-----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, U/b2+UTpD+4iikngSYfyVqT8TZyPwASRhnLvkXAkLhj5GeSe157yDDZ7xSFgbQ+w hutrpJO4FgwKPVR1K/J8LQ== 0000713095-02-000009.txt : 20020809 0000713095-02-000009.hdr.sgml : 20020809 20020808190544 ACCESSION NUMBER: 0000713095-02-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020809 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14412 FILM NUMBER: 02723594 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-Q 1 a10q063002.txt JUNE 30, 2002 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to ____________ 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 (I.R.S. Employer Identification Number) incorporation or organization) P.O. Box 309, 202 West Main Street Frankfort, Kentucky 40602 - ---------------------------------------- --------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (502) 227-1600 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 ____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, par value $0.125 per share 6,844,594 shares outstanding at August 8, 2002
TABLE OF CONTENTS Part I - Financial Information Page No. - ------------------------------ -------- Item 1 - Financial Statements Unaudited Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 3 Unaudited Consolidated Statements of Income - For the Three Months and Six Months Ended June 30, 2002 and June 30, 2001 4 Unaudited Consolidated Statements of Comprehensive Income - For the Three Months and Six Months Ended June 30, 2002 and June 30, 2001 5 Unaudited Consolidated Statements of Cash Flows - For the Six Months Ended June 30, 2002 and June 30, 2001 6 Unaudited Consolidated Statements of Changes in Shareholders' Equity - For the Six Months Ended June 30, 2002 and June 30, 2001 7 Notes to Unaudited Consolidated Financial Statements 8 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 20 Part II - Other Information Item 1 - Legal Proceedings 21 Item 4 - Submission of Matters to a Vote of Security Holders 21 Item 6 - Exhibits and Reports on Form 8-K 22
PART I - FINANCIAL INFORMATION Item 1. Financial Statements - ----------------------------
UNAUDITED CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------------------------------------------------------- June 30, December 31, (In thousands, except per share data) 2002 2001 - -------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents: Cash and due from banks $ 116,143 $ 55,977 Interest bearing deposits in other banks 4,095 3,090 Federal funds sold and securities purchased under agreements to resell 124,353 47,318 - -------------------------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 244,591 106,385 - -------------------------------------------------------------------------------------------------------------------------------- Investment securities: Available for sale, amortized cost of $264,557 (2002) and $306,197 (2001) 266,671 308,081 Held to maturity, fair value of $34,042 (2002) and $38,505 (2001) 32,461 37,461 - -------------------------------------------------------------------------------------------------------------------------------- Total investment securities 299,132 345,542 - -------------------------------------------------------------------------------------------------------------------------------- Loans, net of unearned income 695,226 701,869 Allowance for loan losses (11,026) (10,549) - -------------------------------------------------------------------------------------------------------------------------------- Loans, net 684,200 691,320 - -------------------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 24,028 24,800 Other assets 14,147 15,483 - -------------------------------------------------------------------------------------------------------------------------------- Total assets $ 1,266,098 $ 1,183,530 - -------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Deposits: Noninterest bearing $ 166,157 $ 136,001 Interest bearing 774,586 777,484 - -------------------------------------------------------------------------------------------------------------------------------- Total deposits 940,743 913,485 - -------------------------------------------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 145,443 113,792 Other short-term borrowings 19,491 12,808 Long-term debt 26,349 10,913 Dividends payable 2,137 2,152 Other liabilities 7,098 6,820 - -------------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,141,261 1,059,970 - -------------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies SHAREHOLDERS' EQUITY Common stock, par value $0.125 per share 9,608,000 shares authorized; 8,104,735 and 8,058,244 shares issued at June 30, 2002 and December 31, 2001, respectively 1,013 1,007 Capital surplus 16,608 15,179 Retained earnings 140,050 137,227 Treasury stock, at cost 1,243,594 and 1,152,978 shares at June 30, 2002 and December 31, 2001, respectively (34,210) (31,077) Accumulated other comprehensive income 1,376 1,224 - -------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 124,837 123,560 - -------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,266,098 $ 1,183,530 - -------------------------------------------------------------------------------------------------------------------------------- See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME - -------------------------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, (In thousands, except per share data) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $ 12,639 $ 15,315 $ 25,703 $ 30,707 Interest on investment securities: Taxable 2,601 2,525 5,343 5,165 Nontaxable 938 829 1,849 1,627 Interest on deposits in other banks 133 22 153 47 Interest of federal funds sold and securities purchased under agreements to resell 244 885 455 2,075 - -------------------------------------------------------------------------------------------------------------------------------- Total interest income 16,555 19,576 33,503 39,621 - -------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits 5,771 7,661 11,752 15,662 Interest on federal funds purchased and securities sold under agreements to repurchase 434 971 907 2,227 Interest on other borrowed funds 414 127 753 279 - -------------------------------------------------------------------------------------------------------------------------------- Total interest expense 6,619 8,759 13,412 18,168 - -------------------------------------------------------------------------------------------------------------------------------- Net interest income 9,936 10,817 20,091 21,453 - -------------------------------------------------------------------------------------------------------------------------------- Provision for loan losses 988 1,050 1,109 1,273 - -------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 8,948 9,767 18,982 20,180 - -------------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Service charges and fees on deposits 1,960 1,747 3,779 3,301 Other service charges, commissions, and fees 908 970 1,803 1,893 Data processing income 387 380 723 708 Trust income 361 507 728 893 Investment securities gains, net 396 186 993 465 Gain on sale of mortgage loans 57 65 112 97 Other 72 78 124 148 - -------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 4,141 3,933 8,262 7,505 - -------------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries and employee benefits 4,801 4,565 9,951 9,499 Occupancy expenses, net 588 609 1,159 1,193 Equipment expenses 914 774 1,840 1,581 Bank franchise tax 306 297 613 593 Other 2,082 2,089 4,165 4,016 - -------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 8,691 8,334 17,728 16,882 - -------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 4,398 5,366 9,516 10,803 - -------------------------------------------------------------------------------------------------------------------------------- Income tax expense 1,082 1,470 2,418 3,001 - -------------------------------------------------------------------------------------------------------------------------------- Net income $ 3,316 $ 3,896 $ 7,098 $ 7,802 - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE Basic $ .48 $ .56 $ 1.03 $ 1.11 Diluted .48 .56 1.02 1.11 - -------------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING Basic 6,889 6,949 6,895 7,023 Diluted 6,941 6,978 6,943 7,050 - -------------------------------------------------------------------------------------------------------------------------------- See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - -------------------------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 3,316 $ 3,896 $ 7,098 $ 7,802 Other comprehensive income (loss): Unrealized holding gain on available for sale securities arising during the period, net of tax of $771, $50, $405, and $544, respectively 1,432 98 753 1,056 Reclassification adjustment for prior period unrealized gain recognized during current period, net of tax of $57, $52, $324, and $123, respectively (106) (100) (601) (239) - -------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) 1,326 (2) 152 817 - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income $ 4,642 $ 3,894 $ 7,250 $ 8,619 - -------------------------------------------------------------------------------------------------------------------------------- See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------------------------------------------------------- Six months ended June 30, (In thousands) 2002 2001 - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 7,098 $ 7,802 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,472 1,520 Net amortization (accretion) of investment security premiums and discounts: Available for sale 342 (223) Held to maturity (33) (1) Provision for loan losses 1,109 1,273 Noncash compensation expense 296 464 Mortgage loans originated for sale (14,399) (18,580) Proceeds from sale of mortgage loans 14,341 18,063 Deferred income tax (benefit) expense (95) 14 Gain on sale of mortgage loans (112) (97) Gain on sale of premises and equipment (1) (2) Gain on sale of available for sale investment securities, net (993) (465) Decrease in accrued interest receivable 1,154 757 Decrease (increase) in other assets 182 (945) Decrease in accrued interest payable (261) (178) Increase in other liabilities 556 691 - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 10,656 10,093 - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities and calls of investment securities: Available for sale 222,201 217,372 Held to maturity 5,033 7,570 Proceeds from sale of available for sale investment securities 125,436 7,694 Purchase of investment securities: Available for sale (305,346) (233,817) Held to maturity (334) Loans originated for investment, net of principal collected 6,181 (17,728) Purchase of premises and equipment (701) (1,580) Proceeds from sale of equipment 2 4 - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 52,806 (20,819) - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits 27,258 (73,184) Net increase in securities sold under agreements to repurchase 31,651 19,349 Proceeds from long-term debt 16,500 Repayments of long-term debt (1,064) (3,344) Net increase (decrease) in other short-term borrowings 6,683 (389) Dividends paid (4,290) (4,299) Purchase of common stock (3,133) (8,238) Stock options exercised 1,139 63 - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 74,744 (70,042) - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 138,206 (80,768) - -------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 106,385 229,871 - -------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $244,591 $149,103 - -------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES Cash paid during the period for: Interest $ 13,673 $ 18,346 Income taxes 2,490 3,100 Cash dividend declared and unpaid 2,137 2,084 - -------------------------------------------------------------------------------------------------------------------------------- See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands, except per share data) Accumulated Other Total Six months ended Common Stock Capital Retained Treasury Stock Comprehensive Shareholders' June 30, 2002 and 2001 Shares Amount Surplus Earnings Shares Amount Income Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 2002 8,058 $1,007 $15,179 $ 137,227 1,153 $ (31,077) $ 1,224 $123,560 Net income 7,098 7,098 Other comprehensive income 152 152 Cash dividends declared, $.62 per share (4,275) (4,275) Purchase of common stock 91 (3,133) (3,133) Stock options exercised 47 6 1,133 1,139 Noncash compensation expense attributed to stock option grants 296 296 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 2002 8,105 $1,013 $16,608 $ 140,050 1,244 $ (34,210) $ 1,376 $124,837 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 2001 8,032 $1,004 $13,634 $ 131,021 860 $ (20,755) $ 557 $125,461 Net income 7,802 7,802 Other comprehensive income 817 817 Cash dividends declared, $.60 per share (4,228) (4,228) Purchase of common stock 234 (8,238) (8,238) Stock options exercised 2 63 63 Noncash compensation expense attributed to stock option grants 464 464 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 2001 8,034 $1,004 $14,161 $ 134,595 1,094 $ (28,993) $ 1,374 $ 122,141 - ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to unaudited consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION 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 Company. All significant 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 as of 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. The financial information presented as of any date other than December 31 has been prepared from the books and records without audit. The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 2. RECLASSIFICATIONS Certain reclassifications have been made to the consolidated financial statements of prior periods to conform to the current period presentation. Such reclassifications have no effect on previously reported net income. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS ------------- FORWARD-LOOKING STATEMENTS This report contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Although the 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 SECOND QUARTER 2002 VS. SECOND QUARTER 2001 ------------------------------------------- The Company reported net income of $3.3 million or $.48 per basic and diluted share for the second quarter of 2002 compared to net income of $3.9 million or $.56 per basic and diluted share for the second quarter of 2001. This represents a decrease of 14.3% on a per share basis. Net interest income for the current quarter totaled $9.9 million, a decrease of $881 thousand or 8.1%. Noninterest income increased $208 thousand or 5.3%. Noninterest expense increased $357 thousand or 4.3%. Return on average assets ("ROA") was 1.10% for the current quarter, a decrease of 29 basis points compared to 1.39% reported for the same period in 2001. The 29 basis point decrease in ROA was attributed to a decrease in net interest margin of 47 basis points to 3.94%. The lower net interest margin was partially offset by a decrease in noninterest expense relative to average assets of 10 basis points and a decrease in income tax expense relative to average assets of 14 basis points. Return on average equity was 10.71% for the second quarter of 2002 compared to 12.95% in the same period of 2001. NET INTEREST INCOME - ------------------- The interest rate environment has been extremely volatile in the quarterly comparison, as general market interest rates have dropped significantly since the second quarter of 2001. Actions taken by the Federal Reserve Board (the "Fed") to reduce short-term interest rates by 200 basis points since the end of the second quarter of 2001 have affected the Company's net interest margin, as well as the net interest margin of many financial institutions in the industry. The effect of the Fed's actions on the Company 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 Company's tax-equivalent yield on earning assets for the current three months was 6.43%, a reduction of 141 basis