-----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, Wx63vHwPFjnrsJFvw1SuTy20wCopgxouFHIPpMSA6oBsE+i29CceWBYRqHuwOt5m K8+0PIryH2U6AqAYokLfGQ== 0000713095-03-000009.txt : 20030514 0000713095-03-000009.hdr.sgml : 20030514 20030514124253 ACCESSION NUMBER: 0000713095-03-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARMERS CAPITAL BANK CORP CENTRAL INDEX KEY: 0000713095 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 611017851 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14412 FILM NUMBER: 03697824 BUSINESS ADDRESS: STREET 1: PO BOX 309 STREET 2: 202 W MAIN ST CITY: FRANKFORT STATE: KY ZIP: 40602 BUSINESS PHONE: 5022271668 MAIL ADDRESS: STREET 1: P O BOX 309 STREET 2: 202 WEST MAIN STREET CITY: FRANKFORT STATE: KY ZIP: 40602 10-Q 1 a10q033103.txt FORM 10-Q 3-31-03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ----------- ----------- Commission File Number 0-14412 FARMERS CAPITAL BANK CORPORATION (Exact name of registrant as specified in its charter) KENTUCKY 61-1017851 - ---------------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) P.O. BOX 309, 202 WEST MAIN STREET FRANKFORT, KENTUCKY 40602 - ---------------------------------------- --------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (502) 227-1600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, par value $.125 per share 6,722,551 shares outstanding at May 12, 2003 TABLE OF CONTENTS Part I - Financial Information Page No. Item 1 - Financial Statements Unaudited Consolidated Balance Sheets - March 31, 2003 and December 31, 2002 3 Unaudited Consolidated Statements of Income - For the Three Months Ended March 31, 2003 and March 31, 2002 4 Unaudited Consolidated Statements of Comprehensive Income - For the Three Months Ended March 31, 2003 and March 31, 2002 5 Unaudited Consolidated Statements of Cash Flows - For the Three Months Ended March 31, 2003 and March 31, 2002 6 Unaudited Consolidated Statements of Changes in Shareholders' Equity - For the Three Months Ended March 31, 2003 and March 31, 2002 7 Notes to Unaudited Consolidated Financial Statements 8 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 17 Item 4 - Controls and Procedures 18 Part II - Other Information Item 1 - Legal Proceedings 18 Item 6 - Exhibits and Reports on Form 8-K 19 Signatures 20 Certification of Chief Executive Officer 21 Certification of Chief Financial Officer 22 PART I - FINANCIAL INFORMATION Item 1. Financial Statements
UNAUDITED CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------------------------------------------------- March 31, December 31, (In thousands, except share data) 2003 2002 - --------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents: Cash and due from banks $ 67,021 $ 44,083 Interest bearing deposits in other banks 3,500 3,947 Federal funds sold and securities purchased under agreements to resell 27,286 19,071 - --------------------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 97,807 67,101 - --------------------------------------------------------------------------------------------------------------------------- Investment securities: Available for sale, amortized cost of $293,650 (2003) and $407,560 (2002) 297,814 413,038 Held to maturity, fair value of $29,068 (2003) and $30,312 (2002) 27,333 28,519 - --------------------------------------------------------------------------------------------------------------------------- Total investment securities 325,147 441,557 - --------------------------------------------------------------------------------------------------------------------------- Loans, net of unearned income 738,244 738,639 Allowance for loan losses (11,129) (11,061) - --------------------------------------------------------------------------------------------------------------------------- Loans, net 727,115 727,578 - --------------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 24,198 24,155 Company-owned life insurance 24,214 Other assets 17,923 15,211 - --------------------------------------------------------------------------------------------------------------------------- Total assets $ 1,216,404 $ 1,275,602 - --------------------------------------------------------------------------------------------------------------------------- LIABILITIES Deposits: Noninterest bearing $ 164,776 $ 141,238 Interest bearing 795,468 816,242 - --------------------------------------------------------------------------------------------------------------------------- Total deposits 960,244 957,480 - --------------------------------------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 54,839 115,979 Other short-term borrowings 8,641 9,207 Long-term debt 58,170 57,152 Dividends payable 2,158 2,191 Other liabilities 7,932 7,820 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,091,984 1,149,829 - --------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies SHAREHOLDERS' EQUITY Common stock, par value $.125 per share 9,608,000 shares authorized; 8,138,877 and 8,135,977 shares issued at March 31, 2003 and December 31, 2002, respectively 1,017 1,017 Capital surplus 17,801 17,623 Retained earnings 142,634 141,199 Treasury stock, at cost 1,411,838 and 1,344,463 shares at March 31, 2003 and December 31, 2002, respectively (39,739) (37,627) - --------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 124,420 125,773 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,216,404 $ 1,275,602 - --------------------------------------------------------------------------------------------------------------------------- See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME - -------------------------------------------------------------------------------- (In thousands, except per share data) Three months ended March 31, 2003 2002 - -------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $ 12,229 $ 13,064 Interest on investment securities: Taxable 2,299 2,742 Nontaxable 803 911 Interest on deposits in other banks 15 20 Interest of federal funds sold and securities purchased under agreements to resell 162 211 - -------------------------------------------------------------------------------- Total interest income 15,508 16,948 - -------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits 4,647 5,981 Interest on federal funds purchased and securities sold under agreements to repurchase 259 473 Interest on other borrowed funds 550 339 - -------------------------------------------------------------------------------- Total interest expense 5,456 6,793 - -------------------------------------------------------------------------------- Net interest income 10,052 10,155 - -------------------------------------------------------------------------------- Provision for loan losses 385 121 - -------------------------------------------------------------------------------- Net interest income after provision for loan losses 9,667 10,034 - -------------------------------------------------------------------------------- NONINTEREST INCOME Service charges and fees on deposits 1,835 1,819 Other service charges, commissions, and fees 840 821 Data processing income 345 336 Trust income 399 367 Investment securities gains, net 147 597 Gain on sale of mortgage loans, net 269 129 Income from company-owned life