-----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, HOu9K0d2jqi3G6jJZxJ7id5iTpTBcdszTue1B96GD4DpKgSWRcW2LCU6EhCia2au lOWLQgQWNHvm+JiyTSqm5Q== 0000713095-03-000003.txt : 20030328 0000713095-03-000003.hdr.sgml : 20030328 20030328141924 ACCESSION NUMBER: 0000713095-03-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030328 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14412 FILM NUMBER: 03624388 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-K 1 a10k2002.txt FARMERS CAPITAL BANK CORPORATION 2002 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2002 [ ] 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 [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [x] No [ ] The aggregate market value of the registrant's outstanding voting stock held by non-affiliates on June 28, 2002 (the last business day of the registrant's most recently completed second fiscal quarter) was $241,855,220. As of March 27, 2003 there were 6,726,639 shares outstanding. Documents incorporated by reference: Portions of the Registrant's 2002 Annual Report to Shareholders are incorporated by reference into Part II. Portions of the Registrant's Proxy Statement relating to the Registrant's 2003 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 18. FARMERS CAPITAL BANK CORPORATION FORM 10-K INDEX Page Part I Item 1. Business 3 Item 2. Properties 8 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 10 Part II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 10 Item 6. Selected Financial Data 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 11 Item 8. Financial Statements and Supplementary Data 11 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 12 Part III Item 10. Directors and Executive Officers of the Registrant 13 Item 11. Executive Compensation 13 Item 12. Security Ownership of Certain Beneficial Owners and Management 13 Item 13. Certain Relationships and Related Transactions 13 Item 14. Controls and Procedures 13 Part IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 14 Signatures 15 Certification of Chief Executive Officer 16 Certification of Chief Financial Officer 17 Index of Exhibits 18 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") and its wholly owned subsidiary, Community Development of Kentucky, Inc. ("CDK, Inc."), 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 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 Registrant's chief decision makers monitor the results of the various banking products and services of its subsidiaries. Accordingly, all of the Registrant's operations are considered by management to be aggregated in one reportable operating segment: commercial and retail banking. As of December 31, 2002, the Registrant had $1.3 billion in consolidated assets.
Farmers Capital Bank Corporation Frankfort, KY . . . . ...................................................................................................................... . . . . . . . . . . . . . . . (Inactive) . . . . . . . Kentucky General United Bank & Lawrenceburg Farmers Bank Farmers Bank & First Citizens Kentucky Banking FCB Services, Life Insurance Trust Co. National Bank and Trust Company Capital Trust Co. Bank Centers, Inc. Inc. Company, Inc. Versailles, KY Harrodsburg, KY Georgetown, KY Frankfort, KY Shepherdsville, KY Glasgow, KY Frankfort, KY Frankfort, KY 100% 100% 100% 100% 100% 100% 100% 100% . . . . . . . ...................................................... . . . . . . . . . . (Incactive) . . . . Community Development Farmers Bank Leasing One Farmers Capital (Inactive) of Kentucky, Inc. Realty Co. Corporation Insurance Corp. EG Properties Georgetown, KY Frankfort, KY Frankfort, KY Frankfort, KY Frankfort, KY 100% 100% 100% 100% 100% . . . Farmers Fidelity Insurance Agency, LLP 50%
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, 2002, it had total consolidated assets of $597 million, including loans net of unearned income of $257 million. On the same date, total deposits were $366 million and shareholders' equity totaled $53 million. Farmers Bank had three active subsidiaries during 2002: Farmers Bank Realty Co. ("Realty"), Leasing One Corporation ("Leasing One"), and Farmers Capital Insurance Corporation ("Farmers Insurance"). In May 2000 Farmers Bank incorporated E Properties, Inc. ("E Properties"). 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. In November 2002 Farmers Bank incorporated EG Properties. EG Properties is currently an inactive company. Upon being capitalized, this company will be involved in real estate management and liquidation for properties repossessed by Farmers Bank. 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 $3.5 million on December 31, 2002. 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 2002 it had total assets of $26.7 million, including leases net of unearned income of $23.0 million. Farmers Insurance was organized in 1988 to engage in insurance activities permitted to the Registrant under federal and state law. Farmers Bank capitalized this corporation in December 1998. Farmers Insurance acts as an agent for Commonwealth Land Title Co. At year-end 2002 it had total assets of $115 thousand. Farmers Insurance holds a 50% interest in Farmers Fidelity Insurance Company, LLP ("Farmers Fidelity"). The Creech & Stafford Insurance Agency, Inc., an unrelated party to the Registrant, also holds a 50% interest in Farmers Fidelity. 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. Based on deposits, United Bank is the largest bank chartered in Woodford County with total assets of $153 million and total deposits of $133 million at December 31, 2002. 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. Based on deposits, the Anderson County branches rank number one in size compared to all banks chartered in Anderson County. Total assets were $135 million and total deposits were $121 million at December 31, 2002. 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. Based on deposits, First Citizens Bank's Hardin County branches rank number three in size compared to all banks chartered in Hardin County. Total assets were $157 million and total deposits were $126 million at December 31, 2002. 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. Based on deposits, Farmers Georgetown Bank is the largest bank chartered in Scott County with total assets of $207 million and total deposits of $131 million at December 31, 2002. On July 16, 2002, CDK, Inc. was incorporated in order to apply to be certified as a Community Development Entity for participation in the New Markets Tax Credit Program as provided by the Community Renewal Tax Relief Act of 2000. If CDK, Inc. is successful in being granted an allocation of tax credits, this corporation will lend money to qualified businesses in qualified low-income communities as defined by the tax regulations. 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. Based on deposits, Ky. Banking Centers' Hart County branches rank number one in size compared to all banks chartered in Hart County. Total assets were $103 million and total deposits were $92 million at December 31, 2002. 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 $3.9 million at December 31, 2002. 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, 2002. Lending ------- A significant part of the Company's operating activities include originating loans, approximately 70% of which are secured by real estate at December 31, 2002. Real estate lending primarily includes loans secured by owner-occupied one-to-four family residential properties as well as commercial real estate mortgage loans to developers and owners of other commercial real estate. Real estate lending primarily includes both variable and adjustable rate products. Loan rates on variable rate loans generally adjust upward or downward immediately based on changes in the loan's index, normally prime rate as published in the Wall Street Journal. Rates on adjustable rate loans move upward or downward after an initial fixed term of normally 1, 3, or 5 years. However, rate adjustments on adjustable rate loans are made annually after the initial fixed term expires and are indexed primarily to shorter-term Treasury indexes. Generally, variable and adjustable rate loans contain provisions that cap annual increases at a maximum of 100 basis points with lifetime caps and floors of up to 600 basis points. The Registrant also makes fixed rate commercial real estate loans to a lesser extent with repayment terms generally not exceeding 12 months. The Registrant's subsidiary banks make first and second residential mortgage loans secured by real estate not to exceed 90% loan to value without seeking third party guarantees. Commercial real estate loans are made primarily to small and mid-sized businesses, secured by 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 and include lending across a diverse range of business types. Commercial lending and real estate construction lending, including commercial leasing, generally includes a higher degree of credit risk than other loans, such as residential mortgage loans. Commercial loans, like other loans, are evaluated at the time of approval to determine the adequacy of repayment sources and collateral requirements. Collateral requirements vary to some degree among borrowers and depend on the borrowers financial strength, the terms and amount of the loan, and collateral available to secure the loan. Credit risk results from the decreased ability or willingness to pay by a borrower. Credit risk also results when a liquidation of collateral occurs and there is a shortfall in collateral value as compared to a loans outstanding balance. For construction loans, inaccurate initial estimates of a property's value could lead to a property having a value that is insufficient to satisfy full payment of the amount of funds advanced for the property. Secured and unsecured consumer loans generally are made for automobiles, boats, and other motor vehicles. In most cases loans are restricted to the subsidiaries' general market area. 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"). On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, a law that addresses, among other issues, corporate governance, auditing and accounting oversight, executive compensation, and enhanced and timely disclosure of corporate information. The Nasdaq Stock Market has also proposed corporate governance rules that were presented to the Securities and Exchange Commission ("SEC") for review and approval. The proposed changes, which have various implementation dates, are intended to allow shareholders to more easily and efficiently monitor the performance of companies and directors. Effective August 29, 2002, as directed by Section 302(a) of the Sarbanes-Oxley Act, the Company's chief executive officer and chief financial officer are each required to certify that the Company's Quarterly and Annual Reports do not contain any untrue statement of a material fact. The rules have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Company's internal controls; they have made certain disclosures to the Company's auditors and the audit committee of the Board of Directors about the Company's internal controls; and they have included information in the Company's Quarterly and Annual Reports about their evaluation and whether there have been significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation. The Gramm-Leach-Bliley Act of 1999 ("GLB Act") signed into law in 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 SEC 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, 2002, the Registrant and its subsidiaries had 458 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 Registrant's shareholders at its annual meeting held on May 12, 1998 subsequently ratified the Plan. Available Information --------------------- The Registrant makes available, free of charge through its website (www.farmerscapital.com), the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after electronically filing such material with the Securities and Exchange Commission. 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 condominium building that 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. 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 Kentucky 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. As of December 31, 2002, 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 32 and 33 of the 2002 Annual Report to Shareholders is hereby incorporated by reference. Additional information set forth under Footnote 16 in the notes to the Registrant's 2002 audited consolidated financial statements on pages 52 through 54 of the 2002 Annual Report to Shareholders is also hereby incorporated by reference. STOCK TRANSFER AGENT AND REGISTRAR: Farmers Bank & Capital Trust Co. P.O. Box 309 Frankfort, Kentucky 40602 The Registrant offers shareholders automatic reinvestment of dividends in shares of stock at the market price without fees or commissions. For a description of the plan and an authorization card, contact the Registrar above. NASDAQ MARKET MAKERS: J.J.B. Hilliard, W.L. Lyons, Inc. Morgan, Keegan and Company (502)588-8400 (800) 260-0280 (800)444-1854 Knight Securities LP Trident Securities, Inc. (888) 302-9197 (800) 340-6355
Item 6. Selected Financial Data - ------------------------------- - ----------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2002 2001 2000 1999 1998 (In thousands, except per share data) - ----------------------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS Interest income $ 66,291 $ 77,039 $ 75,481 $ 69,034 $ 69,681 Interest expense 25,746 34,357 32,536 27,184 29,147 Net interest income 40,545 42,682 42,945 41,850 40,534 Provision for loan losses 4,748 2,448 2,472 2,863 1,134 Net income 12,561 14,671 14,380 13,930 14,247 - ----------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net income - Basic $ 1.83 $ 2.10 $ 1.97 $ 1.86 $ 1.89 Diluted 1.82 2.09 1.97 1.86 1.89 Cash dividends declared 1.25 1.21 1.17 1.13 1.00 Book value 18.52 17.89 17.49 16.82 16.47 - ----------------------------------------------------------------------------------------------------------------------- SELECTED RATIOS Percentage of net income to: Average shareholders' equity (ROE) 10.04% 11.93% 11.61% 11.20% 11.88% Average total assets (ROA) 1.04 1.28 1.40 1.41 1.49 Percentage of dividends declared to net income 68.38 57.70 59.33 60.66 53.02 Percentage of average shareholders' equity to average total assets 10.37 10.75 12.06 12.58 12.55 - ----------------------------------------------------------------------------------------------------------------------- Total shareholders' equity $ 125,773 $ 123,560 $ 125,461 $ 125,106 $ 123,839 Total assets 1,275,602 1,183,530 1,204,752 1,039,787 992,338 Long-term debt 57,152 10,913 10,501 3,668 3,466 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 6,870 6,982 7,304 7,478 7,555 Diluted 6,910 7,025 7,307 7,478 7,555 - -----------------------------------------------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operations ------------- The discussion on pages 20 through 35 of the 2002 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 29 and 30 of the 2002 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 2002 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 -------------------- On October 28, 2002, the Audit Committee of the Registrant determined and approved the replacement of KPMG LLP ("KPMG") with Crowe, Chizek, and Company LLP ("Crowe Chizek") as its independent accountants. KPMG's service will terminate at the completion of its audit and issuance of its related report on the Registrant's financial statements to be filed on Form 10-K for the Registrant's 2002 fiscal year ended December 31, 2002. The change in the Registrant's independent accountants was the result of a competitive bidding process involving several accounting firms. In connection with the audits of the two fiscal years ended December 31, 2001, and the subsequent interim period through October 28, 2002, there have been no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure or any reportable events. KPMG's audit reports on the financial statements of the Registrant as of and for the years ended December 31, 2001 and 2000 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. None of the reportable events described under Item 304(a)(1)(v) of Regulation S-K occurred within the Registrant's two most recent fiscal years and the subsequent interim period through October 28, 2002. During the two most recent fiscal years, and any subsequent interim period prior to engaging Crowe Chizek, neither the Registrant, nor anyone on its behalf, consulted Crowe Chizek regarding (i) either the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Registrant's financial statements, where either a written report was provided to the Registrant or oral advice was provided, that Crowe Chizek concluded was an important factor considered by the Registrant in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement (as defined in paragraph 304(a)(1)(iv) of Regulation S-K and the related instructions) or a reportable event (as described in paragraph 304(a)(1)(v) of Regulation S-K). The Registrant has requested that KPMG furnish it with a letter addressed to the SEC stating whether it agrees with the above statements. A copy of KPMG's letter to the SEC dated November 4, 2002 is attached as an exhibit to this report. 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 - ------------------------------------------------------------------------------- G. Anthony Busseni 54 President and CEO, 18* Director2 Allison B. Gordon 39 Senior Vice President3 16* 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 13, 2003 which will be filed with the Commission on or about April 1, 2003, 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 Also a director of Farmers Bank, Ky. Banking Centers, Farmers Georgetown Bank, United Bank, Lawrenceburg Bank, First Citizens Bank, FCB Services, Farmers Insurance (Chairman), and Leasing One (Chairman). 3 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 13, 2003 which will be filed with the Commission on or about April 1, 2003, pursuant to Regulation 14A. Item 14. Controls and Procedures - --------------------------------- The Registrant's Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the Registrant's disclosure controls and procedures within 90 days of the filing of this report, and have concluded that the Registrant's disclosure controls and procedures were adequate and effective to ensure that information required to be disclosed is recorded, processed, summarized, and reported in a timely manner. There were no significant changes in the Registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of the Chief Executive Officer and Chief Financial Officers evaluation, nor were there any significant deficiencies or material weaknesses in the controls which required corrective action. PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 2002 Annual Report To Shareholders (a)1. Financial Statements Page -------------------- Independent Auditors' Report 37 Consolidated Balance Sheets at December 31, 2002 and 2001 38 Consolidated Statements of Income for the years ended December 31, 2002, 2001, and 2000 39 Consolidated Statements of Comprehensive Income for the years ended December 31, 2002, 2001, and 2000 40 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2002, 2001, and 2000 41 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000 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. 