points from the same period a year ago. The cost of funds for the current three months was 2.88%, a decline of 131 basis points compared to the same period a year ago. A goal of the Company in the current interest rate environment is to increase earning assets and decrease the interest rates paid on interest bearing liabilities while remaining competitive in our markets. Average earning assets increased $43.3 million or 4.2% in the quarterly comparison. However, as a percentage of total average assets, earning assets declined 299 basis points from 91.37% to 88.38%. Average interest paying liabilities increased $84.0 million or 10.0% in the comparison. Interest income totaled $16.6 million for the second quarter of 2002, a decrease of $3.0 million or 15.4% compared to the same period in the prior year. Interest expense totaled $6.6 million, a decrease of $2.1 million or 24.4%. Net interest income before provision for loan losses declined $881 thousand or 8.1% in the comparison and totaled $9.9 million at June 30, 2002. Interest and fees on loans decreased $2.7 million mainly due to a decrease in the average rate earned. Average loans decreased $5.2 million or 0.75%, while the yield decreased 148 basis points to 7.41%. Interest on taxable securities increased $76 thousand or 3.0% due primarily to a $55.8 million or 31.8% increase in the average balance. The increase in the average balance offset a 126 basis point decline in the average rate earned. Interest on nontaxable securities increased $109 thousand or 13.1% due to an increase in the average balance of $9.6 million combined with a 20 basis point increase in the average rate earned of 6.68%. Interest on short-term investments, including time deposits in other banks, federal funds sold, and securities purchased under agreements to resell, decreased $530 thousand due primarily to a 214 basis point decrease in the average rate earned on these investments as well as a decline in the average balance of $16.9 million or 21.0%. Interest expense on deposits decreased $1.9 million or 24.7% to $5.8 million. This decrease resulted from a general decline in the average rate paid throughout the deposit portfolio, which offset increases in average balances. The decline in interest expense on deposits was as follows: time deposits $1.1 million or 19.1%; interest bearing demand deposits $327 thousand or 38.5%; and savings deposits $467 thousand or 43.9%. The average rate paid on time deposits, the largest component of interest bearing deposits, was 4.62% for the current quarter compared to 5.96% for the same period of 2001. The average balance of time deposits increased $16.6 million or 4.3% to $403.3 million. The average rate paid on interest bearing demand deposits declined 78 basis points to 0.98% while the average balance increased $20.0 million or 10.3% to $214.1 million. The average rate paid on savings deposits decreased 124 basis points to 1.45% while the average balance increased $7.2 million or 4.5% to $165.9 million. Interest expense on federal funds purchased and securities sold under agreements to repurchase decreased $537 thousand due primarily to a 242 basis point decrease in the average rate paid. The significant decrease in the average rate paid offset a $2.5 million or 2.7% increase in the average balance. Interest expense on other borrowed funds increased $287 thousand in the comparison as additional borrowings from the Federal Home Loan Bank increased the average balance outstanding. The average rate paid on other borrowed funds declined 285 basis points to 3.64%. The net interest margin on a tax equivalent basis decreased 47 basis points to 3.94% during the second quarter of 2002 compared to 4.41% in the second quarter of 2001. The decrease in net interest margin is primarily attributed to a 37 basis point decline in the impact of noninterest bearing sources of funds. The effect of noninterest bearing sources of funds on net interest margin typically declines in a falling rate environment. Also contributing to the reduction in net interest margin is a 10 basis point decline in the spread between rates earned and paid that totaled 3.55% for the current quarter compared to 3.65% in the same quarter a year earlier. The following tables present an analysis of net interest income for the quarterly periods ended June 30.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL - ------------------------------------------------------------------------------------------------------------------------------ Quarter Ended June 30, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------ Average Average Average Average (In thousands) Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------ EARNING ASSETS Investment securities Taxable $ 231,433 $ 2,601 4.51% $ 175,635 $ 2,525 5.77% Nontaxable1 82,347 1,372 6.68 72,784 1,175 6.48 Time deposits with banks, federal funds sold and securities purchased under agreements to resell 63,383 377 2.39 80,251 907 4.53 Loans1,2,3 691,429 12,775 7.41 696,656 15,437 8.89 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets 1,068,592 $17,125 6.43% 1,025,326 $20,044 7.84% - ------------------------------------------------------------------------------------------------------------------------------ Allowance for loan losses (10,393) (10,531) - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets, net of allowance for loan losses 1,058,199 1,014,795 - ------------------------------------------------------------------------------------------------------------------------------ NONEARNING ASSETS Cash and due from banks 112,936 67,404 Premises and equipment, net 24,312 25,133 Other assets 13,602 14,853 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 1,209,049 $ 1,122,185 - ------------------------------------------------------------------------------------------------------------------------------ INTEREST BEARING LIABILITIES Deposits Interest bearing demand $ 214,116 $ 523 0.98% $ 194,160 $ 850 1.76% Savings 165,918 598 1.45 158,745 1,065 2.69 Time 403,276 4,650 4.62 386,641 5,746 5.96 Federal funds purchased and securities sold under agreements to repurchase 93,539 434 1.86 91,064 971 4.28 Other borrowed funds 45,576 414 3.64 7,843 127 6.49 - ------------------------------------------------------------------------------------------------------------------------------ Total interest bearing liabilities 922,425 $ 6,619 2.88% 838,453 $ 8,759 4.19% - ------------------------------------------------------------------------------------------------------------------------------ NONINTEREST BEARING LIABILITIES Commonwealth of Kentucky deposits 39,927 37,743 Other demand deposits 114,413 116,057 Other liabilities 8,095 9,283 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 1,084,860 1,001,536 - ------------------------------------------------------------------------------------------------------------------------------ Shareholders' equity 124,189 120,649 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 1,209,049 $ 1,122,185 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income 10,506 11,285 TE basis adjustment (570) (468) - ------------------------------------------------------------------------------------------------------------------------------ Net interest income $ 9,936 $10,817 - ------------------------------------------------------------------------------------------------------------------------------ Net interest spread 3.55% 3.65% Impact of noninterest bearing sources of funds .39 .76 - ------------------------------------------------------------------------------------------------------------------------------ Net interest margin 3.94% 4.41% - ------------------------------------------------------------------------------------------------------------------------------ 1Income and yield stated at a fully tax equivalent basis using a 35% tax rate. 2Loan balances include principal balances on nonaccrual loans. 3Loan fees included in interest income amount to $476 thousand and $495 thousand in 2002 and 2001, respectively.
ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX EQUIVALENT BASIS) - ------------------------------------------------------------------------------------------------------------------------------ (In thousands) Variance Variance Attributed to Quarter ended June 30, 2002/20011 Volume Rate - ------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Taxable investment securities $ 76 $ 2,668 $ (2,592) Nontaxable investment securities2 197 159 38 Time deposits with banks, federal funds sold and securities purchased under agreements to resell (530) (163) (367) Loans2 (2,662) (115) (2,547) - ------------------------------------------------------------------------------------------------------------------------------ Total interest income (2,919) 2,549 (5,468) - ------------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Interest bearing demand deposits (327) 508 (835) Savings deposits (467) 310 (777) Time deposits (1,096) 1,488 (2,584) Federal funds purchased and securities sold under agreements to repurchase (537) 178 (715) Other borrowed funds 287 673 (386) - ------------------------------------------------------------------------------------------------------------------------------ Total interest expense (2,140) 3,157 (5,297) - ------------------------------------------------------------------------------------------------------------------------------ Net interest income $ (779) $ (608) $ (171) - ------------------------------------------------------------------------------------------------------------------------------ Percentage change 100.0% 78.0% 22.0% - ------------------------------------------------------------------------------------------------------------------------------ 1The changes that 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. 2Income stated at fully tax equivalent basis using a 35% tax rate.
NONINTEREST INCOME - ------------------ Noninterest income totaled $4.1 million for the current quarter, an increase of $208 thousand or 5.3% compared to the prior year. Service charges and fees on deposits, the largest component of noninterest income, increased $213 thousand or 12.2% primarily due to the new overdraft policy and related NSF fee structure that is now fully in place at each of the Company's subsidiary banks. Other service charges, commissions, and fees decreased $62 thousand or 6.4% due primarily to a $37 thousand or 33.0% decrease in fee income on loans originated for sale to unrelated third parties. Trust fees decreased $146 thousand or 28.8% due primarily to unusually large estate fees collected during the same period a year earlier. Net gains on the sale of available for sale investment securities totaled $396 thousand, an increase of $210 thousand. NONINTEREST EXPENSE - ------------------- Total noninterest expense increased $357 thousand or 4.3% from the second quarter of 2001 and totaled $8.7 million. Salaries and employee benefits, the largest component of noninterest expense, increased $236 thousand or 5.2%. Employee benefits increased $249 thousand in the quarterly comparison while salaries and related payroll taxes increased $77 thousand. Noncash compensation expense attributed to stock option grants decreased $90 thousand. Occupancy expense, net of rental income, decreased $21 thousand in the comparison and totaled $588 thousand. Equipment expense totaled $914 thousand, an increase of $140 thousand or 18.1%. The increase is primarily the result of increased depreciation. Bank franchise tax increased 3.0% to $306 thousand. Other noninterest expense decreased less than 1% and totaled $2.1 million. INCOME TAXES - ------------ Income tax expense for the second quarter of 2002 was $1.1 million, a decrease of $388 thousand or 26.4% from the second quarter of 2001. The effective tax rate was 24.6% for the current quarter, a decrease of 280 basis points from the second quarter of 2001. The decrease in the effective tax rate is due to a combination of factors, including the following: tax-exempt investment securities averaged $82.3 million, an increase of $9.6 million or 13.1% in the quarterly comparison; tax-exempt municipal loans averaged $19.6 million, an increase of $7.0 million or 55.8%; and taxable earning assets repriced to a lower interest rate at a faster pace than tax-exempt earning assets in the rapidly declining interest rate environment. The result is less taxable income in proportion to total income. FIRST SIX MONTHS OF 2002 ------------------------ Net income for the six months ended June 30, 2002 was $7.1 million compared to net income of $7.8 million for the same period in 2001, a decrease of $704 thousand or 9.0%. On a basic and diluted per share basis, net income totaled $1.03 and $1.02 for the current six-month period, a decrease of $.08 or 7.2% and $.09 or 8.1%, respectively. The decrease in net income is due primarily to a decline in net interest income. Net interest income decreased $1.4 million or 6.3% in the six-month comparison. ROA was 1.19% for the six months ended June 30, 2002, a decrease of 23 basis points from the same period in 2001. The 23 basis point decrease in ROA was attributed to a decrease in net interest margin of 46 basis points to 3.97%. The lower net interest margin was partially offset by a decrease in noninterest expense relative to average assets of 9 basis points and a decrease in income tax expense relative to average assets of 12 basis points. Return on average equity was 11.53%, a decrease of 133 basis points from the first six months of 2001. NET INTEREST INCOME - ------------------- The interest rate environment has been extremely volatile in the six-month comparison, as general market interest rates have dropped significantly since the second quarter of 2001. Actions taken by the Fed to reduce short-term interest rates by 200 basis points since the end of the second quarter of 2001 have affected the Company's net interest margin, as well as the net interest margin of many financial institutions in the industry. The effect of the Fed's actions on the Company 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 Company's tax-equivalent yield on earning assets for the current six months was 6.47%, a reduction of 156 basis points from the same period a year ago. The cost of funds for the current six months was 2.93%, a decline of 148 basis points compared to the same period a year ago. A goal of the Company in the current interest rate environment is to increase earning assets and decrease the interest rates paid on interest bearing liabilities while remaining competitive in our markets. Average earning assets increased $60.2 million or 5.9% in the comparison. However, as a percentage of total average assets, earning assets declined 208 basis points from 91.71% to 89.63%. Average interest paying liabilities increased $91.0 million or 11.0% in the comparison. Interest income totaled $33.5 million for the six months ended June 30, 2002, a decrease of $6.1 million or 15.4% compared to the same period in 2001. Interest expense was $13.4 million, a decrease of $4.8 million or 26.2%. Net interest income declined $1.4 million or 6.3% Interest and fees on loans decreased $5.0 million or 16.3% primarily due to a 145 basis point decline in the average rate earned of 7.59% in the current six months. Average loans outstanding were virtually unchanged at $690 million. Interest on taxable securities increased $178 thousand or 3.4% as a $74.1 million increase in the average balance outstanding offset a decline in yield of 168 basis points. Interest on nontaxable securities increased $222 thousand or 13.6% due to an increase in both the average balance and rate earned of $10.5 million or 14.7% and 16 basis points, respectively. Interest