------------------------------------------------------------------------ Total interest income 77,039 75,481 69,034 - ------------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Interest on deposits 29,716 28,900 25,061 Interest on securities sold under agreements to repurchase 3,927 3,119 1,926 Interest on other borrowed funds 714 517 197 - ------------------------------------------------------------------------------------------------------------------------------ Total interest expense 34,357 32,536 27,184 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income 42,682 42,945 41,850 - ------------------------------------------------------------------------------------------------------------------------------ Provision for loan losses 2,448 2,472 2,863 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 40,234 40,473 38,987 - ------------------------------------------------------------------------------------------------------------------------------ NONINTEREST INCOME Service charges and fees on deposits 6,899 5,229 5,220 Other service charges, commissions, and fees 3,849 4,009 3,844 Data processing income 1,385 1,314 1,380 Trust income 1,929 1,718 1,466 Investment securities gains, net 465 49 Other 346 173 324 - ------------------------------------------------------------------------------------------------------------------------------ Total noninterest income 14,873 12,443 12,283 - ------------------------------------------------------------------------------------------------------------------------------ NONINTEREST EXPENSE Salaries and employee benefits 19,689 18,372 17,588 Occupancy expenses, net 2,391 2,267 2,207 Equipment expenses 3,365 2,899 2,993 Bank franchise tax 1,192 1,159 1,101 Other 8,298 8,340 8,548 - ------------------------------------------------------------------------------------------------------------------------------ Total noninterest expense 34,935 33,037 32,437 - ------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 20,172 19,879 18,833 - ------------------------------------------------------------------------------------------------------------------------------ Income tax expense 5,501 5,499 4,903 - ------------------------------------------------------------------------------------------------------------------------------ Net income $ 14,671 $ 14,380 $ 13,930 - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME PER COMMON SHARE Basic $ 2.10 $ 1.97 $ 1.86 Diluted 2.09 1.97 1.86 - ------------------------------------------------------------------------------------------------------------------------------ WEIGHTED AVERAGE SHARES OUTSTANDING Basic 6,982 7,304 7,478 Diluted 7,025 7,307 7,478 - ------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - ------------------------------------------------------------------------------------------------------------------------------ (In thousands) Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 14,671 $ 14,380 $ 13,930 Other comprehensive income (loss): Unrealized holding gain (loss) on available for sale securities arising during the period, net of tax of $472, $1,287, and ($1,153), respectively 859 2,498 (2,239) Reclassification adjustment for prior period unrealized gain recognized during current period, net of tax of $99 and $37 in 2001 and 1999 (192) (71) - ------------------------------------------------------------------------------------------------------------------------------ Other comprehensive income (loss) 667 2,498 (2,310) - ------------------------------------------------------------------------------------------------------------------------------ Comprehensive income $ 15,338 $ 16,878 $ 11,620 - ------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated (In thousands, except per share data) Other Total Years Ended Common Stock Capital Retained Treasury Stock Comprehensive Shareholders' December 31, 2001, 2000, and 1999 Shares Amount Surplus Earnings Shares Amount Income (Loss) Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 1999 8,012 $ 1,001 $11,097 $119,692 491 $ (8,321) $ 369 $ 123,838 Net income 13,930 13,930 Other comprehensive income (2,310) (2,310) Cash dividends declared, $1.13 per share (8,449) (8,449) Purchase of common stock 91 (3,177) (3,177) Stock options exercised 8 1 204 205 Noncash compensation expense attributed to stock option grants 1,069 1,069 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1999 8,020 1,002 12,370 125,173 582 (11,498) (1,941) 125,106 - ------------------------------------------------------------------------------------------------------------------------------------ Net income 14,380 14,380 Other comprehensive loss 2,498 2,498 Cash dividends declared, $1.17 per share (8,532) (8,532) Purchase of common stock 278 (9,257) (9,257) Stock options exercised 12 2 297 299 Noncash compensation expense attributed to stock option grants 967 967 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2000 8,032 1,004 13,634 131,021 860 (20,755) 557 125,461 - ------------------------------------------------------------------------------------------------------------------------------------ Net income 14,671 14,671 Other comprehensive income 667 667 Cash dividends declared, $1.21 per share (8,465) (8,465) Purchase of common stock 293 (10,322) (10,322) Stock options exercised, including related tax 26 3 668 671 benefits Noncash compensation expense attributed to stock option grants 877 877 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2001 8,058 $ 1,007 $15,179 $137,227 1,153 $(31,077) $ 1,224 $ 123,560 - ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, (In thousands) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 14,671 $ 14,380 $ 13,930 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,008 2,784 2,951 Net amortization of investment security premiums and discounts: Available for sale (49) (1,014) (196) Held to maturity (23) (7) 25 Provision for loan losses 2,448 2,472 2,863 Noncash compensation expense 877 967 1,069 Mortgage loans originated for sale (40,485) (10,738) (10,016) Proceeds from sale of mortgage loans 39,980 10,761 13,030 Deferred income tax expense (benefit) 132 (161) (324) (Gain) loss on sale of mortgage loans (262) (50) 46 Gain on sale of premises and equipment (12) (5) (83) Gain on sale of available for sale investment securities, net (465) (49) Decrease (increase) in accrued interest receivable 938 (738) (130) (Increase) decrease in other assets (636) (360) 1,154 (Decrease) increase in accrued interest payable (312) 752 (173) Increase (decrease) in other liabilities 378 541 (610) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 20,188 19,584 23,487 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities and calls of investment securities: Available for sale 296,062 311,677 162,755 Held to maturity 12,646 12,513 9,448 Proceeds from sale of available for sale investment securities 98,411 19,989 13,396 Purchases of investment securities: Available for sale (489,581) (370,342) (155,863) Held to maturity (694) Loans originated for investment, net of principal collected (19,901) (41,642) (44,037) Purchases of premises and equipment (2,630) (2,821) (2,257) Proceeds from sale of equipment 21 30 362 - ------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (105,666) (70,596) (16,196) - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Net (decrease) increase in deposits (55,712) 106,977 32,219 Net increase in securities sold under agreements to repurchase 23,788 48,804 14,876 Proceeds from long term debt 8,000 8,000 1,000 Repayments of long term debt (7,588) (1,167) (1,040) Net increase in other borrowed funds 11,631 406 553 Dividends paid (8,468) (8,539) (8,401) Purchase of common stock (10,322) (9,257) (3,177) Stock options exercised 663 299 205 - ------------------------------------------------------------------------------------------------------------------------ Net cash (used in) provided by financing activities (38,008) 145,523 36,235 - ------------------------------------------------------------------------------------------------------------------------ Net (decrease) increase in cash and cash equivalents (123,486) 94,511 43,526 - ------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at beginning of year 229,871 135,360 91,834 - ------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 106,385 $ 229,871 $ 135,360 - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURES Cash paid during the year for: Interest $ 34,669 $ 31,784 $ 27,357 Income taxes 5,350 5,450 6,025 Cash dividend declared and unpaid 2,152 2,155 2,162 - ------------------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Farmers Capital Bank Corporation and subsidiaries conform to accounting principles generally accepted in the United States of America and general practices applicable to the banking industry. The more significant accounting policies are summarized below. BASIS OF PRESENTATION AND ORGANIZATION The consolidated financial statements include the accounts of Farmers Capital Bank Corporation (the "Company"), a financial holding company, and its subsidiaries, including its principal