10-Q 1 a10q093003.txt FORM 10-Q SEPTEMBER 30, 2003 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 September 30, 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 $0.125 per share 6,711,771 shares outstanding at November 10, 2003 TABLE OF CONTENTS Part I - Financial Information Page No. ------------------------------ -------- Item 1 - Financial Statements 3 Unaudited Consolidated Balance Sheets - September 30, 2003 and December 31, 2002 3 Unaudited Consolidated Statements of Income - For the Three Months and Nine Months Ended September 30, 2003 and September 30, 2002 4 Unaudited Consolidated Statements of Comprehensive Income - For the Three Months and Nine Months Ended September 30, 2003 and September 30, 2002 5 Unaudited Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2003 and September 30, 2002 6 Unaudited Consolidated Statements of Changes in Shareholders' Equity - For the Nine Months Ended September 30, 2003 and September 30, 2002 7 Notes to Unaudited Consolidated Financial Statements 8 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 25 Item 4 - Controls and Procedures 26 Part II - Other Information Item 1 - Legal Proceedings 26 Item 6 - Exhibits and Reports on Form 8-K 26 Signatures 27 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEETS ------------------------------------------------------------------------------------------------------------------------------------ September 30, December 31, (In thousands, except share data) 2003 2002 ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and cash equivalents: Cash and due from banks $ 105,700 $ 44,083 Interest bearing deposits in other banks 3,449 3,947 Federal funds sold and securities purchased under agreements to resell 26,810 19,071 ------------------------------------------------------------------------------------------------------------------------------------ Total cash and cash equivalents 135,959 67,101 ------------------------------------------------------------------------------------------------------------------------------------ Investment securities: Available for sale, amortized cost of $313,774 (2003) and $407,560 (2002) 315,899 413,038 Held to maturity, fair value of $25,933 (2003) and $30,312 (2002) 24,223 28,519 ------------------------------------------------------------------------------------------------------------------------------------ Total investment securities 340,122 441,557 ------------------------------------------------------------------------------------------------------------------------------------ Loans, net of unearned income 739,298 738,639 Allowance for loan losses (11,127) (11,061) ------------------------------------------------------------------------------------------------------------------------------------ Loans, net 728,171 727,578 ------------------------------------------------------------------------------------------------------------------------------------ Premises and equipment, net 24,121 24,155 Company-owned life insurance 25,090 Other assets 15,384 15,211 ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 1,268,847 $ 1,275,602 ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES Deposits: Noninterest bearing $ 198,851 $ 141,238 Interest bearing 812,035 816,242 ------------------------------------------------------------------------------------------------------------------------------------ Total deposits 1,010,886 957,480 ------------------------------------------------------------------------------------------------------------------------------------ Federal funds purchased and securities sold under agreements to repurchase 64,230 115,979 Other short-term borrowings 1,116 9,207 Long-term debt 56,649 57,152 Dividends payable 2,149 2,191 Other liabilities 8,617 7,820 ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 1,143,647 1,149,829 ------------------------------------------------------------------------------------------------------------------------------------ Commitments and contingencies SHAREHOLDERS' EQUITY Common stock, par value $.125 per share 9,608,000 shares authorized; 8,150,028 and 8,135,977 shares issued at September 30, 2003 and December 31, 2002, respectively 1,019 1,017 Capital surplus 18,284 17,623 Retained earnings 145,261 141,199 Treasury stock, at cost 1,442,294 and 1,344,463 shares at September 30, 2003 and December 31, 2002, respectively (40,745) (37,627) Accumulated other comprehensive income 1,381 3,561 ------------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 125,200 125,773 ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 1,268,847 $ 1,275,602 ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME ------------------------------------------------------------------------------------------------------------------------------------ Three Months Nine Months Ended Ended September 30, September 30, (In thousands, except per share data) 2003 2002 2003 2002 ------------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Interest and fees on loans $ 11,921 $ 12,880 $ 36,289 $ 38,583 Interest on investment