on short-term investments, including time deposits in other banks, federal funds sold, and securities purchased under agreements to resell, decreased $1.5 million or 71.4% due primarily to a 303 basis point decrease in the average rate earned. A $24.3 million decrease in the average balance also contributed to the decrease. Interest expense on deposits declined $3.9 million or 25.0% to $11.8 million. This decrease resulted from a general decline in the average rate paid throughout the deposit portfolio, which offset increases in average balances. The decline in interest expense on deposits was as follows: time deposits $1.9 million or 16.9%; interest bearing demand deposits $834 thousand or 43.5%; and savings deposits $1.2 million or 48.7%. The average rate paid on time deposits, the largest component of interest bearing deposits, was 4.75% for the current six months compared to 6.02% for the same period of 2001. The average balance of time deposits increased $20.2 million or 5.3% to $401.6 million. The average rate paid on interest bearing demand deposits declined 97 basis points to 1.01% while the average balance increased $20.0 million or 10.3% to $215.3 million. The average rate paid on savings deposits decreased 153 basis points to 1.49% while the average balance increased $6.8 million or 4.3% to $164.3 million. Interest expense on federal funds purchased and securities sold under agreements to repurchase decreased $1.3 million or 59.3% due primarily to a 324 basis point decrease in the average rate paid. The significant decrease in the average rate paid offset a $12.0 million or 13.5% increase in the average balance. Interest expense on other borrowed funds increased $474 thousand in the comparison as additional borrowings from the Federal Home Loan Bank increased the average balance outstanding. The increase in the average balance outstanding offset a 287 basis point decline in the average rate paid. The net interest margin on a tax equivalent basis decreased 46 basis points to 3.97% during the first six months of 2002 compared to the same period of 2001. The decrease in net interest margin is primarily attributed to a 38 basis point decline in the impact of noninterest bearing sources of funds. The effect of noninterest bearing sources of funds on net interest margin typically declines in a falling rate environment. Also contributing to the reduction in net interest margin is an 8 basis point decline in the spread between rates earned and paid that totaled 3.54% for the current six months compared to 3.62% in the same period a year earlier. The following tables present an analysis of net interest income for the six months ended June 30.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL - ---------------------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30, 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average (In thousands) Balance Interest Rate Balance Interest Rate - ---------------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Investment securities Taxable $ 246,098 $ 5,343 4.38% $ 171,957 $ 5,165 6.06% Nontaxable1 81,876 2,699 6.65 71,379 2,298 6.49 Time deposits with banks, federal funds sold and securities purchased under agreements to resell 60,279 608 2.03 84,614 2,122 5.06 Loans1,2,3 690,242 25,968 7.59 690,379 30,948 9.04 - ---------------------------------------------------------------------------------------------------------------------------------- Total earning assets 1,078,495 $ 34,618 6.47% 1,018,329 $ 40,533 8.03% - ---------------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses (10,476) (10,469) - ---------------------------------------------------------------------------------------------------------------------------------- Total earning assets, net of allowance for loan losses 1,068,019 1,007,860 - ---------------------------------------------------------------------------------------------------------------------------------- NONEARNING ASSETS Cash and due from banks 99,222 65,055 Premises and equipment, net 24,502 25,088 Other assets 11,511 12,433 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $ 1,203,254 $ 1,110,436 - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST BEARING LIABILITIES Deposits Interest bearing demand $ 215,265 $ 1,082 1.01% $ 195,240 $ 1,916 1.98% Savings 164,324 1,211 1.49 157,489 2,361 3.02 Time 401,646 9,459 4.75 381,439 11,385 6.02 Federal funds purchased and securities sold under agreements to repurchase 101,037 907 1.81 89,012 2,227 5.05 Other borrowed funds 40,432 753 3.76 8,482 279 6.63 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 922,704 $ 13,412 2.93% 831,662 $ 18,168 4.41% - ---------------------------------------------------------------------------------------------------------------------------------- NONINTEREST BEARING LIABILITIES Commonwealth of Kentucky deposits 35,146 35,185 Other demand deposits 114,910 114,490 Other liabilities 6,355 6,776 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,079,115 988,113 - ---------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity 124,139 122,323 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,203,254 $ 1,110,436 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income 21,206 22,365 TE basis adjustment (1,115) (912) - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 20,091 $ 21,453 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest spread 3.54% 3.62% Impact of noninterest bearing sources of funds .43 .81 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest margin 3.97% 4.43% - ---------------------------------------------------------------------------------------------------------------------------------- 1Income and yield stated at a fully tax equivalent basis using a 35% tax rate. 2Loan balances include principal balances on nonaccrual loans. 3Loan fees included in interest income amount to $906 thousand and $921 thousand in 2002 and 2001, respectively.
ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX EQUIVALENT BASIS) - ---------------------------------------------------------------------------------------------------------------------------------- (In thousands) Variance Variance Attributed to Six Months Ended June 30, 2002/20011 Volume Rate - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Taxable investment securities $ 178 $ 3,625 $ (3,447) Nontaxable investment securities2 401 343 58 Time deposits with banks, federal funds sold and securities purchased under agreements to resell (1,514) (491) (1,023) Loans2 (4,980) (6) (4,974) - ---------------------------------------------------------------------------------------------------------------------------------- Total interest income (5,915) 3,471 (9,386) - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest bearing demand deposits (834) 511 (1,345) Savings deposits (1,150) 289 (1,439) Time deposits (1,926) 1,558 (3,484) Federal funds purchased and securities sold under agreements to repurchase (1,320) 773 (2,093) Other borrowed funds 474 861 (387) - ---------------------------------------------------------------------------------------------------------------------------------- Total interest expense (4,756) 3,992 (8,748) - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income $ (1,159) $ (521) $ (638) - ---------------------------------------------------------------------------------------------------------------------------------- Percentage change 100.0% 45.0% 55.0% - ---------------------------------------------------------------------------------------------------------------------------------- 1The changes that 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. 2Income stated at fully tax equivalent basis using a 35% tax rate.