subsidiary, Farmers Bank & Capital Trust Co. All intercompany transactions and accounts have been eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates used in the preparation of the financial statements are based on various factors including the current interest rate environment and the general strength of the local economy. Changes in the overall interest rate environment can significantly affect the Company's net interest income and the value of its recorded assets and liabilities. Actual results could differ from those estimates used in the preparation of the financial statements. RECLASSIFICATIONS Certain amounts in the accompanying consolidated financial statements presented for prior years have been reclassified to conform to the 2001 presentation. These reclassifications do not affect net income or total shareholders' equity as previously reported. SEGMENT INFORMATION The Company provides a broad range of financial services to individuals, corporations, and others through its 23 banking locations throughout Central Kentucky. These services primarily include the activities of lending and leasing, receiving deposits, providing cash management services, safe deposit box rental, and trust activities. Operations are managed and financial performance is evaluated at the subsidiary level. The Company's chief decision makers monitor the results of the various banking products and services of its subsidiaries. Accordingly, all of the Company's operations are considered by management to be aggregated in one reportable operating segment. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest bearing demand deposits in other banks, federal funds sold and securities purchased under agreements to resell. Generally, federal funds sold and securities purchased under agreements to resell are purchased and sold for one-day periods. INVESTMENT SECURITIES Investments in debt and equity securities are classified into three categories. Securities that management has the positive intent and ability to hold until maturity are classified as held to maturity. Securities that are bought and held specifically for the purpose of selling them in the near term are classified as trading securities. All other securities are classified as available for sale. Securities are designated as available for sale if management intends to use such securities in its asset/liability management strategy, and therefore such securities may be sold in response to changes in interest rates and prepayment risk. Securities classified as trading and available for sale are carried at market value. Unrealized holding gains and losses for trading securities are included in current income. Unrealized holding gains and losses for available for sale securities are reported net of income taxes in other comprehensive income until realized. Investments classified as held to maturity are carried at amortized cost. Realized gains and losses on any sales of securities are computed on the basis of specific identification of the adjusted cost of each security and are included in noninterest income. LOANS AND INTEREST INCOME Loans are stated at the principal amount outstanding. Interest income on loans is recognized using the interest method based on loan principal amounts outstanding during the period, except interest on some consumer installment loans which is recognized on the sum-of-the-months digits method and does not differ materially from the interest method. Fees and incremental direct costs associated with loan origination are deferred and amortized as yield adjustments over the respective loan terms. Generally, the accrual of interest on loans is discontinued when it is determined that the collection of interest or principal is doubtful, or when a default of interest or principal has existed for 90 days or more, unless such loan is well secured and in the process of collection. Cash payments received on nonaccrual loans generally are applied to principal, and interest income is only recorded once principal recovery is assured. The Company accounts for impaired loans in accordance with SFAS No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, as amended by SFAS No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - INCOME RECOGNITION. SFAS No. 114, as amended, requires that impaired loans be measured at the present value of expected future cash flows, discounted at the loan's effective interest rate, at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. Generally, impaired loans are also in nonaccrual status. In certain circumstances, however, the Company may continue to accrue interest on an impaired loan. Cash receipts on impaired loans are applied to the recorded investment in the loan, including any accrued interest receivable. Loans which are part of a large group of smaller-balance homogeneous loans, such as residential mortgage and consumer loans, are collectively evaluated for impairment. LOANS HELD FOR SALE The Company's operations include a limited amount of mortgage banking. Mortgage banking activities include the origination of residential mortgage loans for sale to various investors. Mortgage loans originated and intended for sale in the secondary market, principally under programs with the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and other commercial lending institutions, are carried at the lower of cost or market value and included in net loans on the balance sheet. There were $963 thousand of these loans at December 31, 2001. Mortgage banking revenues, including origination fees, servicing fees, net gains or losses on sales of mortgages, and other fee income amount to less than 1% of the Company's total revenue for the years ended December 31, 2001, 2000, and 1999. PROVISION FOR LOAN LOSSES The provision for loan losses represents charges made to earnings to maintain an allowance for loan losses at an adequate level based on credit losses specifically identified in the loan portfolio, as well as management's best estimate of probable loan losses inherent in the remainder of the portfolio at the balance sheet date. Many factors are considered when establishing an adequate allowance. Those factors include, but are not limited to, the following: an assessment of the financial condition of individual borrowers, a determination of the value and adequacy of underlying collateral, a review of historical loss experience, the condition of the local economy, an analysis of the levels and trends of the loan composition, and a review of delinquent and classified loans. Actual losses could differ significantly from the amounts estimated by management. OTHER REAL ESTATE Other real estate owned and held for sale, included with other assets in the accompanying consolidated balance sheets, includes properties acquired by the Company through actual loan foreclosures. Other real estate owned is carried at fair value less estimated costs to sell. Fair value is the amount that the Company could reasonably expect to receive in a current sale between a willing buyer and a willing seller, other than in a forced or liquidation sale. Fair value of assets is measured by the market value based on comparable sales. INCOME TAXES Deferred income tax assets and liabilities result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the income tax expense. PREMISES AND EQUIPMENT Premises, equipment, and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation is computed primarily on the straight-line method over the estimated useful lives for furniture, equipment, and buildings. Leasehold improvements are amortized over the shorter of the estimated useful lives or terms of the related leases on the straight-line method. Maintenance, repairs, and minor improvements are charged to operating expenses as incurred and major improvements are capitalized. The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in income. NET INCOME PER COMMON SHARE Basic net income per common share is determined by dividing net income by the weighted average total number of shares of common stock outstanding. Diluted net income per common share is determined by dividing net income by the total weighted average number of shares of common stock outstanding, plus the total weighted average number of shares that would be issued upon exercise of dilutive stock options assuming proceeds are used to repurchase shares pursuant to the treasury stock method. COMPREHENSIVE INCOME SFAS No. 130, REPORTING COMPREHENSIVE INCOME, establishes standards for reporting and display of comprehensive income and its components. Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. For the Company, this includes net income and net unrealized gains and losses on available for sale investment securities. This Statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. TREASURY STOCK The purchase of the Company's common stock is recorded at cost. 2. INVESTMENT SECURITIES The following summarizes the amortized cost and estimated fair values of the securities portfolio at December 31, 2001. The summary is divided into available for sale and held to maturity securities.