2002 Annual Report to Shareholders 16. Letter re Change in Certifying Accountant 21. Subsidiaries of the Registrant 23. Independent Auditors' Consent 99.1 CEO Certification 99.2 CFO Certification (b) Reports on Form 8-K ------------------- On January 27, 2003, the Registrant filed a report on Form 8-K disclosing its intention to purchase up to 300,000 shares of its outstanding common stock. The purchases will be dependent on market conditions and there is no guarantee as to the exact number of shares to be purchased. There were no financial statements filed with this Form 8-K. (c) Exhibits -------- See Index of Exhibits set forth on page 18. (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. Anthony Busseni ------------------------------------------ G. Anthony Busseni President and Chief Executive Officer Date: March 13, 2003 ----------------------------------------- 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-13-2003 - ---------------------------- and Director (principal executive ----------------- G. Anthony Busseni officer of the Registrant) /s/ Frank W. Sower, Jr. Chairman 2-21-2003 - ---------------------------- ----------------- Frank W. Sower, Jr. /s/ Gerald R. Hignite Director 3-14-03 - ---------------------------- ----------------- Gerald R. Hignite /s/ Lloyd C Hillard, Jr. Director 3-14-03 - ---------------------------- ----------------- Lloyd C. Hillard, Jr. Director - ---------------------------- ----------------- W. Benjamin Crain Director - ---------------------------- ----------------- Shelley S. Sweeney /s/ Harold G. Mays Director 3-18-03 - ---------------------------- ----------------- Harold G. Mays /s/ E. Glenn Birdwhistell Director 3-19-03 - ---------------------------- ----------------- E. Glenn Birdwhistell /s/ Michael M. Sullivan Director 3-17-03 - ---------------------------- ----------------- Michael M. Sullivan /s/ J. Barry Banker Director 2-21-03 - ---------------------------- ----------------- J. Barry Banker /s/ Robert Roach Jr. Director 2-21-03 - ---------------------------- ----------------- Robert Roach, Jr. /s/ C. Douglas Carpenter Vice President, Secretary and 3-13-03 - ---------------------------- CFO (principal financial and ----------------- C. Douglas Carpenter accounting officer) CERTIFICATIONS I, G. Anthony Busseni, certify that: 1. I have reviewed this annual report on Form 10-K of Farmers Capital Bank Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 13, 2003 /s/ G. Anthony Busseni ----------------------- ----------------------------------- G. Anthony Busseni President and CEO I, C. Douglas Carpenter, certify that: 1. I have reviewed this annual report on Form 10-K of Farmers Capital Bank Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 3-13-03 /s/ C. Douglas Carpenter ----------------------- ----------------------------------- C. Douglas Carpenter Vice President, Secretary, and CFO INDEX OF EXHIBITS Exhibit Page 13. 2002 Annual Report to Shareholders Enclosed 16. Letter re Change in Certifying Accountant 19 21. Subsidiaries of the Registrant 20 23. Independent Auditors' Consent 21 99.1 CEO Certification Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 22 99.2 CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 23 Exhibit 16 Letter re Change in Certifying Accountant November 4, 2002 Securities and Exchange Commission Washington, D.C. 20549 Ladies and Gentlemen: We are currently principal accountants for Farmers Capital Bank Corporation and, under the date of January 15, 2002, we reported on the consolidated financial statements of Farmers Capital Bank Corporation as of and for the years ended December 31, 2001 and 2000. On October 28, 2002, we were notified that Farmers Capital Bank Corporation engaged Crowe, Chizek, and Company LLP as its principal accountant for the year ending December 31, 2003 and that the auditor-client relationship with KPMG LLP will cease upon completion of the audit of Farmers Capital Bank Corporation's consolidated financial statements as of and for the year ended December 31, 2002, and the issuance of our report thereon. We have read Farmers Capital Bank Corporation's statements included under Item 4 of its Form 8-K dated October 28, 2002, and we agree with such statements, except that we are not in a position to agree or disagree with Farmers Capital Bank Corporation's statement that the change was determined and approved by the Audit Committee, and we are not in a position to agree or disagree with Farmers Capital Bank Corporation's stated reason for changing principal accountants, and we are not in a position to agree or disagree with Farmers Capital Bank Corporation's statement that Crowe, Chizek, and Company LLP was not engaged regarding (i) either the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on Farmers Capital Bank Corporation's financial statements, where either a written report was provided to Farmers Capital Bank Corporation or oral advice was provided, that Crowe, Chizek, and Company LLP concluded was an important factor considered by Farmers Capital Bank Corporation in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement (as defined in paragraph 304(a)(1)(iv) of Regulation S-K and the related instructions) or a reportable event (as described in paragraph 304(a)(1)(v) of Regulation S-K). Very truly yours, /s/ KPMG LLP 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, 2002 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 EG Properties, Inc.1,2 Kentucky Farmers Fidelity Insurance Agency, LLP 3 Kentucky Farmers Bank Realty Co. 2 Kentucky Leasing One Corporation 2 Kentucky Community Development of Kentucky, Inc.1,2 Kentucky 1 No stock issued; inactive company. 2 A wholly owned subsidiary of Farmers Bank & Capital Trust Co. 3 A fifty (50%) percent owned LLP of Farmers Capital Insurance Corporation. 4 A wholly owned subsidiary of Farmers Bank and Trust Company 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 17, 2003, with respect to the consolidated balance sheets of Farmers Capital Bank Corporation and Subsidiaries as of December 31, 2002 and 2001, 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, 2002, which report appears in the December 31, 2002 annual report on Form 10-K of Farmers Capital Bank Corporation. /s/ KPMG LLP Louisville, Kentucky March 27, 2003 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 annual report on Form 10-K of the Company for the period ended December 31, 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: March 13, 2003 /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 annual report on Form 10-K of the Company for the period ended December 31, 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: 3-13-02 /s/ C. Douglas Carpenter --------------------- ----------------------------------- C. Douglas Carpenter Vice President, Secretary, and CFO EX-13 3 ar2002.txt FARMERS CAPITAL BANK CORPORATION 02 ANNUAL REPORT
SELECTED FINANCIAL HIGHLIGHTS - ------------------------------------------------------------------------------------------------------------------------------------ December 31, (In thousands, except per share data) 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ RESULTS OF OPERATIONS Interest income $ 66,291 $ 77,039 $ 75,481 $ 69,034 $ 69,681 Interest expense 25,746 34,357 32,536 27,184 29,147 Net interest income 40,545 42,682 42,945 41,850 40,534 Provision for loan losses 4,748 2,448 2,472 2,863 1,134 Net income 12,561 14,671 14,380 13,930 14,247 - ------------------------------------------------------------------------------------------------------------------------------------ PER SHARE DATA Net income- Basic $ 1.83 $ 2.10 $ 1.97 $ 1.86 $ 1.89 Diluted 1.82 2.09 1.97 1.86 1.89 Cash dividends declared 1.25 1.21 1.17 1.13 1.00 Book value 18.52 17.89 17.49 16.82 16.47 - ------------------------------------------------------------------------------------------------------------------------------------ SELECTED RATIOS Percentage of net income to: Average shareholders' equity (ROE) 10.04% 11.93% 11.61% 11.20% 11.88% Average total assets (ROA) 1.04 1.28 1.40 1.41 1.49 Percentage of dividends declared to net income 68.38 57.70 59.33 60.66 53.02 Percentage of average shareholders' equity to average total assets 10.37 10.75 12.06 12.58 12.55 - ------------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity $ 125,773 $ 123,560 $ 125,461 $ 125,106 $ 123,839 Total assets 1,275,602 1,183,530 1,204,752 1,039,787 992,338 Long-term debt 57,152 10,913 10,501 3,668 3,466 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 6,870 6,982 7,304 7,478 7,555 Diluted 6,910 7,025 7,307 7,478 7,555 - ------------------------------------------------------------------------------------------------------------------------------------
CONTENTS 2 Interview with Mr. Sower and Mr. Busseni 3 Farmers Capital Bank Corporation Board of Directors and Officers 4 Strength. Service. Solutions. 14 Affiliates' Directors and Officers 19 Glossary of Financial Terms 20 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 Shareholder Information INTERVIEW WITH FRANK SOWER, CHAIRMAN OF THE BOARD, AND TONY BUSSENI, PRESIDENT AND CEO on Confidence. Strength. Service. WHEN TALKING OF SERVICE, STRENGTH, AND FARMERS CAPITAL BANK CORPORATION, WHAT COMES TO MIND? SOWER. The concept of Service compels me to be ever mindful of my fiduciary duty to ensure your investment achieves long-term growth. At the cornerstone of this growth are dedicated employees providing the highest quality financial service to their customers. Also, they perform their daily tasks with integrity and high ethical standards. These employees characterize superior service for our Company. BUSSENI. Our strength is comprised of several important elements. First, our sizable capital base supports the financial activities of this Company and provides management a framework of strength and stability on which to build. Secondly, our philosophy of "community-managed" local banks overseen by Boards of Directors composed of people who know and care about said communities is very important. Finally, the presence of a large group of committed and talented employees who believe strongly in this philosophy and work diligently make us successful. WHAT IS YOUR VISION FOR FARMERS CAPITAL BANK CORPORATION? SOWER. My vision for our company is two-fold; first, to continue to enhance the rich heritage of service to our customers and the communities in which we operate. By expanding the company's market share via new branch locations as well as acquisitions, we can bring our quality products to new customers. Internet banking, business accounts, insurance, retirement and trust services are only a few of the outstanding services we have to offer. We find products and services that fit the needs of our customers as opposed to finding customers that fit our products and services. Second, to produce sustainable revenue growth and long-term profitability for our shareholders. This can be accomplished because our experienced executives are focused, our products are competitive, and our talented employees are eager to satisfy our customers' financial needs. IN PLANNING THE COURSE OF THE COMPANY, WHAT STRENGTHS DO YOU RELY ON? BUSSENI. The ability and loyalty of our employees and the many years of banking experience they possess provide a great deal of comfort and assurance to me as President and CEO. This is especially important in light of the current economic climate and the challenges that are presented to all of our employees. The fluctuation of our local and national economies will test the plans and strategic direction skills of our management. However, I am confident that our employees have the ability, experience, and the commitment necessary to successfully weather financial concerns and rise above all challenges. /s/ G. Anthony Busseni /s/ Frankf W. Sower, Jr. G. Anthony Busseni Frankf W. Sower, Jr. FARMERS CAPITAL BANK CORPORATION BOARD OF DIRECTORS AND OFFICERS DIRECTORS Pictured from left Michael M. Sullivan retired Senior Vice President of FCB Services, Inc. W. Benjamin Crain President of Fourth Street Tobacco Warehouse, Chairman of the Board of Directors of United Bank & Trust Co. Charles T. Mitchell, CPA Advisory Director, Consultant, Charles T. Mitchell Co., LLP, CPA E. Glenn Birdwhistell Realtor and Auctioneer, Chairman of the Board of Directors of Lawrenceburg National Bank E. Bruce Dungan Advisory Director, retired President and CEO of Farmers Capital Bank Corporation Dr. John P. Stewart Chairman Emeritus, retired Physician, Director of Stewart Home School J. Barry Banker President of Stewart Home School Robert Roach, Jr. retired Teacher, Frankfort City Commissioner Shelley S. Sweeney President of Swell Properties, Inc. Frank W. Sower, Jr. Chairman, retired Appeals Officer, Internal Revenue Service G. Anthony Busseni President and CEO of Farmers Capital Bank Corporation Harold G. Mays President of H.G. Mays Corporation, an asphalt paving firm Gerald R. Hignite President of Curneal & Hignite Insurance, Inc. Lloyd C. Hillard, Jr. President and CEO of First Citizens Bank OFFICERS G. Anthony Busseni 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 Anna Kaye Hall Vice President, Finance Mark A. Hampton, CPA Vice President, Finance Jean T. Harrod Vice President, Legal Counsel Janelda R. Mitchell Vice President, Marketing Dawn M. Simpson, CPA Vice President, Auditing Keith Ballard Assistant Vice President, Auditing Todd Chadwell, CPA Assistant Vice President, Auditing Sue Coles Assistant Vice President, Compliance Teresa Tipton Assistant Vice President, Human Resources STRENGTH. GREAT ACCOMPLISHMENTS BEGIN WITH SMALL ONES. "The journey of a thousand miles begins with one step." And those steps must be confident as in the case of Farmers Capital Bank Corporation. Starting as a collection of community banks in Kentucky, we have grown, both in structure size and assets. Our growth began with a foundation of a vision; creating a financial Company whose goals would include profitability and excellent products and services for the communities we serve. Stability and soundness - touchstones of our success. OLD FASHIONED SERVICE. WE SHARE OUR CUSTOMERS' PASSION FOR NEW IDEAS. Offering sophisticated products to our customers - imaging, CD-ROM statements, Internet banking and bill payment services, FundTech Banker(a) for Automated Clearing House ability, and a subscription service on our website for the latest SEC filings - we present the best and most user friendly of services. But we never neglect superior customer service. An old-fashioned Thank You with a smile. PEACE OF MIND. PLANNING MAKES UNCERTAINTY BECOME SECURITY. In preparing for the unknown, we study our markets, the industry, and ourselves. What are our strengths and opportunities? What threats and weaknesses confine us? This homework is necessary for the annual strategic planning in which we map our approach. For that's what it is - a guideline to lead us into the future, no matter what it holds. Assurance by design. PROBLEM SOLVING. PLAN YOUR COURSE CAREFULLY, BUT BE PREPARED TO ADAPT. Interest rate environment, new competition from non-bank entities, new laws and regulations - such uncertainties throw wrenches into the works of community banks. The experience of our management, the strength of our affiliated relationships, our flexibility in reaction time, and proficient internal communication skills allow us to adjust as the occasions arise. Alliance as an asset. VISION. VISION IS AN INTANGIBLE, BUT YOU KNOW IT WHEN YOU SEE IT. What will the future hold? By continuing to study predictive economic models, listening to our customers' needs and aspirations, and keeping abreast of technology, we can plan our future. To remain open to new ideas and views will allow us to pave our paths of opportunity with strength. Our vision is dedicated to the security and profitability of our customers and our Company. AFFILIATES' DIRECTORS AND OFFICERS FARMERS BANK & CAPITAL TRUST CO. MEMBER FDIC DIRECTORS Dr. John D. Sutterlin, Chairman C. Gary Adkinson Clyde P. Baldwin G. Anthony Busseni Michael A. Fields Don C. Giles Allison B. Gordon Rickey D. Harp 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 Rickey D. Harp President and CEO Bruce W. Brooks Executive Vice President, Chief Lending Officer and Environmental Officer Fontaine Banks, III Senior Vice President, Investments Gregory S. Burton Senior Vice President, Commercial Loans L. Hobbs Cheek, CPA Senior Vice President, Chief Financial Officer Jack Diamond Senior Vice President, Senior Trust Officer Elizabeth D. Hardy Senior Vice President, Retail Barbara Conway, Vice President, Main Office Manager 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 Gail Mitchell Vice President, Franklin Square Branch Manager 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 Bobby Hall Assistant Vice President, Trust Officer Judy Isaacs Assistant Vice President, Bank Cards 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 John Senter Assistant Vice President, Director of Human Resources Deborah West Assistant Vice President, Assistant Manager, Main Office Sally L. Bell Trust Officer Karen DiRaimo Trust Officer Kay Henninger Trust Officer Leigh Ann Young 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 Dorothy H. Switzer Director of Capital First Travelers UNITED BANK & TRUST CO. MEMBER FDIC DIRECTORS W. Benjamin Crain, Chairman G. Anthony Busseni 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 E. Marshall Vice President Rick Roberts Vice President John R. Thompson Vice President Spencer A. Wall Vice President, Midway Office Manager Cornelia T. Ethington Assistant Vice President Rita Green Assistant Vice President Evie P. Knight Assistant Vice President, Security Officer Leisa M. Newton Assistant Vice President, Compliance Officer Carolyn F. Patterson Assistant Vice President Betty K. Poynter Assistant Vice President, Human Resources Sherry T. Reynolds Assistant Vice President Phyllis B. McMahan Assistant Cashier, Locust Street Office Manager Patricia R. Stokley Executive Secretary LAWRENCEBURG NATIONAL BANK MEMBER FDIC DIRECTORS E. Glenn Birdwhistell, Chairman William T. Bond G. Anthony Busseni 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, Harrodsburg Office Manager 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 