insurance 265 Other 66 52 - -------------------------------------------------------------------------------- Total noninterest income 4,166 4,121 - -------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries and employee benefits 5,068 5,150 Occupancy expenses, net 658 571 Equipment expenses 937 926 Bank franchise tax 334 307 Other 2,142 2,083 - -------------------------------------------------------------------------------- Total noninterest expense 9,139 9,037 - -------------------------------------------------------------------------------- Income before income taxes 4,694 5,118 - -------------------------------------------------------------------------------- Income tax expense 1,101 1,336 - -------------------------------------------------------------------------------- Net income $ 3,593 $ 3,782 - -------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE Basic $ .53 $ .55 Diluted .53 .54 - -------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING Basic 6,764 6,901 Diluted 6,798 6,961 - -------------------------------------------------------------------------------- See accompanying notes to unaudited consolidated financial statements. UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - -------------------------------------------------------------------------------- Three months ended March 31, (In thousands) 2003 2002 - -------------------------------------------------------------------------------- NET INCOME $ 3,593 $ 3,782 Other comprehensive loss: Unrealized loss on available for sale securities arising during the period, net of tax of $(398) and $(415), respectively (740) (770) Reclassification adjustment for prior period unrealized gain recognized during current period, net of tax of $(61) and $(218), respectively (114) (404) - -------------------------------------------------------------------------------- Other comprehensive loss (854) (1,174) - -------------------------------------------------------------------------------- COMPREHENSIVE INCOME $ 2,739 $ 2,608 - -------------------------------------------------------------------------------- See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------------------------------ Three months ended March 31, (In thousands) 2003 2002 - ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,593 $ 3,782 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 741 729 Net amortization of investment security premiums and (discounts): Available for sale 453 142 Held to maturity (18) (16) Provision for loan losses 385 121 Noncash compensation expense 107 166 Mortgage loans originated for sale (15,555) (8,666) Proceeds from sale of mortgage loans 13,563 7,591 Deferred income tax expense (benefit) 86 (256) Gain on sale of mortgage loans, net (269) (129) Gain on sale of premises and equipment (2) Gain on sale of available for sale investment securities, net (147) (597) Decrease in accrued interest receivable 234 597 (Increase) decrease in other assets (3,211) 708 Decrease in accrued interest payable (186) (66) Increase in other liabilities 672 1,357 - ------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 446 5,463 - ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities and calls of investment securities: Available for sale 134,522 156,811 Held to maturity 1,204 2,873 Proceeds from sale of available for sale investment securities 74,137 100,438 Purchase of available for sale investment securities (95,055) (263,373) Loans originated for investment, net of principal collected 2,339 15,937 Purchase of company-owned life insurance (23,949) Purchase of premises and equipment (785) (391) Proceeds from sale of equipment 3 - ------------------------------------------------------------------------------------------------------ Net cash provided by investing activities 92,416 12,295 - ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits 2,764 (5,910) Net decrease in federal funds purchased and securities sold under agreements to repurchase (61,140) (4,358) Proceeds from long-term debt 1,683 14,500 Repayments of long-term debt (665) (636) Net (decrease) increase in other short-term borrowings (566) 6,700 Dividends paid (2,191) (2,152) Purchase of common stock (2,112) (891) Stock options exercised 71 392 - ------------------------------------------------------------------------------------------------------ Net cash (used in) provided by financing activities (62,156) 7,645 - ------------------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents 30,706 25,403 - ------------------------------------------------------------------------------------------------------ Cash and cash equivalents at beginning of year 67,101 106,385 - ------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 97,807 $ 131,788 - ------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURES Cash paid during the period for: Interest $ 5,642 $ 6,859 Cash dividend declared and unpaid 2,158 2,138 - ------------------------------------------------------------------------------------------------------ See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands, except per share data) Accumulated Other Total Three months ended Common Stock Capital Retained Treasury Stock Comprehensive Shareholders' March 31, 2003 and 2002 Shares Amount Surplus Earnings Shares Amount Income Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 2003 8,136 $1,017 $17,623 $141,199 1,344 $(37,627) $3,561 $125,773 Net income 3,593 3,593 Other comprehensive loss (854) (854) Cash dividends declared, $.32 per share (2,158) (2,158) Purchase of common stock 68 (2,112) (2,112) Stock options exercised 3 71 71 Noncash compensation expense attributed to stock option grants 107 107 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at March 31, 2003 8,139 $1,017 $17,801 $142,634 1,412 $(39,739) $2,707 $124,420 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 2002 8,058 $1,007 $15,179 $137,227 1,153 $(31,077) $1,224 $123,560 Net income 3,782 3,782 Other comprehensive loss (1,174) (1,174) Cash dividends declared, $.31 per share (2,138) (2,138) Purchase of common stock 25 (891) (891) Stock options exercised 16 2 390 392 Noncash compensation expense attributed to stock option grants 166 166 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at March 31, 2002 8,074 $1,009 $15,735 $138,871 1,178 $(31,968) $ 50 $123,697 - ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to unaudited consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Farmers Capital Bank Corporation (the "Company"), a financial holding company, and its subsidiaries, including its principal subsidiary, Farmers Bank & Capital Trust Company. All significant intercompany transactions and accounts have been eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates used in the preparation of the financial statements are based on various factors including the current interest rate environment and the general strength of the local economy. Changes in the overall interest rate environment can significantly affect the Company's net interest income and the value of its recorded assets and liabilities. Actual results could differ from those estimates used in the preparation of the financial statements. The financial information presented as of any date other than December 31 has been prepared from the books and records without audit. The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. 