- ------------------------------------------------------------------------------------------------------------------------------------ Amortized Gross Gross Estimated December 31, 2001 (In thousands) Cost Unrealized Gains Unrealized Losses Fair Value - ------------------------------------------------------------------------------------------------------------------------------------ AVAILABLE FOR SALE Obligations of U.S. Government agencies $154,616 $ 1,114 $ 37 $155,693 Obligations of states and political subdivisions 42,042 356 607 41,791 Mortgage-backed securities 98,988 1,247 416 99,819 Corporate debt 4,762 111 4,873 Equity securities 5,789 167 51 5,905 - ------------------------------------------------------------------------------------------------------------------------------------ Total securities - available for sale $306,197 $ 2,995 $ 1,111 $308,081 - ------------------------------------------------------------------------------------------------------------------------------------ HELD TO MATURITY Obligations of U.S. Government agencies $ 100 $ 4 $ 104 Obligations of states and political subdivisions 37,055 1,035 $ 5 38,085 Mortgage-backed securities 306 10 316 - ------------------------------------------------------------------------------------------------------------------------------------ Total securities - held to maturity $ 37,461 $ 1,049 $ 5 $ 38,505 - ------------------------------------------------------------------------------------------------------------------------------------
The following summarizes the amortized cost and estimated fair values of the securities portfolio at December 31, 2000.
- ------------------------------------------------------------------------------------------------------------------------------------ Amortized Gross Gross Estimated December 31, 2000 (In thousands) Cost Unrealized Gains Unrealized Losses Fair Value - ------------------------------------------------------------------------------------------------------------------------------------ AVAILABLE FOR SALE U.S. Treasury securities $ 1,251 $ 1 $ 1,250 Obligations of U.S. Government agencies 113,028 $ 67 62 113,033 Obligations of states and political subdivisions 22,692 151 39 22,804 Mortgage-backed securities 52,597 380 36 52,941 Corporate debt 13,954 33 83 13,904 Equity securities 7,053 434 7,487 - ------------------------------------------------------------------------------------------------------------------------------------ Total securities - available for sale $ 210,575 $ 1,065 $ 221 $ 211,419 - ------------------------------------------------------------------------------------------------------------------------------------ HELD TO MATURITY Obligations of U.S. Government agencies $ 100 $ 100 Obligations of states and political subdivisions 48,895 $ 622 $ 3 49,514 Mortgage-backed securities 395 4 399 - ------------------------------------------------------------------------------------------------------------------------------------ Total securities - held to maturity $ 49,390 $ 626 $ 3 $ 50,013 - ------------------------------------------------------------------------------------------------------------------------------------
The amortized cost and estimated fair value of the securities portfolio at December 31, 2001, by contractual maturity, are detailed below. The summary is divided into available for sale and held to maturity securities. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Equity securities in the available for sale portfolio consist primarily of FHLB stock and investments in unrelated financial institution stocks, which have no stated maturity and are not included in the maturity schedule that follows. Mortgage-backed securities are stated separately due to the nature of payment and prepayment characteristics of these securities.
- ------------------------------------------------------------------------------------------------------------------------------------ Available For Sale Held To Maturity Amortized Estimated Amortized Estimated December 31, 2001 (In thousands) Cost Fair Value Cost Fair Value - ------------------------------------------------------------------------------------------------------------------------------------ Due in one year or less $ 97,039 $ 97,259 $ 6,908 $ 6,986 Due after one year through five years 56,439 57,428 19,406 20,111 Due after five years through ten years 33,131 33,262 10,244 10,494 Due after ten years 14,811 14,408 597 598 Mortgage-backed securities 98,988 99,819 306 316 - ------------------------------------------------------------------------------------------------------------------------------------ Total $300,408 $302,176 $37,461 $38,505 - ------------------------------------------------------------------------------------------------------------------------------------
Gross gains of approximately $467,000, $0, and $75,000 for 2001, 2000, and 1999, respectively, were realized on the sale of investment securities. Gross losses of approximately $2,000, $0, and $26,000 were realized during 2001, 2000, and 1999, respectively. Investment securities with a book value of $225,079,000 and $195,217,000 at December 31, 2001 and 2000 were pledged to secure public and trust deposits, repurchase agreements, and for other purposes. 3. LOANS Major classifications of loans are summarized as follows. - -------------------------------------------------------------------------------- December 31, (In thousands) 2001 2000 - -------------------------------------------------------------------------------- Commercial, financial, and agricultural $ 108,516 $ 105,247 Real estate - construction 41,930 40,993 Real estate - mortgage 432,168 425,555 Installment loans 78,501 77,703 Lease financing 46,946 39,669 - -------------------------------------------------------------------------------- Total loans 708,061 689,167 - -------------------------------------------------------------------------------- Less unearned income (6,192) (5,818) - -------------------------------------------------------------------------------- Total loans, net of unearned income $ 701,869 $ 683,349 - -------------------------------------------------------------------------------- Loans to directors, executive officers, and principal shareholders (including loans to affiliated companies of which directors, executive officers, and principal shareholders are principal owners) and loans to members of the immediate family of such persons, were $14,961,000 and $14,641,000 at December 31, 2001 and 2000, respectively. Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers and did not involve more than the normal risk of collectability. An analysis of the activity with respect to these loans follows. - -------------------------------------------------------------------------------- (In thousands) Amount - -------------------------------------------------------------------------------- Balance, December 31, 2000 $ 14,641 New loans 9,242 Repayments (8,952) Loans no longer meeting disclosure requirements and other adjustments 30 - -------------------------------------------------------------------------------- Balance, December 31, 2001 $ 14,961 - -------------------------------------------------------------------------------- 4. ALLOWANCE FOR LOAN LOSSES The Company's recorded investment in impaired loans, as defined in SFAS No. 114, was $1,681,000 at December 31, 2001 and $2,138,000 at December 31, 2000. Of those amounts, none represent loans for which an allowance for loan losses has been established. For the years ended December 31, 2001 and 2000, the recorded investment in impaired loans averaged $3,943,000 and $3,891,000, respectively. Interest income recognized on impaired loans totaled $113,000, $34,000, and $331,000 for the years 2001, 2000, and 1999, respectively. The Company's charge off policy for impaired loans does not differ from the charge off policy for loans outside the definition of SFAS No. 114. Loans that are delinquent in excess of 120 days are charged off unless the borrower continues to maintain a satisfactory financial standing and/or the collateral securing the debt is of such value that any loss appears to be unlikely. An analysis of the allowance for loan losses follows. - -------------------------------------------------------------------------------- Years Ended December 31, (In thousands) 2001 2000 1999 - -------------------------------------------------------------------------------- Balance, beginning of year $ 10,249 $ 9,659 $ 9,048 Provisions for loan losses 2,448 2,472 2,863 Recoveries 777 777 690 Loans charged off (2,925) (2,659) (2,942) - -------------------------------------------------------------------------------- Balance, end of year $ 10,549 $ 10,249 $ 9,659 - -------------------------------------------------------------------------------- 5. PREMISES AND EQUIPMENT Premises and equipment consist of the following. - -------------------------------------------------------------------------------- December 31, (In thousands) 2001 2000 - -------------------------------------------------------------------------------- Land, buildings, and leasehold improvements $ 31,067 $ 30,895 Furniture and equipment 15,974 14,694 - -------------------------------------------------------------------------------- Total premises and equipment 47,041 45,589 - -------------------------------------------------------------------------------- Less accumulated depreciation and amortization (22,241) (20,673) - -------------------------------------------------------------------------------- Premises and equipment, net $ 24,800 $ 24,916 - -------------------------------------------------------------------------------- Depreciation and amortization of premises and equipment was $2,737,000, $2,289,000, and $2,430,000 in 2001, 2000, and 1999, respectively. 6. DEPOSIT LIABILITIES Time deposits of $100,000 or more at December 31, 2001 and 2000 were $84,932,000 and $73,615,000, respectively. At December 31, 2001, the scheduled maturities of time deposits were as follows. - -------------------------------------------------------------------------------- (In thousands) Amount - -------------------------------------------------------------------------------- 2002 $232,251 2003 110,207 2004 40,091 2005 5,913 2006 2,967 Thereafter 3,111 - -------------------------------------------------------------------------------- Total $394,540 - -------------------------------------------------------------------------------- 7. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED FUNDS Securities sold under agreements to repurchase represent borrowings by the Company which generally mature one business day following the date of the transaction. Information pertaining to such borrowings is as follows. - -------------------------------------------------------------------------------- December 31, (Dollars in thousands) 2001 2000 - -------------------------------------------------------------------------------- Average balance during the year $ 103,320 $ 52,773 Average interest rate during the year 3.80% 5.91% Maximum month-end balance during the year $ 152,870 $ 90,004 - -------------------------------------------------------------------------------- The table below displays a summary of the ending balance and average rate for borrowed funds on the dates indicated. For FHLB advances, the subsidiary banks pledge FHLB stock and fully disbursed, otherwise unencumbered, 1-4 family first mortgage loans as collateral for these advances as required by the FHLB.
- ---------------------------------------------------------------------------------------------------------------------------- Average Average December 31, (Dollars in thousands) 2001 Rate 2000 Rate - ---------------------------------------------------------------------------------------------------------------------------- SHORT-TERM Securities sold under agreements to repurchase $113,792 1.84% $90,004 5.42% FHLB advances 12,000 3.68 Other 808 1.33 1,177 6.20 - ---------------------------------------------------------------------------------------------------------------------------- Total short-term $126,600 2.00% $91,181 5.43% - ---------------------------------------------------------------------------------------------------------------------------- LONG-TERM FHLB advances $ 10,551 5.17% $ 9,843 6.90% Other 362 4.12 658 4.12 - ---------------------------------------------------------------------------------------------------------------------------- Total long-term $ 10,913 5.14% $10,501 6.73% - ----------------------------------------------------------------------------------------------------------------------------
Maturities of long-term borrowings at December 31, 2001 are as follows. - -------------------------------------------------------------------------------- (In thousands) Amount - -------------------------------------------------------------------------------- 2002 $ 1,577 2003 544 2004 216 2005 216 2006 8,216 Thereafter 144 - -------------------------------------------------------------------------------- Total $ 10,913 - -------------------------------------------------------------------------------- 8. INCOME TAXES The components of income tax expense are as follows.
- ------------------------------------------------------------------------------------------------------------------------ December 31, (In thousands) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Currently payable $ 5,369 $ 5,660 $ 5,227 Deferred income taxes 132 (161) (324) - ------------------------------------------------------------------------------------------------------------------------ Total applicable to operations 5,501 5,499 4,903 - ------------------------------------------------------------------------------------------------------------------------ Charged to components of shareholders' equity: Net unrealized securities gains 373 1,286 (1,190) - ------------------------------------------------------------------------------------------------------------------------ Total income taxes $ 5,874 $ 6,785 $ 3,713 - ------------------------------------------------------------------------------------------------------------------------
An analysis of the difference between the effective income tax rates and the statutory federal income tax rate follows.
- ------------------------------------------------------------------------------------------------------------------------ December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Federal statutory rate 35.0% 35.0% 35.0% Changes from statutory rates resulting from: Tax exempt interest (7.3) (7.2) (8.6) Nondeductible interest to carry municipal obligations .9 .9 1.0 Amortization of intangibles .5 .8 .9 Low income housing tax credits (1.9) (1.7) (2.1) Other, net (.1) (.2) - ------------------------------------------------------------------------------------------------------------------------ Effective tax rate 27.2% 27.7% 26.0% - ------------------------------------------------------------------------------------------------------------------------
The tax effects of the significant temporary differences which comprise deferred tax assets and liabilities at December 31, 2001 and 2000 follows.