securities: Taxable 1,318 2,578 4,818 7,921 Nontaxable 809 850 2,392 2,699 Interest on deposits in other banks 12 17 49 170 Interest on federal funds sold and securities purchased under agreements to resell 129 317 506 772 ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 14,189 16,642 44,054 50,145 ------------------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Interest on deposits 4,033 5,550 12,996 17,302 Interest on federal funds purchased and securities sold under agreements to repurchase 182 411 684 1,318 Interest on other borrowed funds 542 411 1,649 1,164 ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 4,757 6,372 15,329 19,784 ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 9,432 10,270 28,725 30,361 ------------------------------------------------------------------------------------------------------------------------------------ Provision for loan losses 642 869 1,378 1,978 ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 8,790 9,401 27,347 28,383 ------------------------------------------------------------------------------------------------------------------------------------ NONINTEREST INCOME Service charges and fees on deposits 1,951 2,088 5,804 5,867 Other service charges, commissions, and fees 909 897 2,682 2,627 Data processing income 337 340 1,071 1,063 Trust income 385 368 1,197 1,096 Investment securities gains, net 822 440 966 1,433 Gain on sale of mortgage loans 276 140 788 325 Income from company-owned life insurance 416 1,089 Other 55 68 198 192 ------------------------------------------------------------------------------------------------------------------------------------ Total noninterest income 5,151 4,341 13,795 12,603 ------------------------------------------------------------------------------------------------------------------------------------ NONINTEREST EXPENSE Salaries and employee benefits 5,188 5,033 15,469 14,984 Occupancy expenses, net 621 623 1,921 1,782 Equipment expenses 934 845 2,795 2,685 Bank franchise tax 330 308 995 921 Other 2,136 2,234 6,636 6,399 ------------------------------------------------------------------------------------------------------------------------------------ Total noninterest expense 9,209 9,043 27,816 26,771 ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 4,732 4,699 13,326 14,215 ------------------------------------------------------------------------------------------------------------------------------------ Income tax expense 831 1,173 2,806 3,591 ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 3,901 $ 3,526 $ 10,520 $ 10,624 ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME PER COMMON SHARE Basic $ .58 $ .51 $ 1.56 $ 1.54 Diluted .58 .51 1.55 1.53 ------------------------------------------------------------------------------------------------------------------------------------ WEIGHTED AVERAGE SHARES OUTSTANDING Basic 6,712 6,850 6,733 6,880 Diluted 6,761 6,898 6,773 6,925 ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2003 2002 2003 2002 ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 3,901 $ 3,526 $ 10,520 $10,624 Other comprehensive income: Unrealized holding (loss) gain on available for sale securities arising during the period, net of tax of $719, $1,329, $512, and $1,636, respectively (1,335) 2,468 (950) 3,038 Reclassification adjustment for prior period unrealized gain recognized during current period, net of tax of $601, $111, $662, and $337, respectively (1,116) (207) (1,230) (625) ------------------------------------------------------------------------------------------------------------------------------------ Other comprehensive income (2,451) 2,261 (2,180) 2,413 ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive Income $ 1,450 $ 5,787 $ 8,340 $ 13,037 ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------------------------------------------------------------------------------------------------ Nine months ended September 30, (In thousands) 2003 2002 ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 10,520 $ 10,624 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,257 2,147 Net amortization of investment security premiums and (discounts): Available for sale 2,578 394 Held to maturity (52) (49) Provision for loan losses 1,378 1,978 Noncash compensation expense 319 427 Mortgage loans originated for sale (53,405) (26,768) Proceeds from sale of mortgage loans 54,724 25,159 Deferred income tax expense 144 3 Gain on sale of mortgage loans (788) (325) Gain on sale of premises and equipment (2) (2) Gain on sale of available for sale investment securities, net (966) (1,433) Decrease in accrued interest receivable 170 768 (Increase) decrease in other assets (1,432) 74 Decrease in accrued interest payable (445) (272) Increase in other liabilities 2,271 949 ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 17,271 13,674 ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities and calls of investment securities: Available for sale 316,365 270,455 Held to maturity 4,348 7,159 Proceeds from sale of available for sale investment