2. RECLASSIFICATIONS Certain reclassifications have been made to the consolidated financial statements of prior periods to conform to the current period presentation. These reclassifications do not affect net income or total shareholders' equity as previously reported. 3. COMPANY-OWNED LIFE INSURANCE The Company has purchased life insurance policies on certain key employees with their knowledge and consent. Company-owned life insurance is recorded at its cash surrender value, or the amount that can be realized, on the consolidated balance sheet. The related change in cash surrender value and proceeds received under the policies are reported on the consolidated statement of income under the caption "Income from company-owned life insurance". 4. 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 March 31, 2003 and 2002. -------------------------------------------------------------- (In thousands, except per share data) Three months ended March 31, 2003 2002 -------------------------------------------------------------- Net income, basic and diluted $ 3,593 $ 3,782 -------------------------------------------------------------- Average shares outstanding 6,764 6,901 Effect of dilutive stock options 34 60 -------------------------------------------------------------- Average diluted shares outstanding 6,798 6,961 -------------------------------------------------------------- Net income per share, basic $ .53 $ .55 Net income per share, diluted .53 .54 -------------------------------------------------------------- 5. 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 the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, as amended by SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE, 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) Three months ended March 31, 2003 2002 --------------------------------------------------------------------------- NET INCOME As reported $ 3,593 $ 3,782 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 70 108 Less: Stock-based compensation expense determined under fair value based method for all awards, net of related tax effects (85) (126) --------------------------------------------------------------------------- Proforma $ 3,578 $ 3,764 --------------------------------------------------------------------------- NET INCOME PER COMMON SHARE Basic, as reported $ .53 $ .55 Basic, proforma .53 .55 Diluted, as reported .53 .54 Diluted, proforma .53 .54 --------------------------------------------------------------------------- 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. Item 2. Management's Discussion and Analysis of Financial Condition and Result - ------------------------------------------------------------------------------- of Operations - ------------- FORWARD-LOOKING STATEMENTS This report contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which the Company and its subsidiaries operate); competition for the Company's customers from other providers of financial services; government legislation and regulation (which changes from time to time and over which the Company has no control); changes in interest rates; material unforeseen changes in the liquidity, results of operations, or financial condition of the Company's customers; and other risks detailed in the Company's filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company. RESULTS OF OPERATIONS FIRST QUARTER 2003 VS. FIRST QUARTER 2002 ----------------------------------------- The Company reported net income of $3.6 million for the first quarter of 2003, a decrease of $189 thousand or 5.0% compared to $3.8 million for the same period in 2002. Basic net income per share was $.53 for the current quarter, a decrease of $.02 or 3.6% compared to $.55 a year earlier. On a diluted per share basis, net income decreased $.01 or 1.9% to $.53 in the quarterly comparison. The 3.6% decrease in basic net income per share is 140 basis points better than the 5.0% decrease reported in dollar terms due to the effect of fewer common shares outstanding pursuant to the Company's stock purchase program. The decrease in net income is primarily attributed to a $450 thousand or 75.4% decrease in gains on the sale of available for sale securities included in noninterest income. Other factors contributing to the decrease in net income include the following: a $103 thousand or 1.0% decrease in net interest income to $10.1 million; a $264 thousand or 218.2% increase in the provision for loan losses to $385 thousand; and a $102 thousand or 1.1% increase in noninterest expenses to $9.1 million. Results that had a positive effect on net income include the following: an increase in noninterest income (excluding securities gains) of $495 thousand or 14.0% to $4.0 million; and a reduction in income tax expense of $235 thousand or 17.6% to $1.1 million. The return on average assets ("ROA") was 1.17% for the first quarter of 2003, a decrease of 11 basis points compared to 1.28% reported for the same period of 2002. Significant components of the 11 basis point decrease in ROA include the following: a decrease in net interest margin of 28 basis points to 3.71%; an increase in the earning asset ratio contributing 9 basis points; an increase of 9 basis points in the provision for loan losses relative to average assets; a decrease of 8 basis points in noninterest expense relative to average assets; a 3 basis point decrease in noninterest income relative to average assets; and a 12 basis point decrease in income taxes relative to average earning assets. The return on average equity was 11.66% for the first quarter of 2003, compared to 12.35% for the same period of 2002. The decrease is due to lower net income reported in the current period coupled with a slight increase in average equity compared to the same period a year ago. NET INTEREST INCOME - ------------------- Although continuing weaknesses in the overall economic environment are present, the current interest rate environment is less volatile compared to a year ago when short-term interest rates began to stabilize. Actions taken by the Federal Reserve Board (the "Fed") have resulted in a general reduction in short-term interest rates since the first quarter of 2002 and have now leveled off to historic lows. Fed changes to short-term interest rates, left unchanged since December 2001, were reduced by an additional 50 basis points in November 2002 with a 50 basis points reduction in the federal funds rate. The effects of prior rate reductions by the Fed along with intense competition in the Company's market areas continue to negatively impact net interest margin. The effect of the Fed's actions on the Company has generally led to interest rates on earning assets declining more rapidly than rates paid on interest bearing liabilities. During a falling rate environment, the challenge is to reduce the rates paid on interest bearing liabilities (primarily deposits) to offset the decline in the yield on variable rate assets (primarily loans) while remaining competitive in our markets. The Company's tax equivalent ("TE") yield on earning assets for the current three