- ------------------------------------------------------------------------------------------------------------------------ December 31, (In thousands) 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ ASSETS Allowance for loan losses $ 3,692 $ 3,587 Deferred directors' fees 176 165 Post retirement benefit obligations 661 625 Stock options 1,300 1,108 Self-funded insurance 103 89 - ------------------------------------------------------------------------------------------------------------------------ Total deferred tax assets 5,932 5,574 - ------------------------------------------------------------------------------------------------------------------------ LIABILITIES Depreciation 1,316 1,366 Investment securities 468 694 Deferred loan fees 1,040 1,090 Lease financing operations 2,155 2,003 Other 145 165 - ------------------------------------------------------------------------------------------------------------------------ Total deferred tax liabilities 5,124 5,318 - ------------------------------------------------------------------------------------------------------------------------ Net deferred tax asset (liability) $ 808 $ 256 - ------------------------------------------------------------------------------------------------------------------------
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences at December 31, 2001. 9. RETIREMENT PLANS The Company maintains a retirement plan that is comprised of a defined contribution-money purchase pension component and a stock bonus/employee stock ownership ("ESOP") provision that covers substantially all employees. The Company's contributions under this plan are based upon a percentage of covered employees' salaries. Employees participating in the money purchase part of the plan do not have the ability to make investment decisions regarding the Company's contributions. There are no Company shares currently held under the money purchase part of the plan. The Company's contributions under the ESOP part of the plan are made at the discretion of the Board of Directors of the Company. Under the ESOP component, the Company contributes cash to the plan and Company shares are purchased in the open market. There were no contributions to the plan in each of the years in the three-year period ended December 31, 2001. The Company has also established a salary savings plan which covers substantially all employees. The Company matches 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. Eligible employees are presented with various investment alternatives related to the salary savings plan. Those alternatives include various stock and bond mutual funds that vary from traditional growth funds to more stable income funds. Company shares are not an available investment alternative in the salary savings plan. The total retirement plan expense for 2001, 2000, and 1999 was $764,000, $915,000, and $842,000, respectively. 10. COMMON STOCK OPTIONS In 1997, the Company's Board of Directors approved a nonqualified stock option plan which provides for granting of stock options to key employees and officers of the Company. The plan was subsequently ratified by the Company's shareholders at its annual shareholders' meeting held on May 12, 1998, the measurement date of the plan. All stock options are awarded at a price equal to the fair market value of the Company's common stock at the date the options are granted. The Company applies APB No. 25 and related interpretations in accounting for its plan. Accordingly, since options were granted during 1997 at the fair market value of the Company's stock on the grant date, and the measurement date occurred during 1998, the Company recognizes noncash compensation expense based on the intrinsic value of the stock options measured on the date of shareholder ratification of the plan. The amount of noncash compensation expense is being amortized over the vesting period of the options. The amount of such expense recorded in 2001, 2000, and 1999 net of tax, was $570,000, $629,000, and $724,000, respectively. At December 31, 2001, the schedule of approximate noncash compensation expense related to the Company's stock option plan, net of tax and unadjusted for future forfeitures, is shown in the table below. - ------------------------------------------------------------------------ (In thousands) Amount - ------------------------------------------------------------------------ 2002 $ 483 2003 278 2004 143 - ------------------------------------------------------------------------ Total $ 904 - ------------------------------------------------------------------------ The Company granted 54,000 additional options during 2000 in which there is no compensation expense being recognized pursuant to APB No. 25. Had compensation expense been determined under the fair value method described in SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company's net income and income per common share would have been as shown in the table below. - -------------------------------------------------------------------------------- Years Ended December 31, (In thousands, except per share data) 2001 2000 1999 - -------------------------------------------------------------------------------- NET INCOME As reported $ 14,671 $ 14,380 $ 13,930 Proforma 14,592 14,341 13,884 - -------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE Basic, as reported $ 2.10 $ 1.97 $ 1.86 Basic, proforma 2.09 1.96 1.86 Diluted, as reported 2.09 1.97 1.86 Diluted, proforma 2.08 1.96 1.86 - -------------------------------------------------------------------------------- The fair value of the options granted are estimated as of the measurement date using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2000 and 1997, respectively: dividend yield of 3.12% and 3.18%; expected volatility of 29.6% and 23.4%; risk free interest rate of 6.71% and 5.75%; and expected life of seven years for both grants. The weighted average fair value of options granted during 2000 and 1997 was $9.25 and $16.11 per share, respectively. The plan provides for the granting of options to purchase up to 450,000 shares of the Company's common stock at a price equal to the fair market value of the Company's common stock on the date the option is granted. The term of the options expires after ten years from the date on which the options are granted. Options granted under the plan vest ratably over various time periods ranging from four to seven years. All options granted must be held for a minimum of one year before they can be exercised. Forfeited options are available for the granting of additional stock options under the plan. A summary of the status of the Company's stock option plan as of December 31, 2001, 2000, and 1999 and changes during the years ended on those dates is presented below.
- ----------------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Shares Price Shares Price Shares Price - ----------------------------------------------------------------------------------------------------------------------------- Outstanding at January 1 409,843 $ 25.17 371,446 $ 24.50 394,136 $ 24.50 Granted 54,000 29.75 Forfeited (26,692) 25.16 (3,429) 27.56 (14,337) 24.50 Exercised (13,715) 24.84 (12,174) 24.50 (8,353) 24.50 - ----------------------------------------------------------------------------------------------------------------------------- Outstanding at December 31 369,436 $ 25.19 409,843 $ 25.17 371,446 $ 24.50 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Shares Price Shares Price Shares Price - ----------------------------------------------------------------------------------------------------------------------------- Exercisable 233,212 $ 24.63 175,572 $ 24.50 123,839 $ 24.50 - -----------------------------------------------------------------------------------------------------------------------------