West Park Office Manager, Loan Officer Libby Goodlett Accounting Officer Chandra Ennis Assistant West Park Office Manager Teresa Higginbotham Assistant Harrodsburg Office Manager Robin Miller Operations Officer FIRST CITIZENS BANK MEMBER FDIC DIRECTORS James E. Bondurant, Chairman R. Terry Bennett G. Anthony Busseni 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 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 Cheryl Jessup Assistant Vice President, Director of Human Resources and Director of Marketing Jeffrey S. Pendleton Assistant Vice President, Allotment Department Ronald G. Penwell Assistant Vice President, Mulberry Office Manager Diana Byers Assistant Cashier, Main Office Manager Mary P. Edlin Assistant Cashier, Deposit Processing Connie Kersey Assistant Cashier, Operations OfficeR Debbie Roberts Assistant Manager, Bullitt County Office Leda Kay Pack Assistant Trust Officer FARMERS BANK AND TRUST COMPANY MEMBER FDIC DIRECTORS Cecil D. Bell, Jr., Chairman G. Anthony Busseni 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 Lorraine B. Baldwin Assistant 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 Carole S. Wagoner Assistant Vice President Phyllis True Assistant Cashier KENTUCKY BANKING CENTERS, INC. MEMBER FDIC DIRECTORS Stokes A. Baird, IV, Chairman Sue Bunnell G. Anthony Busseni Anna Kaye Hall Steve Hayes Larry Jewell Phillip Patton William Ray David L. Shadburne, CPA Terry Smith R. Kevin Vance, DVM OFFICERS David L. Shadburne, CPA President and CEO Owen Lambert Executive Vice President Lewis Bauer Senior Vice President Vanessa Puckett Senior Vice President Jeffrey Edwards Vice President Linda Forbes Vice President Greg Isenberg Vice President Jannell Pedigo Vice President Karisa Clark Assistant Vice President Jane T. Howell 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 Carla Wuertzer Loan Officer Mellyn Church, Compliance Officer Angie Bybee Marketing Officer FCB SERVICES, INC. DIRECTORS E. Bruce Dungan, Chairman Rickey D. Harp David L. Shadburne 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 Bruce W. Brooks C. Douglas Carpenter L. Hobbs Cheek, CPA Rickey D. Harp David Lee Charles J. Mann Marvin E. Strong 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 Rickey D. Harp Jamey Bennett Sue Coles OFFICERS G. Anthony Busseni Chairman Rickey D. Harp 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 that 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 relative profitability of the shareholders' investment in the Company. TAX EQUIVALENT BASIS (TE) Income from tax-exempt loans and investment securities have been increased by an amount equivalent to the taxes which would have been paid if this income were 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 RESULST 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 active 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. APPLICATION OF CRITICAL ACCOUNTING POLICIES The Company's audited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices applicable to the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments 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 reported period. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques. The most significant accounting policies followed by the Corporation are presented in Footnote 1 in the notes to the Company's 2002 audited consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this management's discussion and analysis of financial condition and results of operations, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. The allowance for loan losses represents credit losses specifically identified in the loan portfolio, as well as management's estimate of probable credit losses inherent in the loan portfolio at the balance sheet date. Determining the amount of the allowance for loan losses and the related provision for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset group on the consolidated balance sheet. Additional information related to the allowance for loan losses that describes the methodology and risk factors can be found under the captions "Asset Quality" and "Nonperforming Assets" in this management's discussion and analysis of financial condition and results of operation, as well as Footnotes 1 and 4 in the notes to the Company's 2002 audited consolidated financial statements. RESULTS OF OPERATIONS Consolidated net income for 2002 was $12.6 million, a decrease of $2.1 million or 14.4% compared to $14.7 million for 2001. Diluted net income per share for 2002 was $1.82, a decrease of $0.27 or 12.9% from $2.09 reported for 2001. The decrease in net income is due primarily to a combination of a decrease in net interest income and an increase in the provision for loan losses. Net interest income decreased $2.1 million or 5.0% for the year ended December 31, 2002 compared to 2001. The decrease in net interest income is due primarily to lower interest rates charged on variable rate earning assets that have repriced downward in a lower interest rate environment, refinancing activity by loan customers and issuers of debt securities at lower rates, and the addition of new loan customers borrowing at historic low rates. The Company has responded in part by taking advantage of lower borrowing costs, particularly through an increase in long-term fixed rate borrowings. The provision for loan losses was $4.7 million for the current year, an increase of $2.3 million or 94.0% compared to the prior year. The increase in the provision for loan losses relates primarily to a decline in the credit quality of a pool of construction loans secured by residential real estate. The Company is actively managing these credits and considers all available information when evaluating the adequacy of its allowance for loan losses. The return on assets ("ROA") was 1.04% in 2002 compared to 1.28% reported in the prior year. The decrease in ROA is due to a 36 basis point reduction in the net interest margin to 3.92% in 2002 from 4.28% in 2001. The return on equity ("ROE") decreased 189 basis points to 10.04% compared to 11.93% in the prior year. The decline in ROE is a result of the lower reported net income coupled with a $2.1 million increase in the average balance of shareholders' equity. INTEREST INCOME Interest income results from interest earned on earning assets, which primarily include 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 2002 was $66.3 million, a decrease of $10.7 million or 14.0% from the previous year. The decrease in interest income was as follows: loans $8.4 million or 14.1%; federal funds sold and securities purchased under agreements to resell $2.2 million or 67.6%; and taxable securities $404 thousand or 3.9%. Interest on nontaxable securities increased $166 thousand or 4.9%. The $8.4 million decrease in interest income from loans was due primarily to a 127 basis point decrease in the taxable equivalent average interest rate to 7.37% from 8.64%. The decrease in the average interest rate earned on loans offset a modest $6.3 million or 0.9% increase in the average balance outstanding. The $2.2 million decrease in interest income from federal funds sold and securities purchased under agreements to resell was due to a decrease in the average interest rate earned of 223 basis points from 4.02% to 1.79% combined with a $13.9 million or 16.7% decrease in the average balance outstanding. The $404 thousand decrease in interest income from taxable securities was due to a 132 basis point decline in average interest rate earned to 4.22% from 5.54%. The decline in rate offset an increase in the average balance of $49.6 million or 26.2%. The $166 thousand increase in interest income earned on nontaxable securities was due primarily to a $3.7 million or 4.9% increase in the average balance outstanding from $74.2 million to $77.9 million. The average tax equivalent rate on nontaxable securities increased 10 basis points to 6.63% from 6.53% in the comparison. The increase in average securities balances during 2002 were a result of the effort to improve the overall mix of earning assets, taking into consideration the structure and volume of the Company's funding sources. The volume of all interest earning assets increased $45.7 million or 4.4% while the tax equivalent yield on all interest earning assets declined 128 basis points to 6.28% compared to 7.56% in the prior year. 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 $25.8 million for 2002, a decrease of $8.6 million or 25.1% from the prior year. Consistent with the decrease in general market interest rates throughout the year, the Company experienced a 118 basis point reduction in the overall cost of funds for 2002 to 2.79% from 3.97% reported in the prior year . The reduction in the overall cost of funds outweighed a $59.1 million or 6.8% increase in the average balance of interest bearing sources of funds. Interest expense on time deposits, the largest component of total interest expense, decreased $3.9 million or 17.6% to $18.3 million. A decline in the average rate paid on time deposits offset an increase in the average balance outstanding and was the primary reason for the decrease in interest expense. The average rate paid decreased 124 basis points to 4.53% while the average balance increased $19.0 million or 4.9%. Interest expense on savings deposits and interest bearing demand deposits decreased $1.9 million or 44.9% and $1.4 million or 43.0%, respectively. These decreases were due primarily to decreases in the average rate paid on savings and interest bearing demand deposits of 118 basis points to 1.37% and 79 basis points to 0.87%, respectively. The average balance of savings deposits and interest bearing demand deposits increased $4.4 million or 2.7% and $16.7 million or 8.4%, respectively. Interest expense on securities sold under agreements to repurchase decreased $2.3 million or 58.1% due to decreases in both volume and rate of $10.4 million or 10.0% and 203 basis points or 53.4%. Interest expense on other borrowed funds consist primarily of Federal Home Loan Bank ("FHLB") borrowings, a funding source that the Company used to a greater extent during 2002. Consequently, the interest expense on other borrowed funds increased $871 thousand or 122.0% compared to the prior year. A $29.4 million or 214.6% increase in the average balance outstanding offset a 153 basis point or 29.4% decline in the average rate paid. 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 earning assets over the interest paid for funds to support those assets. The two most common metrics used to analyze net interest income are net interest spread and net interest margin. Net interest spread represents the difference between the yields on earning assets and the rates paid on interest bearing liabilities. Net interest margin represents the percentage of net interest income to average earning assets. Net interest margin will exceed net interest spread because of the existence of noninterest bearing sources of funds, principally demand deposits and shareholders' equity, which are also available to fund earning assets. Changes in net interest income and margin result from the interaction between the volume and the composition of earning assets, their related yields, and the associated cost and composition of 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. The table on the following page represents the major components of interest earning assets and interest bearing liabilities on a tax equivalent basis. To compare the tax exempt asset yields to taxable yields, amounts are adjusted to pretax equivalents based on the marginal corporate Federal tax rate of 35%. Tax equivalent net interest income was $42.7 million for 2002, a decrease of $2.0 million or 4.4% compared to $44.7 million in 2001. The net interest margin was 3.92%, a decrease of 36 basis points from the prior year. The impact of noninterest bearing sources of funds contributed 26 basis points to the decrease, while a decline in net interest spread of 10 basis points accounted for the remainder. The effect of noninterest bearing sources of funds on the net interest margin is reflective of the falling rate environment. During 2002, the tax equivalent yield on total earning assets decreased 128 basis points to 6.28% while the cost of funds decreased only 118 basis points to 2.79%, resulting in the 10 basis point decrease in spread noted above. The sharper decline in the rates earned on earning assets versus the rates paid on interest paying liabilities is responsible for the decrease in net interest income. The tax equivalent spread between rates earned on earning assets and rates paid on interest bearing liabilities totaled 3.49% for 2002 compared to 3.59% 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 2002. This task was much more difficult in 2002 than in recent years due to the continuing effects of the sharply falling interest rate environment that carried over from 2001 and the composition of the Company's earning assets and interest paying liabilities. Predicting the movement of interest rates is uncertain. Rates on earning assets have generally declined faster than the rates paid on interest bearing liabilities. Should interest rates continue to decline, the Company's cost of funds should decline to some degree as well. However, the yield on earning assets could potentially decline to a greater degree than has occurred in the current period. Should interest rates begin to move upward, the Company's cost of funds could potentially increase faster than the yields on earning assets.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL - ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Average Average Average Average Average Average (In thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------------ EARNING ASSETS Investment securities Taxable $ 238,496 $ 10,062 4.22% $ 188,927 $ 10,466 5.54% $ 145,479 $ 9,232 6.35% Nontaxable1 77,908 5,168 6.63 74,225 4,845 6.53 75,918 4,967 6.54 Time deposits with banks, federal funds sold and securities purchased under agreements to resell 68,948 1,236 1.79 82,801 3,332 4.02 37,595 2,336 6.21 Loans1,2,3 705,090 51,970 7.37 698,758 60,382 8.64 667,241 60,834 9.12 - ------------------------------------------------------------------------------------------------------------------------------------ Total earning assets 1,090,442 $ 68,436 6.28% 1,044,711 $ 79,025 7.56% 926,233 $77,369 8.35% - ------------------------------------------------------------------------------------------------------------------------------------ Allowance for loan losses (10,951) (10,585) (10,092) - ------------------------------------------------------------------------------------------------------------------------------------ Total earning assets, net of allowance for loan losses 1,079,491 1,034,126 916,141 - ------------------------------------------------------------------------------------------------------------------------------------ NONEARNING ASSETS Cash and due from banks 91,219 70,916 66,706 Premises and equipment, net 24,053 25,151 24,659 Other assets 11,599 13,434 20,242 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $1,206,362 $1,143,627 $1,027,748 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST BEARING LIABILITIES Deposits Interest bearing demand $ 215,766 $ 1,887 0.87% $ 199,067 $ 3,312 1.66% $ 193,982 $ 4,528 2.33% Savings 167,044 2,290 1.37 162,665 4,153 2.55 153,574 5,319 3.46 Time 404,658 18,337 4.53 385,620 22,251 5.77 337,667 19,053 5.64 Securities sold under agreements to repurchase 92,912 1,647 1.77 103,320 3,927 3.80 52,773 3,119 5.91 Other borrowed funds 43,092 1,585 3.68 13,698 714 5.21 7,979 517 6.48 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest bearing liabilities 923,472 $ 25,746 2.79% 864,370 $ 34,357 3.97% 745,975 $32,536 4.36% - ------------------------------------------------------------------------------------------------------------------------------------ NONINTEREST BEARING LIABILITIES Commonwealth of Kentucky deposits 33,318 32,935 32,621 Other demand deposits 117,505 115,821 113,271 Other liabilities 6,931 7,512 11,977 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 1,081,226 1,020,638 903,844 - ------------------------------------------------------------------------------------------------------------------------------------ Shareholders' equity 125,136 122,989 123,904 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $1,206,362 $1,143,627 $1,027,748 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 42,690 44,668 44,833 TE basis adjustment (2,145) (1,986) (1,888) - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $ 40,545 $ 42,682 $42,945 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest spread 3.49% 3.59% 3.99% Effect of noninterest bearing sources of funds .43 .69 .85 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest margin 3.92% 4.28% 4.84% - ------------------------------------------------------------------------------------------------------------------------------------ 1 Income and yield stated at a fully tax equivalent basis using the marginal corporate Federal tax rate of 35%. 2 Loan balances include principal balances on nonaccrual loans. 3 Loan fees included in interest income amounted to $2.0 million, $1.7 million, and $ 1.7 million, in 2002, 2001, and 2000, 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) 2002/2001 1 Volume Rate 2001/2000 1 Volume Rate - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Taxable investment securities $ (404) $2,402 $(2,806) $ 1,234 $ 2,516 $ (1,282) Nontaxable investment securities2 323 247 76 (122) (114) (8) Time deposits with banks, federal funds sold and securities purchased under agreements to resell (2,096) (486) (1,610) 996 2,043 (1,047) Loans2 (8,412) 542 (8,954) (452) 2,816 (3,268) - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income (10,589) 2,705 (13,294) 1,656 7,261 (5,605) - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Interest bearing demand deposits (1,425) 258 (1,683) (1,216) 115 1,331) Savings deposits (1,863) 109 (1,972) (1,166) 300 (1,466) Time deposits (3,914) 1,055 (4,969) 3,199 2,752 447 Securities sold under agreements to repurchase (2,280) (362) (1,918) 807 2,211 (1,404) Other borrowed funds 871 1,135 (264) 197 314 (117) - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense (8,611) 2,195 (10,806) 1,821 5,692 (3,871) - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $(1,978) $ 510 $ (2,488) $ (165) $ 1,569 $ (1,734) - ------------------------------------------------------------------------------------------------------------------------------------ Percentage change 100.0% (25.8)% 125.8% 100.0% (950.9)% 1,050.9% - ------------------------------------------------------------------------------------------------------------------------------------ 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 the marginal corporate Federal tax rate of 35%.