NONINTEREST INCOME - ------------------ Noninterest income was $8.3 million for the first six months of 2002, an increase of $757 thousand or 10.1% compared to the same period in 2001. Service charges and fees on deposits, the largest component of noninterest income, increased $478 thousand or 14.5% primarily due to the new overdraft policy and related NSF fee structure that is now fully in place at each of the Company's subsidiary banks. Other service charges, commissions, and fees decreased $90 thousand or 4.8% to $1.8 million primarily due to a decrease in custodial safekeeping fees from the Commonwealth of Kentucky. Trust fees decreased $165 thousand or 18.5% due primarily to unusually large estate fees collected during the same period in 2001. Net gains on the sale of available for sale investment securities totaled $993 thousand in the current period, an increase of $528 thousand compared to a year earlier. NONINTEREST EXPENSE - ------------------- Total noninterest expense increased $846 thousand or 5.0% and totaled $17.7 million for the first six months of 2002. Salaries and employee benefits, the largest component of noninterest expense, increased $452 thousand or 4.8% in the six-month comparison. Employee benefits increased $351 thousand in the comparison while salaries and related payroll taxes increased $269 thousand. Noncash compensation expense attributed to stock option grants decreased $168 thousand. Occupancy expense, net of rental income, decreased $34 thousand or 2.8% in the comparison. Equipment expense increased $259 thousand or 16.4% primarily due to an increase in depreciation expense. Bank franchise tax expense and other noninterest expense increased $169 thousand or 3.7% to $4.8 million. The increase in other noninterest expense is primarily attributable to a $146 thousand increase in losses on foreclosed assets. INCOME TAXES - ------------ Income tax expense for the first six months of 2002 was $2.4 million, a decrease of $583 thousand or 19.4% compared to the same period in 2001. The effective tax rate was 25.4% for the first six months of 2002, a decrease of 240 basis points from the prior year. The decrease in the effective tax rate is due to a combination of factors, including the following: tax-exempt investment securities averaged $81.9 million, an increase of $10.5 million or 14.7% in the comparison; tax-exempt municipal loans averaged $18.3 million, an increase of $6.4 million or 53.3%; and taxable earning assets repriced to a lower interest rate at a faster pace than tax-exempt earning assets in the rapidly declining interest rate environment. The result is less taxable income in proportion to total income. FINANCIAL CONDITION Total assets were $1.3 billion on June 30, 2002, an increase of $82.6 million or 7.0% from December 31, 2001. Fluctuations in assets and deposits are typical due to the relationship between the Company's principal subsidiary, Farmers Bank & Capital Trust Company 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 provides services to the Teacher's Retirement systems. 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 $1.2 billion for the first six months of 2002, an increase of $59.6 million or 5.2% from year-end 2001. Average earning assets were 89.6% of average total assets at June 30, 2002, a decrease of 172 basis points compared to year-end 2001 LOANS - ----- Loans, net of unearned income, totaled $695.2 million at June 30, 2002, a decrease of $6.6 million or 0.9% from year-end 2001. This reduction in loans outstanding is primarily the result of decreases in commercial and industrial loans of $7.5 million or 9.7% and lease financing of $2.5 million or 6.1%. Loans to states and political subdivision increased $4.1 million or 27.9%. Average net loans for the six-month period ended June 30, 2002 were $690.2 million, a decrease of $8.5 million or 1.2% compared to the year-end 2001 average. On average, loans represented 64.0% of earning assets during the current period compared to 66.9% for year-end 2001. As loan demand fluctuates, the available funds are redirected between either temporary investments or investment securities. ALLOWANCE FOR LOAN LOSSES - ------------------------- The allowance for loan losses was $11.0 million at June 30, 2002, an increase of $477 thousand or 4.5% from the prior year-end. The allowance for loan losses was 1.59% of net loans at June 30, 2002, an increase of nine basis points compared to December 31, 2001. The increase in the allowance for loan losses is primarily attributed to the significant increase in nonperforming loans, as discussed below, and the related estimated credit risk within the loan portfolio. In management's opinion, the allowance for loan losses is adequate to cover losses inherent in the loan portfolio. The provision for loan losses decreased $62 thousand and $164 thousand in the current three and six-month periods compared to the same periods in 2001. The Company had net charge-offs of $291 thousand and $632 thousand in the current three and six month periods of 2002 compared to net charge-offs of $946 thousand and $1.0 million in the same periods of 2001. Annualized net charge-offs represented 0.17% and 0.18% of average net loans for the current three and six-month periods, respectively, compared to 0.31% at year-end 2001. Management continues to emphasize collection efforts and evaluation of risks within the loan portfolio. NONPERFORMING ASSETS - -------------------- Nonperforming assets for the Company include nonperforming loans, other real estate owned, and other foreclosed assets. Nonperforming loans consists of nonaccrual loans, restructured loans, and loans past due ninety days or more on which interest is still accruing. Nonperforming assets totaled $21.1 million at June 30, 2002, an increase of $14.8 million from the prior year-end. Nonperforming loans totaled $20.7 million at June 30, 2002 an increase of $15.5 million compared to year-end 2001. Nonperforming loans as a percentage of net loans were 2.97% at June 30, 2002 compared to 0.74% at year-end 2001. The increase in nonperforming loans is primarily due to a $14.5 million increase in loans on nonaccrual status that totaled $18.1 million at June 30, 2002. Loans on nonaccrual status include $15.3 million of constructions loans secured by residential real estate to a financially troubled builder. The Company has performed a detailed review of this credit and, under the information currently known by management, believes no further provisions for loan losses related to this credit are necessary. Interest income lost on this group of loans due to their nonaccrual status totaled $302 thousand during the six months ended June 30, 2002. A portion of this total, $92 thousand, represents interest income accrued during the first quarter of 2002, before the loan was placed on nonaccrual status, which was reversed in the second quarter of 2002. It is currently estimated that a total of $210 thousand of interest income in each of the remaining quarters of 2002 will be lost related to this credit should it remain on nonaccrual status through year-end 2002. Other real estate owned, which had a balance of $715 thousand at year-end 2001, decreased $391 thousand or 54.7% and totaled $324 thousand on June 30, 2002. TEMPORARY INVESTMENTS - --------------------- Temporary investments consist of interest bearing deposits with other