The exercise price range of outstanding options at December 31, 2001 was $24.50 to $29.75 and the weighted average contractual life was 6.05 years. 11. POSTRETIREMENT BENEFITS The Company provides lifetime medical and dental benefits for certain eligible retired employees. Only employees meeting the eligibility requirements as of December 31, 1989 will be eligible for such benefits upon retirement. The entire cost of these benefits is paid for by the Company. The plan is unfunded. The following schedules set forth a reconciliation of the changes in the plan's benefit obligation and funded status for the periods ended December 31, 2001 and 2000. - -------------------------------------------------------------------------------- (In thousands) 2001 2000 - -------------------------------------------------------------------------------- RECONCILIATION OF BENEFIT OBLIGATION Obligation at beginning of year $ 2,875 $ 2,630 Service cost 2 2 Interest cost 209 190 Actuarial (gain) loss (418) 264 Benefit payments (249) (211) - -------------------------------------------------------------------------------- Obligation at end of year $ 2,419 $ 2,875 - -------------------------------------------------------------------------------- FUNDED STATUS Funded status $(2,419) $(2,875) Unrecognized transition obligation 1,116 1,218 Unrecognized prior service cost 297 339 Unrecognized gain (840) (431) - -------------------------------------------------------------------------------- Accrued postretirement benefit costs $(1,846) $(1,749) - -------------------------------------------------------------------------------- The following table provides disclosure of the net periodic benefit cost as of December 31. - -------------------------------------------------------------------------------- (In thousands) 2001 2000 - -------------------------------------------------------------------------------- Service cost $ 2 $ 2 Interest cost 209 190 Amortization of transition obligation 101 101 Amortization of prior service cost 43 43 Amortization of net gain (10) (30) - -------------------------------------------------------------------------------- Net periodic benefit cost $ 345 $ 306 - -------------------------------------------------------------------------------- Major assumptions: Discount rate 7.25% 7.25% - -------------------------------------------------------------------------------- Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. For measurement purposes, a 6% annual rate of increase in the per capita cost of covered health care benefits was assumed. The rate was assumed to decrease gradually to 5% by 2003 and remain at that level thereafter. A 1% change in the assumed health care cost trend rates would have the following effects: - -------------------------------------------------------------------------------- (In thousands) 1% Increase 1% Decrease - -------------------------------------------------------------------------------- Effect on total of service and interest cost components of net periodic postretirement health care benefit cost $ 14 $ (12) - -------------------------------------------------------------------------------- 12. LEASES The Company leases certain branch sites and certain banking equipment under operating leases. All of the branch site leases have renewal options of varying lengths and terms. The aggregate minimum rental commitments under these leases are not material. 13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. The financial instruments include commitments to extend credit and standby letters of credit. These financial instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Total commitments to extend credit were $105,595,000 and $117,890,000 at December 31, 2001 and 2000, respectively. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, marketable securities, inventory, premises and equipment, residential real estate, and income producing commercial properties. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that received when extending credit to customers. The Company had $4,875,000 and $6,460,000 in irrevocable letters of credit outstanding at December 31, 2001 and 2000, respectively. 14. CONCENTRATION OF CREDIT RISK The Company's bank subsidiaries actively engage in lending, primarily in home counties and adjacent areas. Collateral is received to support these loans when deemed necessary. The more significant categories of collateral include cash on deposit with the Company's banks, marketable securities, income producing property, home mortgages, and consumer durables. Loans outstanding, commitments to make loans, and letters of credit range across a large number of industries and individuals. The obligations are significantly diverse and reflect no material concentration in one or more areas. 15. CONTINGENCIES As of December 31, 2001, there were various pending legal actions and proceedings against the Company arising from the normal course of business and in which claims for damages are asserted. Management, after discussion with legal counsel, believes that these actions are without merit and that the ultimate liability resulting from these legal actions and proceedings, if any, will not have a material adverse effect upon the consolidated financial statements of the Company. 16. REGULATORY MATTERS Payment of dividends by the Company's subsidiary banks is subject to certain regulatory restrictions as set forth in national and state banking laws and regulations. At December 31, 2001, combined retained earnings of the subsidiary banks were approximately $61,522,000 of which $14,598,000 was available for the payment of dividends in 2002 without obtaining prior approval from bank regulatory agencies. Included in cash and due from banks are certain noninterest bearing deposits that are held at the Federal Reserve Bank and correspondent banks in accordance with regulatory reserve requirements specified by the Federal Reserve Board of Governors. The reserve requirement was $12,065,000 and $7,721,000 at December 31, 2001 and 2000, respectively. The Company and its subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements will initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the banks must meet specific capital guidelines that involve quantitative measures of the banks' assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and its subsidiary banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and its subsidiary banks to maintain minimum amounts and ratios (set forth in the tables below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). The Company and each of the subsidiary banks meet all capital adequacy requirements to which they are subject as of December 31, 2001. As of December 31, 2001, the most recent notification from the FDIC categorized the banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the tables. There are no conditions or events since that notification that management believes have changed the institutions' category. The banks' actual capital amounts and ratios are also presented in the following tables.
- ------------------------------------------------------------------------------------------------------------------------------------ To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions December 31, 2001 (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------------------------ TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS) Consolidated $122,336 16.50% $ 23,657 4.00% $ 44,485 6.00% Farmers Bank & Capital Trust Co. 49,807 16.70 11,933 4.00 17,899 6.00 Farmers Bank and Trust Company 14,154 12.07 4,691 4.00 7,037 6.00 Lawrenceburg National Bank 10,613 13.27 3,200 4.00 4,800 6.00 First Citizens Bank 12,777 13.66 3,740 4.00 5,611 6.00 United Bank & Trust Co. 12,363 13.55 3,649 4.00 5,474 6.00 Kentucky Banking Centers, Inc. 7,950 11.20 2,840 4.00 4,260 6.00 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS) Consolidated $131,672 17.76% $ 59,313 8.00% $ 74,142 10.00% Farmers Bank & Capital Trust Co. 53,539 17.95 23,866 8.00 29,832 10.00 Farmers Bank and Trust Company 15,622 13.32 9,382 8.00 11,728 10.00 Lawrenceburg National Bank 11,616 14.52 6,400 8.00 8,000 10.00 First Citizens Bank 13,948 14.92 7,481 8.00 9,351 10.00 United Bank & Trust Co. 13,507 14.81 7,298 8.00 9,123 10.00 Kentucky Banking Centers, Inc. 8,839 12.45 5,681 8.00 7,101 10.00 - ------------------------------------------------------------------------------------------------------------------------------------ TIER 1 CAPITAL (TO AVERAGE ASSETS) Consolidated $122,336 10.70% $ 45,745 4.00% $ 57,181 5.00% Farmers Bank & Capital Trust Co. 49,807 9.36 21,286 4.00 26,608 5.00 Farmers Bank and Trust Company 14,154 8.66 6,539 4.00 8,174 5.00 Lawrenceburg National Bank 10,613 8.72 4,867 4.00 6,084 5.00 First Citizens Bank 12,777 9.19 5,560 4.00 6,950 5.00 United Bank & Trust Co. 12,363 8.86 5,583 4.00 6,979 5.00 Kentucky Banking Centers, Inc. 7,950 8.77 3,627 4.00 4,534 5.00 - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions December 31, 2000 (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------------------------ TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS) Consolidated $124,580 16.66% $ 29,917 4.00% $ 44,876 6.00% Farmers Bank & Capital Trust Co. 43,988 13.98 12,587 4.00 18,880 6.00 Farmers Bank and Trust Company 13,512 12.97 4,166 4.00 6,249 6.00 Lawrenceburg National Bank 9,912 12.56 3,157 4.00 4,736 6.00 First Citizens Bank 11,127 11.94 3,729 4.00 5,593 6.00 United Bank & Trust Co. 12,478 13.30 3,754 4.00 5,631 6.00 Kentucky Banking Centers, Inc. 7,141 10.81 2,641 4.00 3,962 6.00 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS) Consolidated $134,069 17.93% $ 59,834 8.00% $ 74,793 10.00% Farmers Bank & Capital Trust Co. 47,922 15.23 25,173 8.00 31,466 10.00 Farmers Bank and Trust Company 14,816 14.23 8,332 8.00 10,416 10.00 Lawrenceburg National Bank 10,901 13.81 6,315 8.00 7,893 10.00 First Citizens Bank 12,294 13.19 7,457 8.00 9,322 10.00 United Bank & Trust Co. 13,653 14.55 7,508 8.00 9,385 10.00 Kentucky Banking Centers, Inc. 7,968 12.07 5,283 8.00 6,603 10.00 - ------------------------------------------------------------------------------------------------------------------------------------ TIER 1 CAPITAL (TO AVERAGE ASSETS) Consolidated $124,580 12.13% $ 41,097 4.00% $ 51,371 5.00% Farmers Bank & Capital Trust Co. 43,988 9.56 18,398 4.00 22,998 5.00 Farmers Bank and Trust Company 13,512 9.51 5,685 4.00 7,106 5.00 Lawrenceburg National Bank 9,912 9.18 4,319 4.00 5,399 5.00 First Citizens Bank 11,127 8.64 5,151 4.00 6,439 5.00 United Bank & Trust Co. 12,478 9.50 5,251 4.00 6,564 5.00 Kentucky Banking Centers, Inc. 7,141 8.53 3,348 4.00 4,185 5.00 - ------------------------------------------------------------------------------------------------------------------------------------
17. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. This Statement requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet for which it is practicable to estimate that value. The estimated fair value amounts have been determined by the Company using available market information and present value or other valuation techniques. These derived fair values are subjective in nature, involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from the disclosure requirements. Accordingly, the aggregate fair value amounts presented are not intended to represent the underlying value of the Company. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. CASH AND CASH EQUIVALENTS, ACCRUED INTEREST RECEIVABLE, AND ACCRUED INTEREST PAYABLE The carrying amount is a reasonable estimate of fair value. INVESTMENT SECURITIES For marketable equity securities, fair values are based on quoted market prices or dealer quotes. For other securities, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. LOANS RECEIVABLE The fair value of loans is estimated by discounting the future cash flows using current discount rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. DEPOSIT LIABILITIES The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for certificates of deposit with similar remaining maturities. COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT Pricing of these financial instruments is based on the credit quality and relationship, fees, interest rates, probability of funding, compensating balance, and other covenants or requirements. Loan commitments generally have fixed expiration dates, variable interest rates and contain termination and other clauses which provide for relief from funding in the event there is a significant deterioration in the credit quality of the customer. Many loan commitments are expected to, and typically do, expire without being drawn upon. The rates and terms of the Company's commitments to lend and standby letters of credit are competitive with others in the various markets in which the Company operates. There are no unamortized fees relating to these financial instruments, as such the carrying value and fair value are both zero. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED FUNDS The fair value of securities sold under agreements to repurchase and other borrowed funds is estimated using rates currently available for debt with similar terms and remaining maturities. The estimated fair values of the Company's financial instruments are as follows.
- ------------------------------------------------------------------------------------------------------------------------- December 31, 2001 2000 Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value - ------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 106,385 $ 106,385 $ 229,871 $ 229,871 Investment securities: Available for sale 308,081 308,081 211,419 211,419 Held to maturity 37,461 38,505 49,390 50,013 Loans, net 691,320 697,191 673,100 670,676 Accrued interest receivable 8,140 8,140 9,078 9,078 LIABILITIES Deposits 913,485 921,963 969,197 969,887 Securities sold under agreements to repurchase and other borrowed funds 137,513 137,357 101,682 101,693 Accrued interest payable 2,252 2,252 2,563 2,563 - -------------------------------------------------------------------------------------------------------------------------
18. PARENT COMPANY FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS - -------------------------------------------------------------------------------- December 31, (In thousands) 2001 2000 - -------------------------------------------------------------------------------- ASSETS Cash on deposit with subsidiaries $ 14,397 $ 24,386 Investment securities available for sale 1,080 2,935 Investment in subsidiaries 109,343 99,631 Other assets 2,381 1,793 - -------------------------------------------------------------------------------- Total assets $ 127,201 $ 128,745 - -------------------------------------------------------------------------------- LIABILITIES Dividends payable $ 2,152 $ 2,155 Other liabilities 1,489 1,129 - -------------------------------------------------------------------------------- Total liabilities 3,641 3,284 - -------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Common stock 1,007 1,004 Capital surplus 15,179 13,634 Retained earnings 137,227 131,021 Treasury stock (31,077) (20,755) Accumulated other comprehensive income 1,224 557 - -------------------------------------------------------------------------------- Total shareholders' equity 123,560 125,461 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 127,201 $ 128,745 - --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME - --------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, (In thousands) 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- INCOME Dividends from subsidiaries $ 7,058 $ 14,363 $ 10,382 Interest income 120 91 21 Other dividend income 49 86 Investment securities gains, net 449 Other income 1,027 954 912 - --------------------------------------------------------------------------------------------------------------------------- Total income 8,703 15,494 11,315 - --------------------------------------------------------------------------------------------------------------------------- EXPENSE Other expense 2,484 2,503 2,417 - --------------------------------------------------------------------------------------------------------------------------- Total expense 2,484 2,503 2,417 - --------------------------------------------------------------------------------------------------------------------------- Income before income tax benefit and equity in undistributed income of subsidiaries 6,219 12,991 8,898 Income tax benefit 285 503 537 - --------------------------------------------------------------------------------------------------------------------------- Income before equity in undistributed income of subsidiaries 6,504 13,494 9,435 - --------------------------------------------------------------------------------------------------------------------------- Equity in undistributed income of subsidiaries 8,167 886 4,495 - --------------------------------------------------------------------------------------------------------------------------- Net income $ 14,671 $ 14,380 $ 13,930 - ---------------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, (In thousands) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 14,671 $ 14,380 $ 13,930 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries (8,167) (886) (4,495) Noncash compensation expense 213 293 298 Gain on sale of available for sale investment securities (449) Change in