securities 108,975 147,229 Purchase of available for sale investment securities (333,166) (368,437) Loans originated for investment, net of principal collected (2,502) (17,430) Purchase of company-owned life insurance (24,001) Purchase of premises and equipment (2,230) (897) Proceeds from sale of equipment 9 116 ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by investing activities 67,798 38,195 ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 53,406 72,890 Net decrease in federal funds purchased and securities sold under agreements to repurchase (51,749) (1,232) Proceeds from long-term debt 3,874 16,500 Repayments of long-term debt (4,377) (1,511) Net (decrease) increase in other short-term borrowings (8,091) 6,672 Dividends paid (6,500) (6,427) Purchase of common stock (3,118) (4,338) Stock options exercised 344 1,516 ------------------------------------------------------------------------------------------------------------------------------------ Net cash (used in) provided by financing activities (16,211) 84,070 ------------------------------------------------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents 68,858 135,939 ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at beginning of year 67,101 106,385 ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 135,959 $ 242,324 ------------------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURES Cash paid during the period for: Interest $ 15,774 $ 20,056 Income taxes 500 3,840 Cash dividend declared and unpaid 2,149 2,123 ------------------------------------------------------------------------------------------------------------------------------------ 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 Nine months ended Common Stock Capital Retained Treasury Stock Comprehensive Shareholders' September 30, 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 10,520 10,520 Other comprehensive income (2,180) (2,180) Cash dividends declared, $.96 per share (6,458) (6,458) Purchase of common stock 98 (3,118) (3,118) Stock options exercised 14 2 342 344 Noncash compensation expense attributed to stock option grants 319 319 ------------------------------------------------------------------------------------------------------------------------------------ Balance at September 30, 2003 8,150 $1,019 $18,284 $145,261 1,442 $(40,745) $1,381 $125,200 ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 2002 8,058 $1,007 $15,179 $137,227 1,153 $(31,077) $1,224 $123,560 Net income 10,624 10,624 Other comprehensive income 2,413 2,413 Cash dividends declared, $.93 per share (6,398) (6,398) Purchase of common stock 126 (4,338) (4,338) Stock options exercised 62 8 1,508 1,516 Noncash compensation expense attributed to stock option grants 427 427 ------------------------------------------------------------------------------------------------------------------------------------ Balance at September 30, 2002 8,120 $1,015 $17,114 $141,453 1,279 $(35,415) $3,637 $127,804 ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to unaudited consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Farmers Capital Bank Corporation (the "Company"), a financial holding company, and its subsidiaries, including its principal subsidiary, Farmers Bank & Capital Trust Company. All significant intercompany transactions and accounts have been eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates used in the preparation of the financial statements are based on various factors including the current interest rate environment and the general strength of the local economy. Changes in the overall interest rate environment can significantly affect the Company's net interest income and the value of its recorded assets and liabilities. Actual results could differ from those estimates used in the preparation of the financial statements. The financial information presented as of any date other than December 31 has been prepared from the books and records without audit. The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. 2. RECLASSIFICATIONS Certain reclassifications have been made to the consolidated financial statements of prior periods to conform to the current period presentation. Such reclassifications have no effect on previously reported net income or shareholders' equity. 3. RECENTLY ISSUED ACCOUNTING STANDARDS Please refer to the caption "Recently Issued Accounting Standards" under Part I, Item 2 on page 24 of this document. 4. 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". 5. 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 September 30, 2003 and 2002. -------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, (In thousands, except per share data) 2003 2002 2003 2002 -------------------------------------------------------------------------------------------------------- Net income, basic and diluted $ 3,901 $ 3,526 $ 10,520 $ 10,624 -------------------------------------------------------------------------------------------------------- Average shares outstanding 6,712 6,850 6,733 6,880 Effect of dilutive stock options 49 48 40 45 -------------------------------------------------------------------------------------------------------- Average diluted shares outstanding 6,761 6,898 6,773 6,925 -------------------------------------------------------------------------------------------------------- Net income per share, basic $ .58 $ .51 $ 1.56 $ 1.54 Net income per share, diluted .58 .51 1.55 1.53 -------------------------------------------------------------------------------------------------------- The sum of diluted earnings per common share of each of the quarters in 2003 does not add to the year-to-date figure reported due to rounding.