months was 5.64%, a reduction of 88 basis points from 6.52% in the same period a year ago. The cost of funds for the current three months was 2.31%, a decline of 67 basis points compared to 2.98% in the same period a year earlier. A goal of the Company in the current interest rate environment is to increase earning assets and decrease the interest rates paid on interest bearing liabilities. Average earning assets increased $60.8 million or 5.6% to $1.1 billion in the quarterly comparison. As a percentage of total average assets, earning assets increased 160 basis points to 92.35% from 90.75%. This increase had the effect of adding an additional 9 basis points to ROA in the comparison. Interest income totaled $15.5 million for the first quarter of 2003, a decrease of $1.4 million or 8.5% compared to the same period in the prior year. Interest expense totaled $5.5 million, a decrease of $1.3 million or 19.7%. Net interest income fell $103 thousand or 1.0% in the comparison and totaled $10.1 million at March 31, 2003. Interest and fees on loans totaled $12.2 million, a decrease of $835 thousand mainly due to a decrease in the average rate earned. Average loans increased $46.9 million or 6.8% to $736.0 million in the comparison due to higher loan demand in a lower rate environment. The tax equivalent yield on loans decreased 96 basis points to 6.80% from 7.76% and offset the effects of higher average balances on interest income. Interest on taxable securities was $2.3 million, a decrease of $443 thousand or 16.2% due primarily to a decrease in the average rate earned. The average rate earned on taxable securities decreased 96 basis points to 3.30% from 4.26% and offset the effect of a $21.8 million or 8.4% increase in the average balance. Interest on nontaxable securities declined $108 thousand or 11.9% due to a $9.8 million decrease in the average balance to $71.6 million from $81.4 million. Interest on short-term investments, including time deposits in other banks, federal funds sold, and securities purchased under agreements to resell, decreased $54 thousand, which is due primarily to a decrease in the average rate earned on these investments of 42 basis points to 1.22% from 1.64%. Interest expense on deposits decreased $1.3 million or 22.3% to $4.6 million in the quarterly comparison. This decrease resulted from a general decline in the average rate paid throughout the deposit portfolio and correlates with the general decline in market interest rates in the reporting periods. The decline in the average rates paid offset increases in average balances. The decline in interest expense on deposits was as follows: time deposits $969 thousand or 20.5%; interest bearing demand deposits $205 thousand or 36.7%; and savings deposits $160 thousand or 26.1%. The average rate paid on time deposits, the largest component of interest bearing deposits, was 3.73% for the first quarter of 2003 compared to 4.88% for the same period of 2002. The average balance of time deposits increased $17.6 million or 4.4% to $417.6 million. The average rate paid on interest bearing demand deposits declined 41 basis points to .64% from 1.05% while the average balance increased $6.5 million or 3.0% to $222.9 million. The average rate paid on savings deposits decreased 45 basis points to 1.08% from 1.53% while the average balance increased $7.5 million or 4.6% to $170.2 million from $162.7 million. Interest expense on overnight borrowings, consisting of federal funds purchased and securities sold under agreements to repurchase, decreased $214 thousand due to a 47 basis point decline in the average rate paid along with a $27.7 million decline in their average balance. Interest expense on other borrowed funds increased $211 thousand in the comparison as additional borrowings from the Federal Home Loan Bank increased the average balance outstanding. The average balance of other borrowed funds totaled $65.6 million, an increase of $30.3 million or 85.9% in the comparison. The average rate paid on other borrowed funds declined 50 basis points to 3.40% from 3.90%. The net interest margin (TE) decreased 28 basis points to 3.71% during the first quarter of 2003 compared to 3.99% in the first quarter of 2002. The decrease in net interest margin is primarily attributed to a 21 basis point decline in the spread between rates earned on earning assets and the rates paid on interest bearing liabilities to 3.33% in the current quarter from 3.54% in the first quarter of 2002. The effect of noninterest bearing sources of funds contributed an additional 7 basis points to the decline in net interest margin. The effect of noninterest bearing sources of funds on net interest margin typically declines in a falling rate environment. The following tables present an analysis of net interest income for the quarterly periods ended March 31.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL - ---------------------------------------------------------------------------------------------------------------------------------- Three months ended March 31, 2003 2002 - ---------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average (In thousands) Balance Interest Rate Balance Interest Rate - ---------------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Investment securities Taxable $ 282,563 $ 2,299 3.30% $ 260,761 $ 2,742 4.26% Nontaxable1 71,648 1,181 6.68 81,404 1,327 6.61 Time deposits with banks, federal funds sold and securities purchased under 59,027 177 1.22 57,175 231 1.64 agreements to resell Loans1,2,3 736,039 12,339 6.80 689,158 13,193 7.76 - ---------------------------------------------------------------------------------------------------------------------------------- Total earning assets 1,149,277 $ 15,996 5.64% 1,088,498 $17,493 6.52% - ---------------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses (11,279) (10,559) - ---------------------------------------------------------------------------------------------------------------------------------- Total earning assets, net of allowance for loan losses 1,137,998 1,077,939 - ---------------------------------------------------------------------------------------------------------------------------------- NONEARNING ASSETS Cash and due from banks 64,383 85,507 Premises and equipment, net 24,045 24,693 Other assets 18,109 13,336 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $ 1,244,535 $ 1,201,475 - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST BEARING LIABILITIES Deposits Interest bearing demand $ 222,879 $ 354 0.64% $ 216,414 $ 559 1.05% Savings 170,183 453 1.08 162,732 613 1.53 Time 417,581 3,840 3.73 400,007 4,809 4.88 Federal funds purchased and securities sold under agreements to repurchase 80,828 259 1.30 108,534 473 1.77 Other borrowed funds 65,609 550 3.40 35,286 339 3.90 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 957,080 $ 5,456 2.31% 922,973 $ 6,793 2.98% - ---------------------------------------------------------------------------------------------------------------------------------- NONINTEREST BEARING LIABILITIES Commonwealth of Kentucky deposits 32,918 30,365 Other demand deposits 121,013 115,406 Other liabilities 8,535 8,564 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,119,546 1,077,308 - ---------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity 124,989 124,167 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,244,535 $ 1,201,475 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income 10,540 10,700 TE basis adjustment (488) (545) - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income $10,052 $10,155 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest spread 3.33% 3.54% Impact of noninterest bearing sources of funds .38 .45 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest margin 3.71% 3.99% - ---------------------------------------------------------------------------------------------------------------------------------- 1Income and yield stated at a fully tax equivalent basis using the marginal corporate Federal tax rate of 35%. 2Loan balances include principal balances on nonaccrual loans. 3Loan fees included in interest income amounted to $521 thousand and $430 thousand in 2003 and 2002, respectively.
ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX EQUIVALENT BASIS) - ----------------------------------------------------------------------------------------------------------- (In thousands) Variance Variance Attributed to Three months ended March 31, 2003/20021 Volume Rate - ----------------------------------------------------------------------------------------------------------- INTEREST INCOME Taxable investment securities $ (443) $ 1,235 $ (1,678) Nontaxable investment securities2 (146) (239) 93 Time deposits with banks, federal funds sold and securities purchased under agreements to resell (54) 47 (101) Loans2 (854) 4,392 (5,246) - ----------------------------------------------------------------------------------------------------------- Total interest income (1,497) 5,435 (6,932) - ----------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest bearing demand deposits (205) 112 (317) Savings deposits (160) 176 (336) Time deposits (969) 1,294 (2,263) Federal funds purchased and securities sold under agreements to repurchase (214) (105) (109) Other borrowed funds 211 490 (279) - ----------------------------------------------------------------------------------------------------------- Total interest expense (1,337) 1,967 (3,304) - ----------------------------------------------------------------------------------------------------------- Net interest income $ (160) $ 3,468 $ (3,628) - ----------------------------------------------------------------------------------------------------------- Percentage change 100.0% (2,167.5)% 2,267.5% - ----------------------------------------------------------------------------------------------------------- 1The changes that are not solely due to rate or volume are allocated on a percentage basis using the absolute values of rate and volume variances as a basis for allocation. 2Income stated at fully tax equivalent basis using the marginal corporate Federal tax rate of 35%.
NONINTEREST INCOME - ------------------ Noninterest income was $4.2 million for the current quarter, an increase of $45 thousand or 1.1% compared to the first quarter of the prior year. Service charges and fees on deposits, the largest component of noninterest income, remained relatively flat at $1.8 million. Other service charges, commissions, and fees increased $19 thousand or 2.3%. Data processing fees were $345 thousand, an increase of 2.7% from $336 thousand in the prior year. Trust income totaled $399 thousand, an increase of $32 thousand or 8.7%. Net gains on the sale of available for sale securities for the current quarter were $147 thousand compared to $597 thousand in the prior year as the Company continually seeks to properly manage its balance sheet composition. Net gains on the sale of mortgage loans were $269 thousand, an increase of $140 thousand from $129 thousand in the prior year as mortgage loans originated for sale increased $6.9 million in the comparison due to the low interest rate environment. Income from a new company-owned life insurance program initiated near the end of the current quarter was $265 thousand. Other noninterest income totaled $66 thousand, an increase of $14 thousand. NONINTEREST EXPENSE - ------------------- Total noninterest expenses increased $102 thousand or 1.1% from the first quarter of 2002 and totaled $9.1 million. Salaries and employee benefits accounts for more than half of the total of noninterest expense. Salaries and benefits decreased $82 thousand or 1.6% to $5.1 million in the quarterly comparison. Employee benefit related expenses decreased $100 thousand primarily due to lower health insurance costs. Noncash compensation expense related to the Company's nonqualified stock option plan declined $63 thousand due to the structure of the vesting schedule and forfeitures. Salaries and related payroll taxes increased $81 thousand or 2.0% to $4.1 million mainly due to normal salary increases. The number of full time equivalent employees decreased to 456 from 460 reported in the prior period. Occupancy expense, net of rental income, increased $87 thousand or 15.2% and totaled $658 thousand. The increase in net occupancy expense is attributed to increases in maintenance and repairs, utilities costs, and real estate taxes. Equipment expense was relatively unchanged at $937 thousand. Other noninterest expense, including bank franchise taxes, increased $86 thousand or 3.6% to $2.5 million. INCOME TAXES - ------------ Income tax expense for the first quarter of 2003 was $1.1 million, a decrease of $235 thousand or 17.6% from the same period a year earlier. The effective tax rate decreased 264 basis points to 23.46% from 26.10% in 2002. The change in the effective tax rate is due to a combination of factors, primarily including credits derived from qualified zone academy bonds and nontaxable income accrued from the increase in cash surrender value on life insurance purchased on key employees. FINANCIAL CONDITION Total assets were $1.2 billion on March 31, 2003, a decrease of $59.2 million or 4.6% from December 31, 2002. The decrease in assets include a $116.4 million lower balance in the securities portfolio, offset by a $30.7 million increase in cash and cash equivalents and a $26.9 million increase in other assets resulting primarily from the implementation of a company-owned life insurance program in the current quarter. Fed funds purchased and securities sold under agreements to repurchase declined $61.1 million and correspond to the decline in assets during the period. 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 systems. 