banks, federal funds sold, and securities purchased under agreements to resell and totaled $128.4 million at June 30, 2002, an increase of $78.0 million from year-end 2001. Temporary investments averaged $60.3 million for the first six months of 2002, a decrease of $22.5 million from year-end 2001. This decrease is primarily a result of the Company's net funding position and the relationship between its principal subsidiary and the Commonwealth of Kentucky as described in preceding sections of this report. Temporary investments are reallocated as loan demand and other investment alternatives present the opportunity. INVESTMENT SECURITIES - --------------------- Investment securities were $299.1 million on June 30, 2002, a decrease of $46.4 million or 13.4% from year-end 2001. Available for sale and held to maturity securities were $266.7 million and $32.4 million, respectively. Investment securities averaged $328.0 million for the first six months of 2002, an increase of $64.8 million or 24.6% from year-end 2001. The increase in average investment securities is attributable to the Company's continued efforts to manage its net interest margin during a period of relatively low market interest rates and correlates with the increase in borrowed funds. The Company had an unrealized gain on available for sale investment securities of $2.1 million at June 30, 2002 compared to $1.9 million at year-end 2001. DEPOSITS - -------- Total deposits were $940.7 million at June 30, 2002, an increase of $27.3 million or 3.0% from year-end 2001. Noninterest bearing deposits increased $30.2 million or 22.2% in the comparison. This increase is primarily due to the relationship between the Company's principal subsidiary and the Commonwealth of Kentucky as described in preceding sections of this report. Commonwealth of Kentucky deposits increased $27.9 million on June 30, 2002 compared to December 31, 2001. On average, noninterest bearing deposits were $150.1 million during the current period, an increase of $1.3 million or 0.9%. End of period interest bearing deposit balances decreased $2.9 million or 0.4% compared to the prior year end and are summarized as follows: interest bearing checking accounts decreased $2.7 million to $209.9 million; money market deposit accounts decreased $4.1 million to $99.8 million; savings accounts decreased $7.5 million to $58.9 million; and time deposits increased $11.4 million to $406.0 million. On average, interest bearing deposits were $781.2 million in the current six-month period, an increase of $33.9 million from year-end 2001. The increase in average interest bearing deposits is attributable to increases in interest bearing demand deposits of $16.2 million or 8.1%, time deposits of $16.0 million or 4.2%, and money market deposit accounts of $3.3 million or 3.3%. Average savings deposits decreased $1.7 million or 2.8%. Total deposits averaged $931.3 million, an increase of $35.2 million or 3.9% from year-end 2001. BORROWED FUNDS - -------------- Borrowed funds totaled $191.3 million at June 30, 2002, an increase of $53.8 million or 39.1% from year-end 2001. Increases in short-term borrowings of $38.4 million along with an increase in long-term borrowings of $15.4 million account for the total increase in borrowed funds. Federal funds purchased and securities sold under agreements to repurchase accounted for most of the increase in borrowed funds with an increase of $31.7 million or 27.8%. This increase is due primarily to the overall funding needs of the Company as well as the relationship between the Company's principal subsidiary and the Commonwealth of Kentucky as described in preceding sections of this report. Other short-term borrowings increased $6.7 million mainly due to an increase in borrowed funds from the Federal Home Loan Bank ("FHLB"). The $15.4 million increase in long-term borrowings is attributed to additional advances from the FHLB with varying interest rate terms and maturing within 10 years. Recent FHLB advances have been used to fund the purchase of additional investment securities and to aid the efforts of asset and liability management. Total borrowed funds averaged $141.5 million, an increase of $24.5 million or 20.9% from year-end 2001. LIQUIDITY The Parent Company's primary use of cash consists of dividend payments to its common shareholders, purchases of its common stock, and other general operating purposes. Liquidity of the Parent Company depends primarily on the receipt of dividends from its subsidiary banks and cash balances maintained. As of June 30, 2002 combined retained earnings of the subsidiary banks were $69.1 million, of which $17.3 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 pay dividends in order to provide funds to the Parent Company during the remainder of 2002 sufficient to meet its liquidity needs. The Parent Company had cash balances of $8.3 million at June 30, 2002. The Company's objective as it relates to liquidity is to insure that subsidiary banks have funds available to meet deposit withdrawals and credit demands without unduly penalizing profitability. In order to maintain a proper level of liquidity, the banks have several sources of funds available on a daily basis, which can be used for liquidity purposes. These sources of funds primarily 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. The terms of the recent FHLB advances have been taken into consideration in relation to the overall funding needs of the Company. 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. The Company's Asset and Liability Management Committee meets regularly and monitors the composition of the balance sheet to ensure comprehensive management of interest rate risk and liquidity. Liquid assets consist of cash, cash equivalents, and securities available for sale. At June 30, 2002, such assets totaled $511.3 million, an increase of $96.8 million or 23.4% from year-end 2001. The increase in liquid assets is attributed to the overall funding position of the Company combined with the current interest rate environment. Net cash provided by operating activities was $10.7 million in the first six months of 2002, an increase of $563 thousand or 5.6% compared to the same period last year. Net cash provided by investing activities was $52.8 million, an increase of $73.6 million due primarily to a $51.0 million decrease in net purchases and calls of available for sale investment securities. A decrease in loan volume during the six-month periods contributed an additional $23.9 million in the comparison. Net cash provided by financing activities was $74.7 million for the period ended June 30, 2002. In the same period of the prior year, financing activities used $70.0 million, a difference of $144.7 million relating primarily to deposit account activity. CAPITAL RESOURCES Shareholders' equity was $124.8 million on June 30, 2002, an increase of $1.3 million or 1.0% from year-end 2001. The Company purchased 91 thousand shares of its outstanding common stock during the first six months of 2002 for a total cost of $3.1 million. The Company issued 47 thousand shares of common stock during the first six months pursuant to its nonqualified stock option plan. Dividends of $4.3 million or $.62 per share were declared during the first six months of 2002, an increase of 3.3% per share compared to the prior year. Accumulated other comprehensive income, consisting of the unrealized holding gain on available for sale investment securities (net of tax) increased $152 thousand from year-end 2001. 