6. 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 fair market value of the Company's stock was $24.50 and $39.66 on the grant date and measurement date, respectively. The Company granted 54,000 options during 2000. The grant date and the measurement date for these options are the same, with the fair market value of $29.75. Pursuant to APB No. 25, there is no compensation expense being recognized for this grant. Had compensation expense been determined under the fair value method described in 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. ----------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, (In thousands, except per share data) 2003 2002 2003 2002 ----------------------------------------------------------------------------------------------------------------- NET INCOME As reported $ 3,901 $ 3,526 $ 10,520 $ 10,624 Add: Stock-based employee compensation expense included in reported net income under the intrinsic value method, net of related tax effects 69 166 207 358 Less: Stock-based compensation expense determined under fair value based method for all awards, net of related tax effects (85) (249) (253) (475) ----------------------------------------------------------------------------------------------------------------- Proforma $ 3,885 $ 3,443 $ 10,474 $ 10,507 ----------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE Basic, as reported $ .58 $ .51 $ 1.56 $ 1.54 Basic, proforma .58 .50 1.56 1.53 Diluted, as reported .58 .51 1.55 1.53 Diluted, proforma .57 .50 1.55 1.52 -----------------------------------------------------------------------------------------------------------------
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 options under the plan. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS -------------------------------------------------------------------------------- OF OPERATIONS ------------- FORWARD-LOOKING STATEMENTS This report contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which the Company and its subsidiaries operate); competition for the Company's customers from other providers of financial services; government legislation and regulation (which changes from time to time and over which the Company has no control); changes in interest rates; material unforeseen changes in the liquidity, results of operations, or financial condition of the Company's customers; and other risks detailed in the Company's filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company. The Company expressly disclaims any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations. RESULTS OF OPERATIONS THIRD QUARTER 2003 VS. THIRD QUARTER 2002 ----------------------------------------- The Company reported net income of $3.9 million for the third quarter of 2003, an increase of $375 thousand or 10.6% compared to $3.5 million for the same period in 2002. On a basic and diluted per share basis, net income was $0.58 for the current three months, an increase of $.07 or 13.7% compared to the same period in the prior year. A decrease in net interest income had a significant effect on net income in the reporting periods. The continued low interest rate environment, prepayments of certain investment securities, and the sales and maturities of investment securities that were replaced at generally lower yields resulted in lower net interest income in the quarterly comparison. Net interest income decreased $838 thousand or 8.2% in the current three months compared to the same period in 2002. The decline in net interest income for the current quarter is mainly a result of continued declines in the overall market interest rate environment. Interest rates earned on earning assets have declined more rapidly than the interest rates paid on interest paying liabilities since many of the Company's funding sources, particularly deposits, have approached their repricing floors. The provision for loan losses decreased $227 thousand or 26.1% in the three month comparison. The improvement in the provision for loan losses is attributed to changes in the general risk characteristics of the Company's entire loan portfolio from the previous period and can not be attributed directly to any particular individual credit. Total noninterest income increased $810 thousand or 18.7% in the three month comparison. Income from the purchase of company-owned life insurance, instituted in the first quarter of 2003 to offset the rising costs of the Company's employee