NONINTEREST INCOME Total noninterest income increased $1.6 million or 10.5% to $16.6 million for 2002. Service charges and fees on deposits, the largest component of noninterest income, increased $1.0 million or 14.5% primarily due to the continued success of a new overdraft policy and related Non-Sufficient Funds (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 in which repayment of the overdraft and related fees are to be made. The rapid growth in fees resulting from this overdraft policy and related NSF fee structure is expected to slow moderately since it has now been fully in place for a twelve-month period. Other service charges, commissions, and fees declined $145 thousand or 3.8% due primarily to volume related decreases in credit life insurance fees and custodial safekeeping fees from the Commonwealth of Kentucky amounting to $87 thousand and $51 thousand, respectively. Data processing income remained flat at $1.4 million in the comparison. Trust fee income decreased $378 thousand or 19.6% to $1.6 million due primarily to the recognition of several large nonrecurring estate fees in the prior year. Declines in the equity markets have also contributed to the decrease in trust fees since fee income is generally tied to the market value of assets under administration. Net gains on the sale of investment securities were $1.4 million, an increase of $968 thousand or 208.2% compared to 2001. Investment securities were sold during the year in an effort to better position the balance sheet in the current low interest rate environment. Net gains on the sale of mortgage loans totaled $355 thousand, an increase of $93 thousand or 35.5% resulting from the increase in mortgage loans originated for sale of $4.8 million or 12.0%. Mortgage loans originated for sale activity have been driven by the historically low market interest rates along with the Company's increase in correspondent banking relationships. In recent years, the Company has typically sold all of its loans originated for sale into the secondary market with the related loan servicing released. NONINTEREST EXPENSE Total noninterest expense was $36.1 million for 2002, an increase of $990 thousand or 2.8% compared to 2001. Salaries and employee benefits accounted for more than half of the total noninterest expense and a significant portion of the increase from 2001. During 2002, salaries and employee benefits increased $336 thousand or 1.7% to $20.0 million. Employee benefit related expenses increased $235 thousand or 7.0% due primarily to increases in retirement plan contribution expenses. Salaries and related payroll taxes increased a modest $427 thousand or 2.8% due mainly to normal annual increases. Noncash compensation expense related to the Company's nonqualified stock option plan was $550 thousand, a decrease of $327 thousand or 37.3% and is primarily due to the forfeiture of unvested stock options relating to the unexpected passing of the Company's former Chief Executive Officer during the first quarter of 2002. As of December 31, 2002, the Company had 458 full time equivalent employees, a decrease of 10 from the prior year-end. Net occupancy expense remained relatively unchanged compared to the prior year at $2.4 million. Equipment expenses increased $321 thousand or 9.5% due to increased depreciation and maintenance on processing and communication equipment purchases. Bank franchise taxes increased $98 thousand or 8.2% mainly due to higher capital levels of the Company's subsidiary banks. Other noninterest expense increased $189 thousand or 2.2% due primarily to an increase in correspondent banking fees of $244 thousand. A majority of this increase is a result of the relationship between the Company's principle subsidiary, Farmers Bank & Capital Trust Co., and the Commonwealth of Kentucky. Also impacting noninterest expense was a $118 thousand increase in fees paid for ongoing Internet banking website development and maintenance that did not exist in the prior year. Offsetting these increases was a $218 thousand decrease in the amortization of goodwill that is attributed to the expiration of previously established amortization periods. INCOME TAX Income tax expense for 2002 was $3.8 million, a decrease of $1.7 million or 31.4% from the previous year. The effective tax rate decreased 418 basis points to 23.09% from 27.27% in 2001. The change in the effective tax rate is due to a combination of factors, including: a reduction in nondeductible goodwill amortization; an increase in the average balance of tax-exempt municipal loans and securities; and taxable earning assets repricing to a lower interest rate at a faster pace than tax-exempt earning assets in a continued declining interest rate environment, resulting in less taxable income in proportion to total income. FINANCIAL CONDITION On December 31, 2002, the Company reported total assets of $1.3 billion, an increase of $92.1 million or 7.8% from the prior year-end. The growth in assets includes increases in the investment and loan portfolios of $96.0 million or 27.8% and $36.8 million or 5.2%, respectively. These increases were funded by a decline in cash and equivalents of $39.3 million or 36.9%, an increase in total deposits of $44.0 million or 4.8%, and additional borrowings of $44.8 million or 32.6%. The makeup of the balance sheet continually changes as the Company responds to extremely competitive market forces. Management of the Company considers it noteworthy to understand 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. Therefore, reviewing average balances is also important to understanding the financial condition of the Company. On an average basis, total assets were $1.2 billion for 2002, an increase of $62.7 million or 5.5% from the prior year. Average earning assets, primarily loans and investment securities, increased $45.7 million or 4.4% to $1.09 billion. However, as a percentage of average assets, earning assets declined from 91.4% to 90.4% for 2002. LOANS Loans, net of unearned income, totaled $738.6 million, an increase of $36.8 million or 5.2% from year-end 2001. A significant portion of the increase was in real estate lending. Real estate mortgage loans make up 62% of the total loans outstanding at December 31, 2002 and increased $27.5 million or 6.4% compared to a year earlier. Real estate construction loans increased $14.0 million or 33.3%. Commercial, financial, and agriculture loans increased a modest $1.5 million or 1.4% to $110.1 million. These increases were offset by decreases in lease financing of $4.0 million or 9.7% and decreases in installment loans of $2.2 million or 2.9%. On average, loans represented 64.7% of earning assets during 2002 compared to 66.9% for 2001. As loan demand declines, the available funds are redirected to lower earning temporary investments or investment securities, which typically involve a decrease in credit risk and lower yields. The composition of the loan portfolio is summarized in the table below.
- ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) December 31, 2002 % 2001 % 2000 % 1999 % 1998 % - ------------------------------------------------------------------------------------------------------------------------------------ Commercial, financial, and agriculture $110,056 14.9% $108,516 15.4% $105,248 15.4% $ 105,064 16.3% $116,625 19.3% Real estate -- construction 55,896 7.6 41,930 6.0 40,993 6.0 38,471 6.0 24,770 4.1 Real estate-- mortgage 459,620 62.2 432,168 61.6 425,555 62.3 390,598 60.7 352,033 58.2 Installment 76,162 10.3 78,399 11.2 77,284 11.3 77,051 12.0 81,254 13.4 Lease financing 36,905 5.0 40,856 5.8 34,269 5.0 32,379 5.0 30,155 5.0 - ------------------------------------------------------------------------------------------------------------------------------------ Total $738,639 100.0% $701,869 100.0% $683,349 100.0% $ 643,563 100.0% $604,837 100.0% - ------------------------------------------------------------------------------------------------------------------------------------
The following table presents commercial, financial, and agricultural loans and real estate construction loans outstanding at December 31, 2002 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 $73,992 $ 24,656 $11,408 $110,056 Real estate-- construction 52,218 3,627 51 55,896 - ------------------------------------------------------------------------------------------------------------------------------------ Total $126,210 $ 28,283 $11,459 $165,952 - ------------------------------------------------------------------------------------------------------------------------------------
The table below presents commercial, financial, and agricultural loans and real estate construction loans outstanding at December 31, 2002 that are due after one year, classified according to sensitivity to changes in interest rates. INTEREST SENSITIVITY - -------------------------------------------------------------------------------- (In thousands) Fixed Rate Variable Rate - -------------------------------------------------------------------------------- Due after one but within five years $17,805 $ 10,478 Due after five years 4,665 6,794 - -------------------------------------------------------------------------------- Total $22,470 $ 17,272 - -------------------------------------------------------------------------------- ASSET QUALITY The Company's loan portfolio is subject to varying degrees of credit risk. Credit risk is mitigated via diversification within the portfolio, limiting exposure to any single customer or industry, standard lending policies and underwriting criteria, and collateral requirements. 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 guidelines established by policy. The Company's internal audit department performs 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 conditions of the general and 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. While management considers the allowance for loan losses to be adequate based on the information currently available, additional adjustments to the allowance may be necessary due to changes in the factors noted above. 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 $4.7 million in 2002, an increase of $2.3 million or 94.0% compared to $2.4 million reported in 2001. The Company had $4.2 million in net charge-offs, a 97.2% increase from $2.1 million in the prior year. Real estate lending and installment loans to individuals accounted for $2.8 million and $914 thousand, respectively, of the net charge-offs for 2002. The increase in net charge-offs relates primarily to a decline in the credit quality of a pool of construction loans secured by residential real estate to a financially troubled builder. Additional information related to this pool of loans is included under the caption "Nonperforming Assets" below. Net charge-offs equaled 0.60% of average loans for 2002, an increase of 29 basis points compared to the prior year. The allowance for loan losses was $11.1 million at year-end 2002 and represented 1.50% of loans net of unearned income at year-end 2002 and year-end 2001. The allowance for loan losses as a percentage of nonperforming loans totaled 57.3% and 202.3% at year-end 2002 and 2001, respectively. The decrease for 2002 reflects the additional loans on nonaccrual status during 2002 as noted under the caption "Nonperforming Assets" below. 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) 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Balance of allowance for loan losses at beginning of year $ 10,549 $ 10,249 $ 9,659 $ 9,048 $ 9,114 Loans charged off: Commercial, financial, and agricultural 481 600 1,336 1,590 716 Real estate 2,833 1,476 369 79 386 Installment loans to individuals 1,146 762 857 1,209 1,061 Lease financing 147 87 97 64 109 - ------------------------------------------------------------------------------------------------------------------------------------ Total loans charged off 4,607 2,925 2,659 2,942 2,272 - ------------------------------------------------------------------------------------------------------------------------------------ Recoveries of loans previously charged off: Commercial, financial, and agricultural 63 157 313 249 383 Real estate 71 371 132 172 345 Installment loans to individuals 232 247 310 267 341 Lease financing 5 2 22 2 3 - ------------------------------------------------------------------------------------------------------------------------------------ Total recoveries 371 777 777 690 1,072 - ------------------------------------------------------------------------------------------------------------------------------------ Net loans charged off 4,236 2,148 1,882 2,252 1,200 - ------------------------------------------------------------------------------------------------------------------------------------ Additions to allowance charged to expense 4,748 2,448 2,472 2,863 1,134 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of year $ 11,061 $ 10,549 $ 10,249 $ 9,659 $ 9,048 - ------------------------------------------------------------------------------------------------------------------------------------ Average loans net of unearned income $705,090 $698,758 $ 667,241 $ 618,860 $589,714 Ratio of net charge-offs during year to average loans, net of unearned income .60% .31% .28% .36% .20% - ------------------------------------------------------------------------------------------------------------------------------------
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) 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Commercial, financial, and agricultural $ 3,913 $ 3,492 $ 4,050 $ 3,649 $ 2,536 Real estate 4,838 4,135 3,835 3,807 4,637 Installment loans to individuals 1,879 2,208 1,861 1,829 1,450 Lease financing 431 714 503 374 425 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 11,061 $ 10,549 $ 10,249 $ 9,659 $ 9,048 - ------------------------------------------------------------------------------------------------------------------------------------
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 $19.8 million at year-end 2002, an increase of $13.5 million or 214.9% compared to 2001. The increase is primarily due to a $12.1 million or 333.1% increase in nonaccrual loans. The increase in nonaccrual loans is related primarily to the deterioration in the credit quality of a pool of construction loans secured by residential real estate to a financially troubled builder as noted under the caption "Asset Quality". The Company charged off approximately $2.4 million related to this pool of loans during the fourth quarter of 2002. This pool of loans totaled $12.9 million at year-end 2002. Interest income lost on this pool of loans due to their nonaccrual status totaled $707 thousand for the twelve months ended December 31, 2002. This total includes $92 thousand accrued in the first quarter of 2002, before the loans were placed on nonaccrual status, which was reversed in the second quarter of 2002. It is currently estimated that a total of $188 thousand of interest income will be lost in each subsequent quarter related to this credit while it remains on nonaccrual status. Nonperforming loans represent 2.61% of loans net of unearned income at year-end 2002, an increase from 187 basis points compared to year-end 2001. Information pertaining to nonperforming loans and assets is presented in the table below.