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 the first three months of 2003, an increase of $38.2 million or 3.1% from year-end 2002. Average earning assets, primarily loans and securities, were $1.1 billion at March 31, 2003, an increase of $60.8 million or 5.6% from year-end 2002. Average earning assets represent 92.35% of total average assets on March 31, 2003, an increase of 160 basis points compared to 90.75% at year-end 2002. LOANS - ----- Loans, net of unearned income, totaled $738.2 million at March 31, 2003, a decrease of $395 thousand or 0.1% from year-end 2002. The composition of the loan portfolio is summarized in the table below. - ------------------------------------------------------------------------------- March 31, 2003 December 31, 2002 (Dollars in thousands) Amount % Amount % - ------------------------------------------------------------------------------- Commercial, financial, and agriculture $ 114,306 15.5% $ 110,056 14.9% Real estate - construction 53,120 7.2 55,896 7.6 Real estate - mortgage 461,202 62.5 459,620 62.2 Installment 73,694 10.0 76,162 10.3 Lease financing 35,922 4.8 36,905 5.0 - ------------------------------------------------------------------------------- Total $ 738,244 100.0% $ 738,639 100.0% - ------------------------------------------------------------------------------- On average, loans represented 64.0% of earning assets during the current period compared to 64.7% for year-end 2002. 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. ALLOWANCE FOR LOAN LOSSES - ------------------------- The allowance for loan losses was $11.1 million at March 31, 2003, an increase of $68 thousand or 0.6% from the prior year-end. The allowance for loan losses was 1.51% of loans net of unearned income at March 31, 2003, an increase of 1 basis point compared to December 31, 2002. The provision for loan losses increased $264 thousand in the current three-month period compared to the same period in 2002. The Company had net charge-offs of $317 thousand in the first three months of 2003 compared to net charge-offs of $341 thousand in the same period of 2002, a decrease of $24 thousand or 7.0%. Annualized net charge-offs represent 0.17% and 0.20% of average net loans for three months ended March 31, 2003 and 2002, respectively, as compared to 0.60% at year-end 2002. The allowance for loan losses as a percentage of nonperforming loans totaled 67.7% and 57.3% at March 31, 2003 and December 31, 2002, respectively. The increase is primarily reflective of the decline in nonperforming assets of $2.9 million in the comparison. Management continues to emphasize collection efforts and evaluation of risks within the loan portfolio. In management's opinion, the allowance for loan losses is adequate to cover losses inherent in the loan portfolio. NONPERFORMING ASSETS - -------------------- Nonperforming assets for the Company include nonperforming loans, other real estate owned, and other foreclosed assets. Nonperforming loans consist of nonaccrual loans, restructured loans, and loans past due ninety days or more on which interest is still accruing. Nonperforming assets totaled $16.9 million at March 31, 2003, a decrease of $2.9 million or 14.6% from the prior year-end. Nonperforming loans totaled $16.4 million at March 31, 2003 a decrease of $2.9 million or 14.9% compared to year-end 2002. Nonperforming loans include a pool of constructions loans secured by residential real estate to a financially troubled builder. This pool of loans totaled $12.0 million at March 31, 2003. Interest income lost on this group of loans due to their nonaccrual status totaled $189 thousand during the three months ended March 31, 2003. It is currently estimated that a total of $177 thousand of interest income will be lost in each subsequent quarter related to this credit while it remains on nonaccrual status. Nonperforming loans as a percentage of net loans were 2.22% at March 31, 2003, a decrease of 39 basis points from 2.61% compared to year-end 2002. Other real estate owned, which had a balance of $385 thousand at year-end 2002, decreased $121 thousand or 31.4% to $264 thousand on March 31, 2003 TEMPORARY INVESTMENTS - --------------------- Temporary investments consist of interest bearing deposits with other banks, federal funds sold, and securities purchased under agreements to resell and totaled $30.8 million at March 31, 2003, an increase of $7.8 million or 33.7% from year-end 2002. Temporary investments averaged $59.0 million for the first three months of 2003, a decrease of $9.9 million from year-end 2002. The decrease is primarily a result of the Company's net funding position and the relationship between its principal subsidiary and the Commonwealth of Kentucky as described in preceding sections of this report. Temporary investments are reallocated as loan demand and other investment alternatives present the opportunity. INVESTMENT SECURITIES Investment securities were $325.1 million on March 31, 2003, a decrease of $116.4 million or 26.4% from year-end 2002. Available for sale and held to maturity securities were $297.8 million and $27.3 million, respectively. Investment securities averaged $354.2 million for the first quarter of 2003, an increase of $37.8 million or 11.9% from year-end 2002. The increase in average investment securities is attributable to the Company's continued efforts to manage its net interest margin during a period of low market interest rates and correlates with the increase in average borrowed funds. The Company had an unrealized gain on available for sale investment securities of $4.2 million at March 31, 2003 compared to $5.5 million at year-end 2002. The decrease is due to a combination of recognized gains on the sale of available for sale investment securities during the current quarter of $147 thousand, maturities and calls of securities during the quarter, and a general decline in the market value of securities held in the portfolio at March 31, 2003. COMPANY-OWNED LIFE INSURANCE - ---------------------------- The Company purchased life insurance policies on certain key employees, with their knowledge and consent, during the current quarter at a cost of $23.9 million. Company-owned life insurance is recorded at its cash surrender value, or the amount that can be realized, on the consolidated balance sheet with the related change in cash surrender value and proceeds received under the policies reported on the consolidated statement of income as tax-free noninterest income, which totaled $265 thousand for the current quarter. The Company is the sole beneficiary of proceeds received under the policies. Expected income from the purchase of the insurance policies will be used to offset the rising costs of the Company's various benefit plans as well as the additional costs of implementing a new postretirement health insurance program. Under the new postretirement health insurance plan, any employee that meets the service requirements upon retirement would be eligible to continue their health insurance coverage, identical to the coverage that is offered to active employees. The employee will pay 50% of the cost and the Company will pay 50%. It is currently estimated that the expense related to the new postretirement health insurance plan will be approximately $114 thousand per quarter for the remainder of 2003. DEPOSITS - -------- Total deposits were $960.2 million at March 31, 2003, an increase of $2.8 million or 0.3% from year-end 2002. Noninterest bearing deposits increased $23.5 million or 16.7% in the comparison. This increase is primarily due to the relationship between the Company's principal subsidiary and the Commonwealth of Kentucky as described in preceding sections of this report. On average, noninterest bearing deposits were $153.9 million during the current period, a decrease of $3.1 million or 2.1%. End of period interest bearing deposit balances