benefit plans, totaled $416 thousand for the current three months. Securities gains increased $382 thousand in the current three month comparison. Gains on the sale of mortgage loans increased $136 thousand as the low interest rate environment continued to fuel the Company's secondary market mortgage loan originations. Total noninterest expenses increased $166 thousand or 1.8% in the three month comparison. Noninterest expenses increased primarily due to an increase in salaries and employee benefits of $155 thousand or 3.1%. These increases mainly represent employee benefits and normal salary increases. A decline in correspondent banking fees of $172 thousand favorably impacted noninterest expenses in the three month comparison. Other operating expenses generally increased in the comparison, including depreciation increases of $86 thousand or 12.7% and bank franchise taxes of $22 thousand or 7.1%. The effective income tax rate declined 740 basis points to 17.56% for the three months ended September 30, 2003 compared to the same period a year earlier. The decrease in the effective income tax rate is due primarily to lower revenue from taxable sources, an increased amount of credits derived from qualified zone academy bonds, and the addition of nontaxable income accrued from the increase in cash surrender value on company-owned life insurance purchased on key employees. Return on average assets ("ROA") was 1.24% for the current quarter, an increase of 8 basis points compared to 1.16% reported for the same period in 2002. Negatively impacting ROA was a 44 basis point decline in net interest margin to 3.53%. Offsetting the decline in net interest margin that positively effected ROA was an increase in noninterest income relative to average assets of 20 basis points and declines in expenses relative to average assets that include 9 basis points for the provision for loan losses, 7 basis points for other operating expenses, and 15 basis points attributed to income tax expense. Return on average equity ("ROE") was 12.44% for the third quarter of 2003 compared to 11.26% in the same period of 2002. The increase is due to higher net income reported in the current period coupled with a slight increase in financial leverage compared to the same period a year ago. NET INTEREST INCOME ------------------- The interest rate environment has continued to trend downward after a period of relative stability throughout much of 2002 and has negatively impacted the Company's net interest income. Additional actions taken by the Federal Reserve Board (the "Fed") in the fourth quarter of 2002 and the second quarter of 2003 have resulted in a general reduction in short-term interest rates in the reporting periods. Short-term interest rates, left unchanged since December 2001, were reduced 50 basis points by the Fed in November 2002 and an additional 25 basis points in June 2003. The prime rate as reported in The Wall Street Journal was lowered in an identical manner shortly following the Fed changes. 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 5.2%, a reduction of 109 basis points from 6.3% in the same period a year ago. The cost of funds for the current three months was 2.0%, a decline of 77 basis points compared to 2.7% 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. However, many of the Company's funding sources, particularly deposits, have approached their repricing floors. Average earning assets increased $33.4 million or 3.1% to $1.1 billion in the quarterly comparison. However, as a percentage of total average assets, earning assets decreased 97 basis points to 88.97% from 89.94%. Interest income totaled $14.2 million for the third quarter of 2003, a decrease of $2.5 million or 14.7% compared to the same period in the prior year. Interest expense totaled $4.8 million, a decrease of $1.6 million or 25.3%. Net interest income fell $838 thousand or 8.2% in the comparison and totaled $9.4 million for the three months ended September 30, 2003. Interest and fees on loans totaled $11.9 million, a decrease of $959 thousand or 7.4% mainly due to a decrease in the average rate earned. Average loans increased $33.7 million or 4.8% to $740.2 million in the comparison due to higher loan demand in a lower rate environment. The tax equivalent yield on loans decreased 87 basis points to 6.4% from 7.3% and offset the effects of higher average balances on interest income. Interest on taxable securities was $1.3 million, a decrease of $1.3 million or 48.9% due primarily to a decrease in the average rate earned and the effect of higher premium amortization on mortgage-backed securities. Prepayments on mortgage-backed securities have increased greatly due to corresponding refinancing of home mortgages that serve as collateral for these investment securities. The increase in activity is directly related to the lower interest rate environment. The average rate earned on taxable securities decreased 237 basis points to 2.2% from 4.6% while the average balance increased 6.0% to $237.4 million from $224.0 million. Interest