- -------------------------------------------------------------------------------------------- December 31, (In thousands) 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------- Loans accounted for on nonaccrual basis $15,681 $ 3,621 $ 2,852 $ 2,767 $ 1,286 Loans past due 90 days or more 3,624 1,593 1,739 2,102 1,645 - -------------------------------------------------------------------------------------------- Total nonperforming loans 19,305 5,214 4,591 4,869 2,931 Other real estate owned 385 715 598 734 1,671 Other foreclosed assets 126 363 136 95 69 - -------------------------------------------------------------------------------------------- Total nonperforming assets $19,816 $ 6,292 $ 5,325 $ 5,698 $ 4,671 - --------------------------------------------------------------------------------------------
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 2002, temporary investments averaged $68.9 million, a decrease of $13.9 million or 16.7%. This decrease 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 $441.6 million on December 31, 2002, an increase of $96.0 million or 27.8% from year-end 2001. The funds made available from maturing or called bonds have been redirected as necessary to fund higher yielding 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 $316.4 million in total for the year, an increase of $53.3 million or 20.2%. The majority of the purchases during 2002 were U.S. Government agencies and mortgage-backed securities classified as available for sale. The Company purchased $35.0 million in money market mutual funds near year-end, as the yields and flexibility of these investments were attractive. On December 31, 2002, available for sale securities made up 93.5% of the total investment securities as opposed to 89.2% a year earlier. U.S. Government agencies were 39.2% of the total available for sale securities and 36.7% of the total portfolio at year-end. A year ago, U.S. Government agencies made up 50.5% of the total available for sale securities and 45.1% of the total portfolio. Mortgage-backed securities in the available for sale portfolio increased 48.7% to $148.4 million at year-end 2002 as compared to $99.8 million at year-end 2001. The increase in investment securities resulted from the Company's efforts to manage its net interest margin during a continued general economic downturn and a lower market interest rate environment. The Company took advantage of decreased borrowing costs during 2002 to fund the purchase of additional investment securities with attractive returns within risk guidelines. This action served to mitigate the effect of lower market interest rates experienced during the year. The Company realized $1.4 million in net gains on the sale of available for sale securities during 2002, an increase of $968 thousand compared to 2001. The increase in gains on the sale of available for sale securities was due to normal asset/liability management along with favorable market conditions related to the securities sold. On December 31, 2002, shareholders' equity included a $3.6 million net unrealized gain related to the increase in value of the available for sale securities portfolio. This amount was $1.2 million at year-end 2001. Typically, the value of a bond portfolio and market interest rates have an inverse relationship; therefore, as the interest rate environment has generally fallen throughout the year, the value of the available for sale portfolio has increased. The following table summarizes the carrying values of investment securities on December 31, 2002, 2001, and 2000. 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, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Available Held to Available Held to Available Held to (In thousands) for Sale Maturity for Sale Maturity for Sale Maturity - ------------------------------------------------------------------------------------------------------------------------------------ Money market mutual funds $ 35,021 U.S. Treasury securities $ 1,250 Obligations of U.S. Government agencies 161,867 $ 100 $155,693 $ 100 113,033 $ 100 Obligations of states and political subdivisions 51,556 28,242 41,791 37,055 22,804 48,895 Mortgage-backed securities 148,407 177 99,819 306 52,941 395 Corporate debt 10,259 4,873 13,904 Equity securities 5,928 5,905 7,487 - ------------------------------------------------------------------------------------------------------------------------------------ Total $413,038 $ 28,519 $308,081 $ 37,461 $211,419 $ 49,390 - ------------------------------------------------------------------------------------------------------------------------------------
The following table presents an analysis of the contractual maturity distribution and tax equivalent weighted average interest rates of investment securities at December 31, 2002. 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 restricted 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 - ------------------------------------------------------------------------------------------------------------------------------------ Money market mutual funds $ 35,021 1.3% Obligations of U.S. Government agencies 108,645 1.5 $ 43,728 2.8% $ 9,494 4.9% Obligations of states and political subdivisions 598 5.8 8,920 5.9 31,960 5.1 $ 10,078 7.1% Mortgage-backed securities 8,044 6.2 60,427 5.6 79,936 5.3 Corporate debt 1,400 1.9 8,859 1.6 - ------------------------------------------------------------------------------------------------------------------------------------ Total $144,264 1.4% $ 60,692 3.7% $103,281 5.4% $ 98,873 5.2% - ------------------------------------------------------------------------------------------------------------------------------------
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 4,184 6.7 $ 19,371 6.8% $ 4,539 7.0% $ 148 7.2% Mortgage-backed securities 177 7.2 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 4,284 6.7% $ 19,548 6.8% $ 4,539 7.0% $ 148 7.2% - ------------------------------------------------------------------------------------------------------------------------------------
The calculation of the weighted average interest rates for each category is based on the weighted average costs of the securities. The weighted average tax rates on exempt states and political subdivisions are computed based on the marginal corporate Federal tax rate of 35%. DEPOSITS The Company's primary source of funding for its lending and investment activities results from its customer deposits, which consist of noninterest and interest bearing demand, savings, and time deposits. On December 31, 2002, deposits totaled $957.5 million, an increase of $44.0 million or 4.8% from year-end 2001. Average deposits were $938.3 million in 2002, an increase of $42.2 million or 4.7% compared to 2001. During 2002, total average interest bearing deposits increased $40.1 million or 5.4% to $787.5 million, while average noninterest bearing deposits increased $2.1 million or 1.4% to $150.8 million. A summary of average balances and rates paid on deposits follows.
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Average Average Average Average Average Average (In thousands) Balance Rate Balance Rate Balance Rate - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest bearing demand $150,823 $148,756 $145,892 Interest bearing demand 215,766 0.87% 199,067 1.66% 193,982 2.33% Savings 167,044 1.37 162,665 2.55 153,574 3.46 Time 404,658 4.53 385,620 5.77 337,667 5.64 - ------------------------------------------------------------------------------------------------------------------------------------ Total $938,291 2.40% $896,108 3.32% $831,115 3.47% - ------------------------------------------------------------------------------------------------------------------------------------
Maturities of time deposits of $100,000 or more outstanding at December 31, 2002 are summarized as follows. - ----------------------------------------------------------------------------- (In thousands) Amount - ----------------------------------------------------------------------------- 3 months or less $ 25,877 Over 3 through 6 months 20,439 Over 6 through 12 months 31,125 Over 12 months 30,796 - ----------------------------------------------------------------------------- Total $108,237 - ----------------------------------------------------------------------------- SHORT-TERM BORROWINGS Short-term borrowings primarily consist of securities sold under agreements to repurchase with year-end balances of $116.0 million, $113.8 million, and $90.0 million in 2002, 2001, and 2000, respectively. Such borrowings are generally on an overnight basis. Other short-term borrowings consist of FHLB borrowings totaling $8.4 million and $12.0 million at year-end 2002 and 2001, respectively, and demand notes issued to the U.S. Treasury under the treasury tax and loan note option account totaling $807 thousand, $808 thousand, and $1.1 million in 2002, 2001, and 2000, respectively. A summary of short-term borrowings is as follows. - -------------------------------------------------------------------------------- (In thousands) 2002 2001 2000 - -------------------------------------------------------------------------------- Amount outstanding at year-end $125,186 $126,600 $ 91,181 Maximum outstanding at any month-end 164,950 165,678 91,181 Average outstanding 108,743 108,091 53,315 Weighted average rate during the year 1.88% 3.80% 5.91% - -------------------------------------------------------------------------------- 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 restricted holdings of 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. Interest rates on FHLB advances are generally fixed and range between 2.01% and 5.22% over a maturity period of up to 16 years. Approximately $24.5 million of the total long-term advances from FHLB are convertible to a floating interest rate following initial fixed rate terms ranging from 1 to 2 years. Once the initial fixed rate term expires, the advances may convert to a floating interest rate indexed to LIBOR only if LIBOR equals or exceeds 7%. 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 $57.1 million at December 31, 2002, an increase of $46.5 million from $10.6 million at year-end 2001. 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, 2002, 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 0.7% and 1.3%, 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 3.8% and 8.1%, respectively. In the current low interest rate environment, it is not practical or possible to reduce certain deposit rates by the same magnitude as rates on earning assets. The average rate paid on some of the Company's deposits is well below 2%. This situation magnifies the model's predicted results when modeling a decrease in interest rates, as earning assets with higher yields have more of an opportunity to reprice at lower rates than lower-rate deposits. LIQUIDITY At the Parent Company level, liquidity is primarily affected by the receipt of dividends from its subsidiary banks (see Footnote 16 in the notes to the Company's 2002 audited consolidated financial statements) and cash balances maintained. The Parent Company's primary uses of cash include the payment of dividends to shareholders, repurchasing its common stock, and paying for general operating expenses. The primary source of funds for the Parent Company is the receipt of dividends from its subsidiary banks. As of December 31, 2002, combined retained earnings of the subsidiary banks were $65.5 million, of which $13.8 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 $9.7 million at year-end 2002. 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; FHLB borrowings; 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, 2002, liquid assets totaled $480.1 million, a $65.7 million or 15.8% increase compared to the prior year-end. The increase is due to increased levels of available for sale investment securities funded by both a decrease in lower earning federal funds sold and securities purchased under agreements to resell and an increase in borrowed funds. Net cash provided by operating activities was $19.3 million in 2002, a slight decrease from $20.2 million in the prior year. Net cash used in investing activities was $134.2 million during 2002, an increase of $28.6 million or 27.0% from the prior year due primarily to the increase in funding of loans originated for investment, net of principal repayments. Net cash provided by financing activities totaled $75.6 million for the year 2002. In the prior year, financing activities used $38.0 million, a difference of $113.6 million in the comparison. The difference primarily relates to deposit and FHLB borrowing activity; in 2002, deposits provided $44.0 million in cash flow while during 2001 a 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 Company's 2002 audited consolidated financial statements are considered in addressing the Company's liquidity management. The Company does not expect these commitments to significantly effect the liquidity position in future periods. CAPITAL RESOURCES Shareholders' equity was $125.8 million on December 31, 2002. This represents an increase of $2.2 million or 1.8% from year-end 2001. During 2002, the Company purchased 191,000 shares of its outstanding common stock for a total cost of $6.6 million. Favorable results of the share buy back program are reflected in the difference between the change in net income and the change in earnings per share. For 2002, net income decreased 14.4% compared to the prior year; however, on a per share basis, the decrease was 12.9%, a 150 basis point difference that is attributed to the share buy back program. The Company issued 78,000 shares of common stock during 2002 pursuant to its nonqualified employee stock option plan. Dividends of $8.6 million or $1.25 per share were declared during 2002. This represents a 3.3% 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 $2.3 million from year-end 2001 primarily as a result of the increase in value of the available for sale securities portfolio due to a lower interest rate environment. 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, 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 14.83% 4.00% 6.00% Total risk based 16.09 8.00 10.00 Leverage 10.13 4.00 5.00 - -------------------------------------------------------------------------------- The capital ratios of each subsidiary bank were in excess of the applicable minimum regulatory capital ratio requirements at December 31, 2002. The table below is an analysis of dividend payout ratios and equity to asset ratios for the previous five years. - -------------------------------------------------------------------------------- Years Ended December 31, 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------- Percentage of dividends declared to net income 68.38% 57.70% 59.33% 60.66% 53.02% Percentage of average shareholders' equity to average total assets 10.37 10.75 12.06 12.58 12.55 - -------------------------------------------------------------------------------- SHARE BUY BACK PROGRAM In January 2003, the Company announced that it intended to purchase up to 300,000 additional shares of its outstanding common stock. This is in addition to the stock purchase plans announced in July 2000 and November 1998 to purchase 500,000 and 400,000 shares, respectively. 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. At the time of the most recent announcement, the Company had purchased nearly all of the previously authorized shares. SHAREHOLDER INFORMATION As of January 1, 2003, there were 803 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 2002 and 2001. STOCK PRICES - -------------------------------------------------------------------------------- High Low Dividends Declared - -------------------------------------------------------------------------------- 2002 Fourth Quarter $ 35.000 $ 32.200 $ 0.32 Third Quarter 35.250 32.250 0.31 Second Quarter 35.990 32.400 0.31 First Quarter 37.490 32.500 0.31 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 - -------------------------------------------------------------------------------- Dividends declared per share increased $0.04 or 3.3% and $0.04 or 3.4% for the years 2002 and 2001, respectively. 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. The adoption of SFAS No. 142 did not have an effect on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. SFAS No. 143 requires an entity to record a liability for an obligation associated with the retirement of an asset at the time the liability is incurred by capitalizing the cost as part of the carrying value of the related asset and depreciating it over the remaining useful life of that asset. The provisions of SFAS No. 143 are effective January 1, 2003. The adoption of this Statement is not expected to have a material effect on the Company's consolidated financial statements. 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 Company's consolidated financial statements. 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 SFAS No. 4, FASB Statement No. 64, EXTINGUISHMENTS OF DEBT MADE TO SATISFY SINKING-FUND REQUIREMENTS. SFAS No. 145 also rescinds FASB Statement No. 44, ACCOUNTING FOR INTANGIBLE ASSETS OF MOTOR CARRIERS. SFAS No. 145 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. Management expects 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 FASB Emerging Issues Task Force Consensus Summary 94-3 and is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Management expects the adoption of this Statement will not have a material effect on the Company's consolidated financial statements. In October 2002, the FASB issued SFAS No. 147, ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS. This Statement brings all business combinations involving financial institutions, except mutuals, into the scope of SFAS No. 141, BUSINESS COMBINATIONS. SFAS No. 147 requires that all acquisitions of financial institutions that meet the definition of a business, including acquisitions of part of a financial institution that meet the definition of a business, must be accounted for in accordance with SFAS No. 141 and the related intangibles accounted for in accordance with SFAS No. 142. SFAS No. 147 removes such acquisitions from the scope of SFAS No. 72, ACCOUNTING FOR CERTAIN ACQUISITIONS OF BANKING OR THRIFT INSTITUTIONS, which was adopted in February 1983 to address financial institutions acquisitions during a period when many of such acquisitions involved "troubled" institutions. SFAS No. 147 also amends SFAS No. 144 to include in its scope long-term customer-relationship intangible assets of financial institutions. SFAS No. 147 is generally effective immediately and provides guidance with respect to amortization and impairment of intangibles recognized in connection with acquisitions previously within the scope of SFAS No. 72. The adoption of this Statement did not have a material effect on the Company's consolidated financial statements. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS. FIN 45 expands disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 applies to most types of guarantees except for, among others, guarantees relating to employee compensation, residual value guarantees under capital lease arrangements, commercial letters of credit, loan commitments, and guarantees of a company's own future performance. Historically, the guarantor has not recorded guarantees until it was probable that a payment would be required under the guarantee. The new accounting requirements now require a guarantor to record a liability at its fair value at the time the guarantee is made. Certain guarantees are subject to the disclosure requirements of FIN 45, but not to its recognition provisions. These guarantees include, but are not limited to, guarantees treated as derivatives under SFAS 133, guarantees that are considered contingent consideration in a business combination, and guarantees issued between parent corporations and their subsidiaries or between entities under common control. The new disclosure requirements require a guarantor to disclose the following about each guarantee: the overall details of the guarantee, the maximum, potential amount of future payments that could be required, the carrying amount of the guarantor's obligation under the guarantee, the fair value of the liability included in the statement of financial position, and the nature and extent of recourse provisions and collateral related to the guarantee and the extent of any potential amounts that the guarantor may recover from third parties as a result of payments made under the guarantee. The new accounting requirements are to be applied prospectively to any guarantees issued or modified after December 31, 2002. The new disclosure requirements are applicable to all guarantees covered by this interpretation, no matter when issued, and are effective for interim or annual financial statements for periods ending after December 15, 2002. Additional information related to the Company's significant guarantees are disclosed in Footnote 13 in the notes to the Company's 2002 audited consolidated financial statements. The adoption of FIN 45 is not expected to have a material effect on the Company's consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE, which amends SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS No. 148 requires more frequent and prominent disclosures in the financial statements about the effects of stock-based compensation. It also provides alternative methods for the voluntary transition to the expense recognition method of accounting for stock options. The transition and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The adoption of this Statement did not have a material effect on the Company's consolidated financial statements. 2001 COMPARED TO 2000 Net income was $14.7 million in 2001 compared to $14.4 million in 2000, an increase of $291 thousand or 2.0%. Basic and diluted net income per share were $2.10 and $2.09, respectively, an increase of $0.13 or 6.6% and $0.12 or 6.1% from 2000. Diluted earnings per share growth was 410 basis points higher than the net income growth for the year ended December 31, 2001. This is primarily attributed to the positive impact of the share buy back program that has been in effect for several years. The Company purchased 293,000 shares of 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 of 7.3 million for 2000. Other items of significance that were viewed positively for the Company during 2001 included the following: o Net interest income decreased a very modest $263 thousand or 0.6% compared to 2000. This is significant given the drastic decline in market interest rates during 2001. 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. o The provision for loan losses decreased a modest 1.0% in 2001 compared to 2000. o Noninterest income increasead $2.6 million or 20.5% compared to 2000. 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 2000. The return on equity increased 32 basis points to 11.93% compared to 11.61% in 2000. This was another positive result of the share buy back program. Total interest income on a tax equivalent basis was $79.0 million in 2001, an increase of $1.7 million or 2.1% compared to 2000. The increase in interest income was due to a $118.5 million or 12.8% increase in the volume of earning assets, primarily investment securities and other temporary investments, which offset declines in the rates earned throughout the entire earning asset portfolio. The average tax equivalent yield on total interest earning assets was 7.56%, a decline of 79 basis points from 2000 and was attributed to the decline in general market interest rates noted above. Total interest expense was $34.4 million for 2001, an increase of $1.8 million or 5.6% from 2000. 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% in 2000. The spread between rates earned and paid was 3.59% in 2001, a 40 basis point decrease from 2000. This decrease was the result of a 79 basis point decrease in the average rate earned on earning assets, which was partially offset by the 39 basis point decline in the average rate paid on interest bearing liabilities. The net interest margin declined 56 basis points to 4.28% for 2001 and is attributed to the 40 basis point decline in net interest spread combined with a 16 basis point reduction in the impact of noninterest bearing sources of funds. Total noninterest income increased $2.6 million or 20.5% to $15.0 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. 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 $0 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 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%. Total noninterest expense was $35.1 million for 2001, an increase of $2.0 million or 6.1% 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 $9.7 million. Income tax expense for 2001 was $5.5 million, relatively unchanged from 2000. 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. 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 2002 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, 2002 the system of internal control was adequate to accomplish the objectives discussed herein. /S/ G. Anthony Busseni /s/ C. Douglas Carpenter G. Anthony Busseni 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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. /S/ KPMG LLP Louisville, Kentucky January 17, 2003 CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- December 31, (In thousands, except share data) 2002 2001 - -------------------------------------------------------------------------------- ASSETS Cash and cash equivalents: Cash and due from banks $ 44,083 $ 55,977 Interest bearing deposits in other banks 3,947 3,090 Federal funds sold and securities purchased under agreements to resell 19,071 47,318 - -------------------------------------------------------------------------------- Total cash and cash equivalents 67,101 106,385 - -------------------------------------------------------------------------------- Investment securities: Available for sale, amortized cost of $407,560 (2002) and $306,197 (2001) 413,038 308,081 Held to maturity, fair value of $30,312 (2002) and $38,505 (2001) 28,519 37,461 - -------------------------------------------------------------------------------- Total investment securities 441,557 345,542 - -------------------------------------------------------------------------------- Loans, net of unearned income 738,639 701,869 Allowance for loan losses (11,061) (10,549) - -------------------------------------------------------------------------------- Loans, net 727,578 691,320 - -------------------------------------------------------------------------------- Premises and equipment, net 24,155 24,800 Other assets 15,211 15,483 - -------------------------------------------------------------------------------- Total assets $ 1,275,602 $ 1,183,530 - -------------------------------------------------------------------------------- LIABILITIES Deposits: Noninterest bearing $ 141,238 $ 136,001 Interest bearing 816,242 777,484 - -------------------------------------------------------------------------------- Total deposits 957,480 913,485 - -------------------------------------------------------------------------------- Securities sold under agreements to repurchase 115,979 113,792 Other borrowed funds 66,359 23,721 Dividends payable 2,191 2,152 Other liabilities 7,820 6,820 - -------------------------------------------------------------------------------- Total liabilities 1,149,829 1,059,970 - -------------------------------------------------------------------------------- Commitments and contingencies SHAREHOLDERS' EQUITY Common stock, par value $.125 per share; 9,608,000 shares authorized; 8,135,977 and 8,058,244 shares issued at December 31, 2002 and 2001, respectively 1,017 1,007 Capital surplus 17,623 15,179 Retained earnings 141,199 137,227 Treasury stock, at cost, 1,344,463 and 1,152,978 shares at December 31, 2002 and 2001, respectively (37,627) (31,077) Accumulated other comprehensive income 3,561 1,224 - -------------------------------------------------------------------------------- Total shareholders' equity 125,773 123,560 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,275,602 $ 1,183,530 - -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME - -------------------------------------------------------------------------------- (In thousands, except per share data) Years Ended December 31, 2002 2001 2000 - -------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $51,459 $59,873 $60,458 Interest on investment securities: Taxable 10,062 10,466 9,232 Nontaxable 3,534 3,368 3,455 Interest on deposits in other banks 185 92 68 Interest on federal funds sold and securities purchased under agreements to resell 1,051 3,240 2,268 - -------------------------------------------------------------------------------- Total interest income 66,291 77,039 75,481 - -------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits 22,514 29,716 28,900 Interest on securities sold under agreements to repurchase 1,647 3,927 3,119 Interest on other borrowed funds 1,585 714 517 - -------------------------------------------------------------------------------- Total interest expense 25,746 34,357 32,536 - -------------------------------------------------------------------------------- Net interest income 40,545 42,682 42,945 - -------------------------------------------------------------------------------- Provision for loan losses 4,748 2,448 2,472 - -------------------------------------------------------------------------------- Net interest income after provision for loan losses 35,797 40,234 40,473 - -------------------------------------------------------------------------------- NONINTEREST INCOME Service charges and fees on deposits 7,898 6,899 5,229 Other service charges, commissions, and fees 3,704 3,849 4,009 Data processing income 1,386 1,385 1,314 Trust income 1,551 1,929 1,718 Investment securities gains, net 1,433 465 Gains on sale of mortgage loans, net 355 262 50 Other 309 260 173 - -------------------------------------------------------------------------------- Total noninterest income 16,636 15,049 12,493 - -------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries and employee benefits 20,025 19,689 18,372 Occupancy expenses, net 2,437 2,391 2,267 Equipment expenses 3,686 3,365 2,899 Bank franchise tax 1,290 1,192 1,159 Other 8,663 8,474 8,390 - -------------------------------------------------------------------------------- Total noninterest expense 36,101 35,111 33,087 - -------------------------------------------------------------------------------- Income before income taxes 16,332 20,172 19,879 - -------------------------------------------------------------------------------- Income tax expense 3,771 5,501 5,499 - -------------------------------------------------------------------------------- Net income $12,561 $14,671 $14,380 - -------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE Basic $ 1.83 $ 2.10 $ 1.97 Diluted 1.82 2.09 1.97 - -------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING Basic 6,870 6,982 7,304 Diluted 6,910 7,025 7,307 - -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - -------------------------------------------------------------------------------- (In thousands) Years Ended December 31, 2002 2001 2000 - -------------------------------------------------------------------------------- NET INCOME $ 12,561 $ 14,671 $ 14,380 Other comprehensive income: Unrealized holding gain on available for sale securities arising during the period, net of tax of $1,595, $472, and $1,287, respectively 2,962 859 2,498 Reclassification adjustment for prior period unrealized gain recognized during current period, net of tax of $337 and $99 in 2002 and 2001, respectively (625) (192) - -------------------------------------------------------------------------------- Other comprehensive income 2,337 667 2,498 - -------------------------------------------------------------------------------- Comprehensive income $ 14,898 $ 15,338 $ 16,878 - -------------------------------------------------------------------------------- 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, 2002, 2001, and 2000 Shares Amount Surplus Earnings Shares Amount (Loss) Income Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 2000 8,020 $ 1,002 $12,370 $125,173 582 $(11,498) $(1,941) $125,106 - ------------------------------------------------------------------------------------------------------------------------------------ Net income 14,380 14,380 Other comprehensive income 2,498 2,498 Cash dividends declared, $1.17 per share (8,532) (8,532) Purchase of common stock 278 (9,257) (9,257) Stock options exercised 12 2 297 299 Noncash compensation expense attributed to stock option grants 967 967 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2000 8,032 1,004 13,634 131,021 860 (20,755) 557 125,461 - ------------------------------------------------------------------------------------------------------------------------------------ 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 benefits 26 3 668 671 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 - ------------------------------------------------------------------------------------------------------------------------------------ Net income 12,561 12,561 Other comprehensive income 2,337 2,337 Cash dividends declared, $1.25 per share (8,589) (8,589) Purchase of common stock 191 (6,550) (6,550) Stock options exercised 78 10 1,894 1,904 Noncash compensation expense attributed to stock option grants 550 550 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2002 8,136 $ 1,017 $17,623 $141,199 1,344 $(37,627) $ 3,561 $125,773 - ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOW - ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, (In thousands) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 12,561 $ 14,671 $ 14,380 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,890 3,008 2,784 Net amortization of investment security premiums and discounts: Available for sale 711 (49) (1,014) Held to maturity (77) (23) (7) Provision for loan losses 4,748 2,448 2,472 Noncash compensation expense 550 877 967 Mortgage loans originated for sale (45,330) (40,485) (10,738) Proceeds from sale of mortgage loans 45,156 39,980 10,761 Deferred income tax expense (benefit) 561 132 (161) Gains on sale of mortgage loans, net (355) (262) (50) Gain on sale of premises and equipment (103) (12) (5) Gain on sale of available for sale investment securities, net (1,433) (465) Decrease (increase) in accrued interest receivable 967 938 (738) Increase in other assets (695) (636) (360) (Decrease) increase in accrued interest payable (399) (312) 752 (Decrease) increase in other liabilities (419) 378 541 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 19,333 20,188 19,584 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities and calls of investment securities: Available for sale 316,912 296,062 311,677 Held to maturity 9,019 12,646 12,513 Proceeds from sale of available for sale investment securities 172,229 98,411 19,989 Purchases of investment securities: Available for sale (589,782) (489,581) (370,342) Held to maturity (694) Loans originated for investment, net of principal collected (40,477) (19,901) (41,642) Purchases of premises and equipment (2,259) (2,630) (2,821) Proceeds from sale of equipment 117 21 30 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (134,241) (105,666) (70,596) - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits 43,995 (55,712) 106,977 Net increase in securities sold under agreements to repurchase 2,187 23,788 48,804 Proceeds from long-term debt 48,175 8,000 8,000 Repayments of long-term debt (1,936) (7,588) (1,167) Net (decrease) increase in other borrowed funds (3,601) 11,631 406 Dividends paid (8,550) (8,468) (8,539) Purchase of common stock (6,550) (10,322) (9,257) Stock options exercised 1,904 663 299 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 75,624 (38,008) 145,523 - ------------------------------------------------------------------------------------------------------------------------------------ Net (decrease) increase in cash and cash equivalents (39,284) (123,486) 94,511 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at beginning of year 106,385 229,871 135,360 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 67,101 $ 106,385 $ 229,871 - ------------------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURES Cash paid during the year for: Interest $ 26,145 $ 34,669 $ 31,784 Income taxes 4,940 5,350 5,450 Cash dividend declared and unpaid 2,191 2,152 2,155 - ------------------------------------------------------------------------------------------------------------------------------------ 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. Significant accounting policies are summarized below. PRINCIPLES OF CONSOLIDATION 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. USE OF ESTIMATES 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 2002 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: commercial and retail banking. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include the following: 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. A decline in the market value of any available for sale security below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security. LOANS AND INTEREST INCOME Loans are reported at their principal amount outstanding adjusted for any charge-offs and any deferred fees or costs on originated loans. Interest income on loans is recognized using the interest method based on loan principal amounts outstanding during the period, except interest on certain consumer installment loans recognized using the sum-of-the-months digits method, which does not differ materially from the interest method. Net fees and incremental direct costs associated with loan origination are deferred and amortized as yield adjustments over the respective loan terms. Generally, the accrual of interest on loans is discontinued when it is determined that the collection of interest or principal is doubtful, or when a default of interest or principal has existed for 90 days or more, unless such loan is well secured and in the process of collection. Cash payments received on nonaccrual loans generally are applied to principal, and interest income is only recorded once principal recovery is assured. The Company accounts for impaired loans in accordance with Statement of Financial Accounting Standards ("SFAS") No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, as amended by SFAS No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - INCOME RECOGNITION. SFAS No. 114, as amended, requires that impaired loans be measured at the present value of expected future cash flows, discounted at the loan's effective interest rate, at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. Generally, impaired loans are also in nonaccrual status. In certain circumstances, however, the Company may continue to accrue interest on an impaired loan. Cash receipts on impaired loans are applied to the recorded investment in the loan, including any accrued interest receivable. Loans that 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 estimated market value and included in net loans on the balance sheet. Mortgage loans held for sale totaled $1.3 million at December 31, 2002. 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, 2002, 2001, and 2000. PROVISION FOR LOAN LOSSES The provision for loan losses represents charges made to earnings to maintain an allowance for loan losses at an adequate level based on credit losses specifically identified in the loan portfolio, as well as management's best estimate of probable loan losses inherent in the remainder of the portfolio at the balance sheet date. Many factors are considered when establishing an adequate allowance. Those factors include, but are not limited to, the following: an assessment of the financial condition of individual borrowers, a determination of the value and adequacy of underlying collateral, a review of historical loss experience, the condition of the local economy, an analysis of the levels and trends of the loan composition, and a review of delinquent and classified loans. Actual losses could differ significantly from the amounts estimated by management. OTHER REAL ESTATE Other real estate owned and held for sale, included with other assets in the accompanying consolidated balance sheets, includes properties acquired by the Company through actual loan foreclosures. Other real estate owned is carried at the lower of cost or fair value less estimated costs to sell. Fair value is the amount that the Company could reasonably expect to receive in a current sale between a willing buyer and a willing seller, other than in a forced or liquidation sale. Fair value of assets is measured by the market value based on comparable sales. INCOME TAXES Deferred income tax assets and liabilities result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the 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. Land is carried at cost. 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. Net income per common share computations were as follows at December 31, 2002, 2001, and 2000: - -------------------------------------------------------------------------------- (In thousands, except per share data) Years Ended December 31, 2002 2001 2000 - -------------------------------------------------------------------------------- Net income, basic and diluted $ 12,561 $ 14,671 $ 14,380 - -------------------------------------------------------------------------------- Average shares outstanding 6,870 6,982 7,304 Effect of dilutive stock options 40 43 3 - -------------------------------------------------------------------------------- Average diluted shares outstanding 6,910 7,025 7,307 - -------------------------------------------------------------------------------- Net income per share, basic $ 1.83 $ 2.10 $ 1.97 Net income per share, diluted 1.82 2.09 1.97 - -------------------------------------------------------------------------------- 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. STOCK-BASED COMPENSATION In 1997, the Company's Board of Directors approved a nonqualified stock option plan that provides for granting of stock options to key employees and officers of the Company. The plan was subsequently ratified by the Company's shareholders at its annual shareholders' meeting held on May 12, 1998, the measurement date of the plan. All stock options are awarded at a price equal to the fair market value of the Company's common stock at the date the options are granted. The Company applies Accounting Principles Board ("APB") Opinion No. 25 and related interpretations in accounting for its plan. Accordingly, since options were granted during 1997 at the fair market value of the Company's stock on the grant date, and the measurement date occurred during 1998, the Company recognizes noncash compensation expense based on the intrinsic value of the stock options measured on the date of shareholder ratification of the plan. The 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. - -------------------------------------------------------------------------------- (In thousands, except per share data) Years Ended December 31, 2002 2001 2000 - -------------------------------------------------------------------------------- NET INCOME As reported $ 12,561 $ 14,671 $ 14,380 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 358 570 629 Less: Stock-based compensation expense determined under fair value based method for all awards, net of related tax effects (424) (649) (668) - -------------------------------------------------------------------------------- Proforma $ 12,495 $ 14,592 $ 14,341 - -------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE Basic, as reported $ 1.83 $ 2.10 $ 1.97 Basic, proforma 1.82 2.09 1.96 Diluted, as reported 1.82 2.09 1.97 Diluted, proforma 1.81 2.08 1.96 - -------------------------------------------------------------------------------- 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. 2. INVESTMENT SECURITIES The following summarizes the amortized cost and estimated fair values of the securities portfolio at December 31, 2002. The summary is divided into available for sale and held to maturity securities.
- ------------------------------------------------------------------------------------------------------------------------------------ Amortized Gross Gross Estimated December 31, 2002 (In thousands) Cost Unrealized Gains Unrealized Losses Fair Value - ------------------------------------------------------------------------------------------------------------------------------------ AVAILABLE FOR SALE Money market mutual funds $ 35,021 $ 35,021 Obligations of U.S. Government agencies 161,300 $ 571 $ 4 161,867 Obligations of states and political subdivisions 49,525 2,031 51,556 Mortgage-backed securities 145,554 2,890 37 148,407 Corporate debt 10,259 10,259 Equity securities 5,901 72 45 5,928 - ------------------------------------------------------------------------------------------------------------------------------------ Total securities - available for sale $ 407,560 $ 5,564 $ 86 $ 413,038 - ------------------------------------------------------------------------------------------------------------------------------------ HELD TO MATURITY Obligations of U.S. Government agencies $ 100 $ 2 $ 102 Obligations of states and political subdivisions 28,242 1,781 30,023 Mortgage-backed securities 177 10 187 - ------------------------------------------------------------------------------------------------------------------------------------ Total securities - held to maturity $ 28,519 $ 1,793 $ 0 $ 30,312 - ------------------------------------------------------------------------------------------------------------------------------------
The following summarizes the amortized cost and estimated fair values of the securities portfolio at December 31, 2001.
- ------------------------------------------------------------------------------------------------------------------------------------ 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 amortized cost and estimated fair value of the securities portfolio at December 31, 2002, 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 restricted Federal Home Loan Bank ("FHLB") stock and investments in unrelated financial institution stocks, which have no stated maturity and are not included in the maturity schedule that follows. 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, 2002 (In thousands) Cost Fair Value Cost Fair Value - ------------------------------------------------------------------------------------------------------------------------------------ Due in one year or less $ 144,158 $ 144,264 $ 4,284 $ 4,345 Due after one year through five years 51,862 52,648 19,371 20,721 Due after five years through ten years 41,466 42,854 4,539 4,901 Due after ten years 18,619 18,937 148 158 Mortgage-backed securities 145,554 148,407 177 187 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 401,659 $ 407,110 $ 28,519 $ 30,312 - ------------------------------------------------------------------------------------------------------------------------------------
Gross gains of approximately $1,529,000, $467,000, and $0 for 2002, 2001, and 2000, respectively, were realized on the sale of investment securities. Gross losses of approximately $96,000, $2,000, and $0 were realized during 2002, 2001, and 2000, respectively. Investment securities with a book value of $259,965,000 and $225,079,000 at December 31, 2002 and 2001 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) 2002 2001 - -------------------------------------------------------------------------------- Commercial, financial, and agricultural $ 110,056 $ 108,516 Real estate-- construction 55,896 41,930 Real estate-- mortgage 459,620 432,168 Installment loans 76,185 78,501 Lease financing 41,847 46,946 - -------------------------------------------------------------------------------- Total loans 743,604 708,061 - -------------------------------------------------------------------------------- Less unearned income (4,965) (6,192) - -------------------------------------------------------------------------------- Total loans, net of unearned income $ 738,639 $ 701,869 - -------------------------------------------------------------------------------- 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 $14,604,000 and $14,961,000 at December 31, 2002 and 2001, 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, 2001 $ 14,961 New loans 7,025 Repayments (7,643) Loans no longer meeting disclosure requirements and other adjustments 261 - -------------------------------------------------------------------------------- Balance, December 31, 2002 $ 14,604 - -------------------------------------------------------------------------------- 4. ALLOWANCE FOR LOAN LOSSES The Company's recorded investment in impaired loans, measured using the fair value of collateral method as defined in SFAS No. 114, was $15,363,000 at December 31, 2002 and $1,681,000 at December 31, 2001. Of those amounts, $15,363,000 and $0 for 2002 and 2001, respectively, represent loans for which an allowance for loan losses totaling $321,000 and $0 for 2002 and 2001, respectfully, has been established. For the years ended December 31, 2002 and 2001, the recorded investment in impaired loans averaged $16,525,000 and $3,943,000, respectively. Interest income recognized on impaired loans totaled $268,000, $113,000, and $34,000 for the years 2002, 2001, and 2000, 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) 2002 2001 2000 - -------------------------------------------------------------------------------- Balance, beginning of year $ 10,549 $ 10,249 $ 9,659 Provisions for loan losses 4,748 2,448 2,472 Recoveries 371 777 777 Loans charged off (4,607) (2,925) (2,659) - -------------------------------------------------------------------------------- Balance, end of year $ 11,061 $ 10,549 $ 10,249 - -------------------------------------------------------------------------------- 5. PREMISES AND EQUIPMENT Premises and equipment consist of the following. - -------------------------------------------------------------------------------- December 31, (In thousands) 2002 2001 - -------------------------------------------------------------------------------- Land, buildings, and leasehold improvements $ 31,347 $ 31,067 Furniture and equipment 17,652 15,974 - -------------------------------------------------------------------------------- Total premises and equipment 48,999 47,041 - -------------------------------------------------------------------------------- Less accumulated depreciation and amortization (24,844) (22,241) - -------------------------------------------------------------------------------- Premises and equipment, net $ 24,155 $ 24,800 - -------------------------------------------------------------------------------- Depreciation and amortization of premises and equipment was $2,890,000, $2,737,000 and $2,289,000 in 2002, 2001, and 2000, respectively. 6. DEPOSIT LIABILITIES Time deposits of $100,000 or more at December 31, 2002 and 2001 were $108,237,000 and $84,932,000, respectively. Interest expense on time deposits of $100,000 or more was $3,894,000, $4,616,000, and $3,568,000 for 2002, 2001, and 2000, respectively. At December 31, 2002, the scheduled maturities of time deposits were as follows. - -------------------------------------------------------------------------------- (In thousands) Amount - -------------------------------------------------------------------------------- 2003 $ 261,220 2004 84,238 2005 49,283 2006 4,126 2007 6,571 Thereafter 7,595 - -------------------------------------------------------------------------------- Total $ 413,033 - -------------------------------------------------------------------------------- 7. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED FUNDS Securities sold under agreements to repurchase represent borrowings by the Company that generally mature one business day following the date of the transaction. Information pertaining to such borrowings is as follows. - -------------------------------------------------------------------------------- December 31, (Dollars in thousands) 2002 2001 - -------------------------------------------------------------------------------- Average balance during the year $ 92,919 $ 103,320 Average interest rate during the year 1.77% 3.80% Maximum month-end balance during the year $145,442 $ 152,870 - -------------------------------------------------------------------------------- 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) 2002 Rate 2001 Rate - -------------------------------------------------------------------------------- SHORT-TERM Securities sold under agreements to repurchase $115,979 1.17% $ 113,792 1.84% FHLB advances 8,400 1.57 12,000 3.68 Other 807 1.17 808 1.33 - -------------------------------------------------------------------------------- Total short-term $125,186 1.19% $ 126,600 2.00% - -------------------------------------------------------------------------------- LONG-TERM FHLB advances $ 57,100 3.69% $ 10,551 5.17% Other 52 4.12 362 4.12 - -------------------------------------------------------------------------------- Total long-term $ 57,152 3.69% $ 10,913 5.14% - -------------------------------------------------------------------------------- FHLB advances are made pursuant to several different credit programs, which have their own interest rates and range of maturities. Interest rates on FHLB advances are generally fixed and range between 2.01% and 5.22% over a maturity period of up to 16 years. Approximately $24.5 million of the total long-term advances from FHLB are convertible to a floating interest rate following initial fixed rate terms ranging from 1 to 2 years. Once the initial fixed rate term expires, the advances may convert to a floating interest rate indexed to LIBOR only if LIBOR equals or exceeds 7%. Maturities of long-term borrowings at December 31, 2002 are as follows. - -------------------------------------------------------------------------------- (In thousands) Amount - -------------------------------------------------------------------------------- 2003 $ 3,521 2004 8,866 2005 7,134 2006 11,542 2007 11,361 Thereafter 14,728 - -------------------------------------------------------------------------------- Total $ 57,152 - -------------------------------------------------------------------------------- 8. INCOME TAXES
The components of income tax expense are as follows. - ------------------------------------------------------------------------------------------------------------------------------------ December 31, (In thousands) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Currently payable $ 3,210 $ 5,369 $ 5,660 Deferred income tax expense (benefit) 561 132 (161) - ------------------------------------------------------------------------------------------------------------------------------------ Total applicable to operations 3,771 5,501 5,499 Charged to components of shareholders' equity: Net unrealized securities gains 1,258 373 1,286 - ------------------------------------------------------------------------------------------------------------------------------------ Total income taxes $ 5,029 $ 5,874 $ 6,785 - ------------------------------------------------------------------------------------------------------------------------------------
An analysis of the difference between the effective income tax rates and the statutory federal income tax rate follows.