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 June 30, 2002, 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 16.30% 4.00% 6.00% Total risk based 17.55% 8.00% 10.00% Leverage 10.28% 4.00% 5.00% - ------------------------------------------------------------------------------ The capital ratios of all the subsidiary banks, on an individual basis, were in excess of the applicable minimum regulatory capital ratio requirements at June 30, 2002. EFFECT OF IMPLEMENTING RECENTLY ISSUED ACCOUNTING STANDARDS Effective January 1, 2002, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. 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 also requires 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 adoption of SFAS No. 142 did not have an effect on the consolidated financial statements of the Company. Effective January 1, 2002, the Company adopted 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 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. The adoption of SFAS No. 144 did not have an effect on the consolidated financial statements of the Company. In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS. This Statement rescinds FASB Statement No. 4, REPORTING GAINS AND LOSSES FROM EXTINGUISHMENT OF DEBT, and an amendment of that Statement, FASB Statement No. 64, EXTINGUISHMENTS OF DEBT MADE TO SATISFY SINKING-FUND REQUIREMENTS. This Statement also rescinds FASB Statement No. 44, ACCOUNTING FOR INTANGIBLE ASSETS OF MOTOR CARRIERS. This Statement amends FASB Statement No. 13, ACCOUNTING FOR LEASES, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 related to SFAS No. 4 and SFAS No. 13 are effective for fiscal years beginning and transactions occurring after May 15, 2002, respectively. All other provisions of this Statement are effective for financial statements issued on or after May 15, 2002. The adoption of this Statement will not have a material effect on the Company's consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. This Statement requires that a liability for costs associated with an exit or disposal activity to be recognized when incurred rather than at the date commitment to an exit or disposal plan. This Statement replaces EITF 94-3 and is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of this Statement will not have a material effect on the Company's consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- 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 over future time periods. 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 of net interest income and net income. The forecasted results are then adjusted for the effect of a gradual 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 June 30, 2002, the model indicated that if rates were to gradually increase by 150 basis points during the remainder of the calendar year, then net interest income and net income would decrease 0.66% and 1.62%, respectively, for the year ending December 31, 2002. The model indicated that if rates were to gradually decrease by 150 basis points over the same period, then net interest income and net income would decrease 0.20% and 0.41%, respectively. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - -------------------------- In the case of EARL H. SHILLING ET AL. V. FARMERS BANK & Capital Trust Company, on May 10, 2002, the Kentucky Court of Appeals affirmed the Jefferson Circuit Court's judgment in favor of the Bank. The plaintiff bondholders filed a motion for discretionary review to the Supreme Court on June 7, 2002. It is not possible at this stage of the proceedings to make any prediction as to the outcome, however the Supreme Court must grant the plaintiff bondholders' motion to review the appeal, or the affirmed judgment in favor of the Bank will become the final outcome of the case. There were various other 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ The annual meeting of shareholders was held May 14, 2002. The matters that were voted upon included the election of four directors for three-year terms ending in 2005 or until their successors have been elected and qualified. The outcome of the voting was as follows: NAME FOR AGAINST WITHHELD ABSTAINED Gerald R. Hignite 5,609,477 0 1,982 110,115 G. Anthony Busseni 5,445,249 0 166,210 110,115 Shelley S. Sweeney 5,609,477 0 1,982 110,115 Michael M. Sullivan 5,609,669 0 1,790 110,115 Listed below are the names of each director whose term of office continued after the meeting. Lloyd C. Hillard, Jr. J. Barry Banker Harold G. Mays W. Benjamin Crain Robert Roach, Jr. Glenn Birdwhistell Frank W. Sower, Jr. In addition to the directors above, Dr. John P. Stewart, Chairman Emeritus, E. Bruce Dungan, and Charles T. Mitchell serve as advisory directors for the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- a) List of Exhibits ---------------- 11 Statement re computation of per share earnings 99.1 CEO Certification 99.2 CFO Certification b) Reports on Form 8-K ------------------- None. SIGNATURES Pursuant to the requirements 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. Date: 8-8-02 /s/ G. Anthony Busseni ----------------------- -------------------------------------------- G. Anthony Busseni, President and CEO (Principal Executive Officer) Date: 8-8-02 /s/ C. Douglas Carpenter ----------------------- -------------------------------------------- C. Douglas Carpenter, Vice President, Secretary, and CFO (Principal Financial and Accounting Officer) Exhibit 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS ---------------------------------------------- - -------------------------------------------------------------------------------- Three Months Six Months Ended Ended June 30 June 30 (In thousands, except per share data) 2002 2001 2002 2001 - -------------------------------------------------------------------------------- Net income, basic and diluted $3,316 $3,896 $7,098 $7,802 - -------------------------------------------------------------------------------- Average shares outstanding 6,889 6,949 6,895 7,023 Effect of dilutive stock options 52 29 48 27 - -------------------------------------------------------------------------------- Average diluted shares outstanding 6,941 6,978 6,943 7,050 - -------------------------------------------------------------------------------- Net income per share, basic $ .48 $ .56 $ 1.03 $ 1.11 Net income per share, diluted .48 .56 1.02 1.11 - -------------------------------------------------------------------------------- Exhibit 99.1 CERTIFICATION OF PERIODIC REPORT -------------------------------- I, G. Anthony Busseni, President and Chief Executive Officer of Farmers Capital Bank Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: 8-8-02 /s/ G. Anthony Busseni --------------------------- -------------------------------------- G. Anthony Busseni President and CEO Exhibit 99.2 CERTIFICATION OF PERIODIC REPORT -------------------------------- I, C. Douglas Carpenter, Vice President, Secretary, and Chief Financial Officer of Farmers Capital Bank Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: 8-8-02 /s/ C. Douglas Carpenter --------------------------- --------------------------------------- C. Douglas Carpenter Vice President, Secretary, and CFO -----END PRIVACY-ENHANCED MESSAGE-----