other assets and liabilities, net (65) (1,270) 6 Deferred income tax benefit (51) (78) (22) - ------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 6,152 12,439 9,717 - ------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of available for sale investment securities 1,986 Purchases of investment securities available for sale (2,502) - ------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities 1,986 (2,502) - ------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (8,468) (8,539) (8,401) Purchase of common stock (10,322) (9,257) (3,177) Stock options exercised 663 299 205 - ------------------------------------------------------------------------------------------------------------------------------ Net cash used in financing activities (18,127) (17,497) (11,373) - ------------------------------------------------------------------------------------------------------------------------------ Net decrease in cash and cash equivalents (9,989) (7,560) (1,656) - ------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at beginning of year 24,386 31,946 33,602 - ------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 14,397 $ 24,386 $ 31,946 - ------------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURES Cash paid during the year for income taxes $ 5,350 $ 5,450 $ 6,025 Cash dividend declared and unpaid 2,152 2,155 2,162 - ------------------------------------------------------------------------------------------------------------------------------
19. QUARTERLY FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------ Unaudited (In thousands, except per share data) Quarters Ended 2001 March 31 June 30 Sept. 30 Dec. 31 - ------------------------------------------------------------------------------------------------------------------------------ Interest income $ 20,045 $ 19,576 $ 19,154 $ 18,264 Interest expense 9,409 8,759 8,548 7,641 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income 10,636 10,817 10,606 10,623 - ------------------------------------------------------------------------------------------------------------------------------ Provision for loan losses 223 1,050 836 339 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 10,413 9,767 9,770 10,284 - ------------------------------------------------------------------------------------------------------------------------------ Other income 3,532 3,894 3,436 4,011 Other expense 8,508 8,295 9,067 9,065 - ------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 5,437 5,366 4,139 5,230 - ------------------------------------------------------------------------------------------------------------------------------ Income tax expense 1,531 1,470 1,109 1,391 - ------------------------------------------------------------------------------------------------------------------------------ Net income $ 3,906 $ 3,896 $ 3,030 $ 3,839 - ------------------------------------------------------------------------------------------------------------------------------ Net income per common share, basic $ 0.55 $ 0.56 $ 0.44 $ 0.55 Net income per common share, diluted 0.55 0.56 0.43 0.55 - ------------------------------------------------------------------------------------------------------------------------------ Weighted average shares outstanding, basic 7,099 6,949 6,950 6,931 Weighted average shares outstanding, diluted 7,121 6,978 7,012 6,997 - ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ Unaudited (In thousands, except per share data) Quarters Ended 2000 March 31 June 30 Sept. 30 Dec. 31 - ------------------------------------------------------------------------------------------------------------------------------ Interest income $ 17,940 $ 18,467 $ 19,146 $ 19,928 Interest expense 7,081 7,789 8,370 9,296 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income 10,859 10,678 10,776 10,632 - ------------------------------------------------------------------------------------------------------------------------------ Provision for loan losses 260 1,167 460 585 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 10,599 9,511 10,316 10,047 - ------------------------------------------------------------------------------------------------------------------------------ Other income 3,064 3,268 3,146 2,965 Other expense 8,282 8,507 8,153 8,095 - ------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 5,381 4,272 5,309 4,917 - ------------------------------------------------------------------------------------------------------------------------------ Income tax expense 1,383 1,320 1,522 1,274 - ------------------------------------------------------------------------------------------------------------------------------ Net income $ 3,998 $ 2,952 $ 3,787 $ 3,643 - ------------------------------------------------------------------------------------------------------------------------------ Net income per common share, basic and diluted $ 0.54 $ 0.40 $ 0.52 $ 0.51 - ------------------------------------------------------------------------------------------------------------------------------ Weighted average shares outstanding, basic 7,422 7,346 7,263 7,188 Weighted average shares outstanding, diluted 7,423 7,348 7,279 7,215 - ------------------------------------------------------------------------------------------------------------------------------
PHOTOGRAPH IDENTIFICATION Page 5 FROM LEFT John O. Finnan President and CEO Peoples Bank of Northern Kentucky Joseph C. (Critt) Murphy President and CEO Farmers Bank and Trust Company Michael E. Schornick, Jr. Senior Vice President Farmers Bank and Trust Company G. Anthony Busseni President and CEO Farmers Bank & Capital Trust Co. Mark Menne Executive Vice President Peoples Bank of Northern Kentucky Jim Burkholder Vice President, Manager of Correspondent Banking Division Page 7 FROM LEFT Critt Murphy J. Morrow Richards President and CEO Owingsville Banking Co. Don Hughes President and CEO FCB Services, Inc. Michael Q.Shields Vice President and CFO Owingsville Banking Co. Page 8 BACK, FROM LEFT Ben F. Brown President and CEO Citizens National Bank of Jessamine County Jim Burkholder Critt Murphy SEATED, FROM LEFT Duane Flora Vice President, Operations Citizens National Bank of Jessamine County Don Hughes Page 10 FROM LEFT Critt Murphy Brenda Gibson Farmers State Bank Tammy Hensley Controller Farmers State Bank Shawn Garrison CFO Farmers State Bank Pamela Brock Marketing and Human Resources Farmers State Bank Jim Burkholder Angela Woods Internal Auditor, Loan Review, Compliance Farmers State Bank Nelson Bobrowski President, Middlefork Financial Group Page 13 FROM LEFT Jim Burkholder Tony Busseni Jerri Riney Executive Vice President and CFO Kentucky Home Bank Gary Clifton President and CEO Kentucky Home Bank Page 15 FROM LEFT Jerry W. Carey President and CEO Union National Bank and Trust Co. Jamey Bennett Vice President Farmers Capital Insurance Corporation Critt Murphy Jim Burkholder John David King Vice President Union National Bank and Trust Co. SHAREHOLDER INFORMATION CORPORATE ADDRESS The headquarters of Farmers Capital Bank Corporation is located at: 202 West Main Street Frankfort, Kentucky 40601 Direct correspondence to: Farmers Capital Bank Corporation P.O. Box 309 Frankfort, Kentucky 40602-0309 Phone: (502) 227-1600 www.farmerscapital.com ANNUAL MEETING The annual meeting of shareholders of Farmers Capital Bank Corporation will be held Tuesday, May 14, 2002 at 11:00 a.m. at the main office of Farmers Bank & Capital Trust Co., Frankfort, Kentucky. FORM 10-K For a copy of Farmers Capital Bank Corporation's Annual Report on Form 10-K filed with the Securities and Exchange Commission, please write: C. Douglas Carpenter, Vice President, Secretary, & Chief Financial Officer Farmers Capital Bank Corporation P.O. Box 309 Frankfort, Kentucky 40602-0309 STOCK INFORMATION Farmers Capital Bank Corporation's stock is traded on the National Association of Securities Dealers Automated Quotation System (NASDAQ) SmallCap Market tier of The NASDAQ Stock Market, with sales prices reported under the symbol: FFKT. NASDAQ Market Makers Herzog, Heine, Geduld, Inc. Morgan, Keegan and Company (800) 221-3600 (800) 260-0280 J.J.B. Hilliard, W.L. Lyons, Inc. Spear, Leeds & Kellogg (502) 588-8400 (800) 526-3160 (800) 444-1854 Knight Securities LP (888) 302-9197 The Transfer Agent and Registrar for Farmers Capital Bank Corporation is the Farmers Bank & Capital Trust Co. -----END PRIVACY-ENHANCED MESSAGE-----