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, (In thousands) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Federal statutory rate 35.0% 35.0% 35.0% Changes from statutory rates resulting from: Tax exempt interest (9.6) (7.3) (7.2) Nondeductible interest to carry municipal obligations .9 .9 .9 Amortization of intangibles .5 .8 Tax credits (3.8) (1.9) (1.7) Other, net .6 (.1) - ------------------------------------------------------------------------------------------------------------------------------------ Effective tax rate 23.1% 27.2% 27.7% - ------------------------------------------------------------------------------------------------------------------------------------
The tax effects of the significant temporary differences which comprise deferred tax assets and liabilities at December 31, 2002 and 2001 follows. - -------------------------------------------------------------------------------- December 31, (In thousands) 2002 2001 - -------------------------------------------------------------------------------- ASSETS Allowance for loan losses $ 3,871 $ 3,692 Investment securities 708 Deferred directors' fees 127 176 Postretirement benefit obligations 658 661 Stock options 1,218 1,300 Self-funded insurance 140 103 - -------------------------------------------------------------------------------- Total deferred tax assets 6,722 5,932 - -------------------------------------------------------------------------------- LIABILITIES Depreciation 1,340 1,316 Investment securities 468 Deferred loan fees 1,083 1,040 Lease financing operations 2,613 2,155 Other 181 145 - -------------------------------------------------------------------------------- Total deferred tax liabilities 5,217 5,124 - -------------------------------------------------------------------------------- Net deferred tax asset $ 1,505 $ 808 - -------------------------------------------------------------------------------- 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, 2002. 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. The money purchase part of the plan currently does not hold any Company shares. 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, 2002. The Company has also established a salary savings plan that 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 2002, 2001, and 2000 was $1,014,000, $764,000, and $915,000, respectively. 10. COMMON STOCK OPTIONS As described at Footnote 1 of the Company's audited consolidated financial statements, the Company recognizes noncash compensation expense attributed to its stock option plan in accordance with APB No. 25 and related interpretations. The amount of such expense recorded in 2002, 2001, and 2000 net of tax, was $358,000, $570,000, and $629,000, respectively. At December 31, 2002, the schedule of approximate future 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 - -------------------------------------------------------------------------------- 2003 $ 275 2004 141 - -------------------------------------------------------------------------------- Total $ 416 - -------------------------------------------------------------------------------- A summary of the status of the Company's stock option plan as of December 31, 2002, 2001, and 2000 and changes during the years ended on those dates is presented below.
- ---------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Shares Price Shares Price Shares Price - ---------------------------------------------------------------------------------------------------------- Outstanding at January 1 369,436 $ 25.19 409,843 $ 25.17 371,446 $ 24.50 Granted 54,000 29.75 Forfeited (13,267) 24.50 (13,715) 24.84 (3,429) 27.56 Exercised (77,733) 24.50 (26,692) 25.16 (12,174) 24.50 - ---------------------------------------------------------------------------------------------------------- Outstanding at December 31 278,436 $ 25.42 369,436 $ 25.19 409,843 $ 25.17 - ----------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Shares Price Shares Price Shares Price - ---------------------------------------------------------------------------------------------------------- Exercisable 190,531 $ 24.87 233,212 $ 24.63 175,572 $ 24.50 - ----------------------------------------------------------------------------------------------------------
The exercise price range of outstanding options at December 31, 2002 was $24.50 to $29.75 and the weighted average contractual life was 5.1 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 Company pays for the entire costs of these benefits. 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, 2002 and 2001. - -------------------------------------------------------------------------------- (In thousands) 2002 2001 - -------------------------------------------------------------------------------- RECONCILIATION OF BENEFIT OBLIGATION Obligation at beginning of year $ 2,419 $ 2,875 Service cost 2 2 Interest cost 175 209 Actuarial loss (gain) 686 (418) Benefit payments (236) (249) - -------------------------------------------------------------------------------- Obligation at end of year $ 3,046 $ 2,419 - -------------------------------------------------------------------------------- FUNDED STATUS Accumulated postretirement benefit obligation $(3,046) $ (2,419) Unrecognized transition obligation 1,015 1,116 Unrecognized prior service cost 255 297 Unrecognized gain (102) (840) - -------------------------------------------------------------------------------- Accrued postretirement benefit costs $(1,878) $ (1,846) - -------------------------------------------------------------------------------- The following table provides disclosure of the net periodic benefit cost as of December 31. - -------------------------------------------------------------------------------- (In thousands) 2002 2001 - -------------------------------------------------------------------------------- Service cost $ 2 $ 2 Interest cost 175 209 Amortization of transition obligation 101 101 Amortization of prior service cost 42 43 Amortization of net gain (52) (10) - -------------------------------------------------------------------------------- Net periodic benefit cost $ 268 $ 345 - -------------------------------------------------------------------------------- Major assumptions: Discount rate 6.50% 7.25% - -------------------------------------------------------------------------------- Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. For measurement purposes, an 8% annual rate of increase in the per capita cost of covered health care benefits was assumed beginning on January 1, 2003. The rate was assumed to decrease 1% each year until reaching 5% and remaining at 5% thereafter. A 1% change in the assumed health care cost trend rates would have the following incremental effects: - -------------------------------------------------------------------------------- (In thousands) 1% Increase 1% Decrease - -------------------------------------------------------------------------------- Effect on total of service and interest cost components of net periodic postretirement health care benefit cost $ 17 $ (14) - -------------------------------------------------------------------------------- 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 to the financial statements taken as a whole. 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 $119,192,000 and $105,595,000 at December 31, 2002 and 2001, respectively. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit, if deemed necessary by the Company, is based on management's credit evaluation of the counter party. 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 $5,638,000 and $4,875,000 in irrevocable letters of credit outstanding at December 31, 2002 and 2001, 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, 2002, 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, 2002, combined retained earnings of the subsidiary banks were approximately $65,492,000 of which $13,838,000 was available for the payment of dividends in 2003 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 $12,171,000 and $12,065,000 at December 31, 2002 and 2001, 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, 2002. As of December 31, 2002, 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, 2002 (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------------------------ TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS) Consolidated $ 122,212 14.83% $ 32,953 4.00% $ 49,430 6.00% Farmers Bank & Capital Trust Co. 51,011 15.21 13,419 4.00 20,128 6.00 Farmers Bank and Trust Company 16,361 12.30 5,322 4.00 7,983 6.00 Lawrenceburg National Bank 11,421 12.76 3,581 4.00 5,372 6.00 First Citizens Bank 12,745 12.44 4,100 4.00 6,149 6.00 United Bank & Trust Co. 12,419 12.63 3,933 4.00 5,900 6.00 Kentucky Banking Centers, Inc. 8,143 10.58 3,079 4.00 4,619 6.00 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS) Consolidated $ 132,531 16.09% $ 65,907 8.00% $ 82,383 10.00% Farmers Bank & Capital Trust Co. 54,894 16.36 26,837 8.00 33,547 10.00 Farmers Bank and Trust Company 18,026 13.55 10,644 8.00 13,306 10.00 Lawrenceburg National Bank 12,543 14.01 7,162 8.00 8,953 10.00 First Citizens Bank 14,028 13.69 8,199 8.00 10,249 10.00 United Bank & Trust Co. 13,651 13.88 7,866 8.00 9,833 10.00 Kentucky Banking Centers, Inc. 9,107 11.83 6,159 8.00 7,698 10.00 - ------------------------------------------------------------------------------------------------------------------------------------ TIER 1 CAPITAL (TO AVERAGE ASSETS) Consolidated $ 122,212 10.13% $ 48,254 4.00% $ 60,318 5.00% Farmers Bank & Capital Trust Co. 51,011 9.21 22,162 4.00 27,703 5.00 Farmers Bank and Trust Company 16,361 8.75 7,482 4.00 9,353 5.00 Lawrenceburg National Bank 11,421 8.71 5,247 4.00 6,558 5.00 First Citizens Bank 12,745 8.61 5,920 4.00 7,401 5.00 United Bank & Trust Co. 12,419 8.57 5,794 4.00 7,243 5.00 Kentucky Banking Centers, Inc. 8,143 8.21 3,967 4.00 4,959 5.00 - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------------
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 that 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, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) Carrying Amount Fair Value Carrying Amount Fair Value - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and cash equivalents $ 67,101 $ 67,101 $ 106,385 $ 106,385 Investments securities: Available for sale 413,038 413,038 308,081 308,081 Held to maturity 28,519 30,312 37,461 38,505 Loans, net 727,578 732,656 691,320 697,191 Accrued interest receivable 7,173 7,173 8,140 8,140 LIABILITIES Deposits 957,480 963,201 913,485 921,963 Securities sold under agreements to repurchase and other borrowed funds 182,338 191,562 137,513 137,357 Accrued interest payable 1,853 1,853 2,252 2,252 - ------------------------------------------------------------------------------------------------------------------------------------
18. PARENT COMPANY FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS - -------------------------------------------------------------------------------- December 31, (In thousands) 2002 2001 - -------------------------------------------------------------------------------- ASSETS Cash on deposit with subsidiaries $ 9,691 $ 14,397 Investment securities available for sale 702 1,080 Investment in subsidiaries 116,005 109,343 Other assets 3,252 2,381 - -------------------------------------------------------------------------------- Total assets $ 129,650 $ 127,201 - -------------------------------------------------------------------------------- LIABILITIES Dividends payable $ 2,191 $ 2,152 Other liabilities 1,686 1,489 - -------------------------------------------------------------------------------- Total liabilities 3,877 3,641 - -------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Common stock 1,017 1,007 Capital surplus 17,623 15,179 Retained earnings 141,199 137,227 Treasury stock (37,627) (31,077) Accumulated other comprehensive income 3,561 1,224 - -------------------------------------------------------------------------------- Total shareholders' equity 125,773 123,560 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 129,650 $ 127,201 - --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME - -------------------------------------------------------------------------------------------------------------------- Years Ended December 31, (In thousands) 2002 2001 2000 - -------------------------------------------------------------------------------------------------------------------- INCOME Dividends from subsidiaries $ 9,585 $ 7,058 $ 14,363 Interest income 95 120 91 Other dividend income 24 49 86 Investment securities gains, net 110 449 Other income 1,078 1,027 954 - -------------------------------------------------------------------------------------------------------------------- Total income 10,892 8,703 15,494 - -------------------------------------------------------------------------------------------------------------------- EXPENSE Other expense 2,393 2,484 2,503 - -------------------------------------------------------------------------------------------------------------------- Total expense 2,393 2,484 2,503 - -------------------------------------------------------------------------------------------------------------------- Income before income tax benefit and equity in undistributed income of subsidiaries 8,499 6,219 12,991 Income tax benefit 318 285 503 - -------------------------------------------------------------------------------------------------------------------- Income before equity in undistributed income of subsidiaries 8,817 6,504 13,494 - -------------------------------------------------------------------------------------------------------------------- Equity in undistributed income of subsidiaries 3,744 8,167 886 - -------------------------------------------------------------------------------------------------------------------- Net income $ 12,561 $ 14,671 $ 14,380 - --------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------------------------------------------- Years Ended December 31, (In thousands) 2002 2001 2000 - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 12,561 $ 14,671 $ 14,380 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries (3,744) (8,167) (886) Noncash compensation expense 27 213 293 Gain on sale of available for sale investment securitites (110) (449) Change in other assets and liabilities, net (848) (65) (1,270) Deferred income tax expense (benefit) 205 (51) (78) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 8,091 6,152 12,439 - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of available for sale investment securities 399 1,986 Purchases of investment securities available for sale (2,502) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 399 1,986 (2,502) - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (8,550) (8,468) (8,539) Purchase of common stock (6,550) (10,322) (9,257) Stock options exercised 1,904 663 299 - -------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (13,196) (18,127) (17,497) - -------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (4,706) (9,989) (7,560) - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 14,397 24,386 31,946 - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 9,691 $ 14,397 $ 24,386 - -------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES Cash paid during the year for income taxes $ 4,940 $ 5,350 $ 5,450 Cash dividend declared and unpaid 2,191 2,152 2,155 - --------------------------------------------------------------------------------------------------------------------
19. QUARTERLY FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------------ Unaudited (In thousands, except per share data) Quarters Ended 2002 March 31 June 30 Sept. 30 Dec. 31 - ------------------------------------------------------------------------------------------------------------------------------------ Interest income $ 16,948 $ 16,555 $ 16,642 $ 16,146 Interest expense 6,793 6,619 6,372 5,962 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 10,155 9,936 10,270 10,184 - ------------------------------------------------------------------------------------------------------------------------------------ Provision for loan losses 121 988 869 2,770 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 10,034 8,948 9,401 7,414 - ------------------------------------------------------------------------------------------------------------------------------------ Other income 4,121 4,141 4,341 4,033 Other expense 9,037 8,691 9,043 9,330 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 5,118 4,398 4,699 2,117 - ------------------------------------------------------------------------------------------------------------------------------------ Income tax expense 1,336 1,082 1,173 180 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 3,782 $ 3,316 $ 3,526 $ 1,937 - ------------------------------------------------------------------------------------------------------------------------------------ Net income per common share, basic $ 0.55 $ 0.48 $ 0.51 $ 0.29 Net income per common share, diluted 0.54 0.48 0.51 0.29 - ------------------------------------------------------------------------------------------------------------------------------------ Weighted average shares outstanding, basic 6,901 6,889 6,850 6,839 Weighted average shares outstanding, diluted 6,961 6,941 6,898 6,884 - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ 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 3,572 3,933 3,452 4,092 Other expense 8,548 8,334 9,083 9,146 - ------------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------------
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) 227-1668 www.farmerscapital.com ANNUAL MEETING The annual meeting of shareholders of Farmers Capital Bank Corporation will be held Tuesday, May 13, 2003 at 11:00 a.m. at the main office of Farmers Bank & Capital Trust Co., Frankfort, Kentucky. FORM 10-K For a free 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, and Chief Financial Officer Farmers Capital Bank Corporation P.O. Box 309 Frankfort, Kentucky 40602-0309 Phone: (502) 227-1668 WEB SITE ACCESS TO FILINGS All reports filed electronically by the Company to the United States Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are available at no cost on the Company's Web site at www.farmerscapital.com. 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 Trident Securities, Inc. (800) 340-6355 J.J.B. Hilliard, W.L. Lyons, Inc. (502) 588-8400 (800) 444-1854 Knight Securities LP (888) 302-9197 Morgan, Keegan and Company (800) 260-0280 The Transfer Agent and Registrar for Farmers Capital Bank Corporation is the Farmers Bank & Capital Trust Co., Frankfort, Kentucky. -----END PRIVACY-ENHANCED MESSAGE-----