decreased $20.8 million during the three months ended March 31, 2003 due to decreases in interest bearing checking accounts of $5.8 million, money market deposit accounts of $18.3 million, and savings accounts of $4.2 million. Time deposits increased $7.5 million in the end of period comparisons. On average, interest bearing deposits were $810.6 million in the current period, an increase of $23.2 million from year-end 2002. The increase in average interest bearing deposits is attributable to increases in interest bearing demand deposits of $7.1 million, time deposits of $12.9 million, money market deposit accounts of $1.8 million, and savings accounts of $1.3 million. Total deposits averaged $964.6 million, an increase of $26.3 million or 2.8% from year-end 2002. BORROWED FUNDS - -------------- Borrowed funds totaled $121.6 million at March 31, 2003, a decrease of $60.7 million or 33.3% from $182.3 million at year-end 2002. A $1.0 million increase in long-term borrowings was offset by a $61.7 million decrease in short-term borrowings, which account for the total decrease in borrowed funds. Federal funds purchased and securities sold under agreements to repurchase decreased $61.1 million or 52.7% due primarily to the relationship between the Company's principal subsidiary and the Commonwealth of Kentucky as described in preceding sections of this report. Other short-term borrowings decreased $566 thousand mainly due to repayments of borrowed funds from the Federal Home Loan Bank ("FHLB"). The $1.0 million increase in long-term borrowings is mainly attributed to the funding of new data processing equipment financed over a term of four years. Total borrowed funds averaged $146.4 million, an increase of $10.4 million or 7.7% from year-end 2002. LIQUIDITY The Parent Company's primary use of cash consists of dividend payments to its common shareholders, purchases of its common stock, and other general operating purposes. Liquidity of the Parent Company depends primarily on the receipt of dividends from its subsidiary banks and cash balances maintained. As of March 31, 2003 combined retained earnings of the subsidiary banks were $62.0 million, of which $9.2 million was available for the payment of dividends to the Parent Company without obtaining prior approval from bank regulatory agencies. As a practical matter, payment of future dividends is also subject to the maintenance of other capital ratio requirements. Management expects that in the aggregate, its subsidiary banks will continue to have the ability to pay dividends in order to provide funds to the Parent Company during the remainder of 2003 sufficient to meet its liquidity needs. The Parent Company had cash balances of $6.9 million at March 31, 2003. The Company's objective as it relates to liquidity is to insure that subsidiary banks have funds available to meet deposit withdrawals and credit demands without unduly penalizing profitability. In order to maintain a proper level of liquidity, the banks have several sources of funds available on a daily basis, which can be used for liquidity purposes. These sources of funds primarily include the subsidiary banks' core deposits, consisting of both business and nonbusiness deposits; cash flow generated by repayment of loan principal and interest; and federal funds purchased and securities sold under agreements to repurchase. The terms of the recent FHLB advances have been taken into consideration in relation to the overall funding needs of the Company. For the longer term, the liquidity position is managed by balancing the maturity structure of the balance sheet. This process allows for an orderly flow of funds over an extended period of time. The Company's Asset and Liability Management Committee meets regularly and monitors the composition of the balance sheet to ensure comprehensive management of interest rate risk and liquidity. Liquid assets consist of cash, cash equivalents, and securities available for sale. At March 31, 2003, such assets totaled $395.6 million, a decrease of $84.5 million or 17.6% from year-end 2002. The decrease in liquid assets is attributed to the overall funding position of the Company and the purchase of company-owned life insurance on key employees during the current quarter. Net cash provided by operating activities was $446 thousand in the first three months of 2003, a decrease of $5.0 million or 91.8% compared to the same period last year. Net cash provided by investing activities was $92.4 million, an increase of $80.1 million due primarily to a $118.1 million increase from investment securities transactions offset by the purchase of company-owned life insurance on key employees of $23.9 million and a decrease in net loan principal repayments of $13.6 million during the three-month periods. Net cash used in financing activities was $62.2 million for the period ended March 31, 2003 as a result of a $61.1 million net decrease in federal funds purchased and securities sold under agreements to repurchase attributed to the Commonwealth of Kentucky deposit activity. In the same period of the prior year, financing activities provided $7.6 million primarily due to additional FHLB borrowing activity. Commitments to extend credit 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 $124.4 million on March 31, 2003, a decrease of $1.4 thousand or 1.1% from year-end 2002 and due primarily to additional treasury stock purchases. The Company purchased 68 thousand shares of its outstanding common stock during the first three months of 2003 for a total cost of $2.1 million. The Company issued 3 thousand shares of common stock during the first three months pursuant to its nonqualified stock option plan. Dividends of $2.2 million or $.32 per share were declared during the first three months of 2003, an increase of 3.2% per share compared to the prior year. Accumulated other comprehensive income, consisting of unrealized holding gains on available for sale investment securities (net of tax), decreased $854 thousand from year-end 2002 due to a combination of recognized gains on the sale of available for sale investment securities during the current quarter, maturities and calls of securities during the quarter, and a general decline in the market value of securities held in the portfolio at March 31, 2003. 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 March 31, 2003, 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 15.31% 4.00% 6.00% Total risk based 16.56% 8.00% 10.00% Leverage 9.78% 4.00% 5.00% - -------------------------------------------------------------------------------- As of March 31, 2003, all of the Company's subsidiary banks were in excess of the well-capitalized regulatory ratio requirements as calculated under guidelines established by federal banking agencies. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- The Company uses a simulation model as a tool to monitor and evaluate interest rate risk exposure. The model is designed to measure the sensitivity of net interest income and net income to changing interest rates over future time periods. Forecasting net interest income and its sensitivity to changes in interest rates requires the Company to make assumptions about the volume and characteristics of many attributes, including assumptions relating to the replacement of maturing earning assets and liabilities. Other assumptions include, but are not limited to, projected prepayments, projected new volume, and the predicted relationship between changes in market interest rates and changes in customer account balances. These effects are combined with the Company's estimate of the most likely rate environment to produce a forecast of net interest income and net income. The forecasted results are then adjusted for the effect of a gradual increase and decrease in market interest rates on the Company's net interest income and net income. Because assumptions are inherently uncertain, the model cannot precisely estimate net interest income or net income or the effect of interest rate changes on net interest income and net income. Actual results could differ significantly from simulated results. At March 31, 2003, the model indicated that if rates were to gradually increase by 150 basis points during the calendar year, then net interest income and net income would increase 0.99% and 2.08%, respectively for the year ending December 31, 2003. The model indicated that if rates were to gradually decrease by 150 basis points over the same period, then net interest income and net income would decrease 2.44% and 5.38%, 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 1.5%. 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. ITEM 4. CONTROLS AND PROCEDURES - -------------------------------- The Company's Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the Company's disclosure controls and procedures within 90 days of the filing of this report, and have concluded that the Company'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 Company'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 II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - -------------------------- In September 1992, Farmers Bank & Capital Trust Company (the "Bank") was named as a defendant in Case No. 92CIO5734 in Jefferson Circuit Court, Louisville, Kentucky, in a case styled 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. On June 7, 2002, the plaintiffs filed with the Kentucky Supreme Court a motion for discretionary review. The Bank filed a response opposing the plaintiffs' motion On April 17, 2003 the Kentucky Supreme Court denied plaintiffs' motion for discretionary review. The judgment in favor of the Bank is therefore now final and subject to no further appeal or judicial review. As of March 31, 2003, there were various other pending legal actions and proceedings against the Company arising from the normal course of business and in which claims for damages are asserted. Management, after discussion with legal counsel, believes that these actions are without merit and that the ultimate liability resulting from these legal actions and proceedings, if any, will not have a material adverse effect upon the consolidated financial statements of the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- a) List of Exhibits ---------------- 3i. Amended and Restated Articles of Incorporation of Farmers Capital Bank Corporation (incorporated by reference to Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998). 3ii. Amended and Restated By-Laws of Farmers Capital Bank Corporation (incorporated by reference to Annual Report of Form 10-K for the fiscal year ended December 31, 1997. 3iia Amendments to By-Laws of Farmers Capital Bank Corporation (page 23) 99.1 CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (page 24) 99.2 CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (page 25) b) Reports on Form 8-K ------------------- On January 28, 2003, the Registrant filed a report on Form 8-K under Item 5 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. On March 31, 2003, the Registrant filed a report on Form 8-K under Item 4 disclosing the change in the Registrant's certifying accountant. There were no financial statements filed with this Form 8-K. On April 21, 2003, the Registrant filed a report on Form 8-K under Item 9 (furnished under Item 12) in accordance with SEC release No. 33-8216 reporting its earnings for the first quarter of 2003. There were no financial statements filed with this Form 8-K. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May-13, 2003 /s/ G. Anthony Busseni - -------------------- ----------------------------------------------- G. Anthony Busseni, President and CEO (Principal Executive Officer) Date: 5-13-03 /s/ C Douglas Carpenter - -------------------- ----------------------------------------------- C. Douglas Carpenter, Vice President, Secretary, and CFO (Principal Financial and Accounting Officer) CERTIFICATIONS I, G. Anthony Busseni, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Farmers Capital Bank Corporation; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and c) presented in this quarterly 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 quarterly 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: Mayt 13, 2003 /s/ G. Anthony Busseni - ---------------------- -------------------------- G. Anthony Busseni President and CEO I, C. Douglas Carpenter, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Farmers Capital Bank Corporation; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and c) presented in this quarterly 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 quarterly 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: 5-13-03 /s/ C Douglas Carpenter - --------------- ----------------------------------- C. Douglas Carpenter Vice President, Secretary, and CFO Exhibit 3iia AMENDMENTS TO BY-LAWS OF FARMERS CAPITAL BANK CORPORATION --------------------------------------------------------- RESOLVED, that the first sentence of Section 2.11 of the Corporation's Bylaws is hereby amended so that said sentence shall henceforth read as follows: Each outstanding share of common stock authorized by the Corporation's Articles of Incorporation to have voting power shall be entitled to one vote upon each matter submitted to a vote at a meeting of shareholders. RESOLVED, that Section 2.13 of the Corporation's Bylaws is hereby amended so that said Section 2.13 shall henceforth read in its entirety as follows: 2.13 Voting for Directors. Corporation directors shall be elected by a plurality of votes cast by the shares entitled to vote in the election at a meeting of shareholders at which a quorum is present. A "plurality" means that the individuals with the largest number of votes are elected as directors up to the maximum number of directors to be chosen at the election. Exhibit 99.1 CERTIFICATION OF PERIODIC REPORT -------------------------------- I, G. Anthony Busseni, President and Chief Executive Officer of Farmers Capital Bank Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2003 (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: May 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 Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2003 (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: 5-13-03 /s/ C Douglas Carpenter - ---------------- ----------------------------------- C. Douglas Carpenter Vice President, Secretary, and CFO -----END PRIVACY-ENHANCED MESSAGE-----