on nontaxable securities was $809 thousand, a decline of $41 thousand or 4.8% due to a 28 basis point decrease in the tax equivalent yield to 6.3% from 6.6%. Interest on short-term investments, including time deposits in other banks, federal funds sold, and securities purchased under agreements to resell, decreased $193 thousand. This decline was due to a decrease in the average rate earned on these investments of 85 basis points to .9% from 1.8% along with a $14.0 million or 18.8% decrease in the average balance. Interest expense on deposits decreased $1.5 million or 27.3% to $4.0 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 a general increase in average balances. The decline in interest expense on deposits was as follows: time deposits $1.2 million or 26.0%; interest bearing demand deposits $143 thousand or 34.2%; and savings deposits $184 thousand or 33.3%. The average rate paid on time deposits, the largest component of interest bearing deposits, was 3.2% for the third quarter of 2003 compared to 4.5% for the same period of 2002. The average balance of time deposits increased $19.2 million or 4.7% to $426.0 million. The average rate paid on interest bearing demand deposits declined 29 basis points to .5% from .8% while the average balance increased $12.3 million or 5.7% to $227.6 million. The average rate paid on savings deposits decreased 46 basis points to .9% from 1.3% while the average balance increased $3.1 million or 1.9% to $167.8 million. Interest expense on overnight borrowings, consisting of federal funds purchased and securities sold under agreements to repurchase, decreased $229 thousand or 55.7% due to an 86 basis point decline in the average rate paid along with a $14.8 million decline in the average balance. Interest expense on other borrowed funds increased $131 thousand or 31.9% 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 $61.9 million, an increase of $16.5 million or 36.5% in the comparison. The average rate paid on other borrowed funds declined 13 basis points to 3.5% from 3.6%. The net interest margin (TE) decreased 44 basis points to 3.53% during the third quarter of 2003 compared to 3.97% in the third quarter of 2002. The decrease in net interest margin is primarily attributed to a 32 basis point decline in the spread between rates earned on earning assets and the rates paid on interest bearing liabilities to 3.25% in the current quarter from 3.57% in the third quarter of 2002. The effect of noninterest bearing sources of funds contributed an additional 12 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 September 30.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL ---------------------------------------------------------------------------------------------------------------------------------- Quarter Ended September 30, 2003 2002 Average Average Average Average (In thousands) Balance Interest Rate Balance Interest Rate ---------------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Investment securities Taxable $ 237,389 $ 1,318 2.20% $ 224,006 $ 2,578 4.57% Nontaxable 75,434 1,195 6.29 75,110 1,244 6.57 Time deposits with banks, federal funds sold and securities purchased under agreements to resell 60,342 141 .93 74,335 334 1.78 Loans 740,215 11,991 6.43 706,562 13,009 7.30 ---------------------------------------------------------------------------------------------------------------------------------- Total earning assets 1,113,380 $ 14,645 5.22% 1,080,013 $ 17,165 6.31% ---------------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses (11,204) (11,164) ---------------------------------------------------------------------------------------------------------------------------------- Total earning assets, net of allowance for loan losses 1,102,176 1,068,849 ---------------------------------------------------------------------------------------------------------------------------------- NONEARNING ASSETS Cash and due from banks 89,302 96,373 Premises and equipment, net 24,260 23,777 Other assets 35,626 11,818 ---------------------------------------------------------------------------------------------------------------------------------- Total assets $ 1,251,364 $ 1,200,817 ---------------------------------------------------------------------------------------------------------------------------------- INTEREST BEARING LIABILITIES Deposits Interest bearing demand $ 227,607 $ 275 .48% $ 215,260 $ 418 .77% Savings 167,827 369 .87 164,679 553 1.33 Time 426,007 3,389 3.16 406,770 4,579 4.47 Federal funds purchased and securities sold under agreements to repurchase 74,362 182 .97 89,165 411 1.83 Other borrowed funds 61,893 542 3.47 45,352 411 3.60 ---------------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 957,696 $ 4,757 1.97% 921,226 $ 6,372 2.74% ---------------------------------------------------------------------------------------------------------------------------------- NONINTEREST BEARING LIABILITIES Commonwealth of Kentucky deposits 30,810 30,146 Other demand deposits 131,681 117,403 Other liabilities 6,763 7,793 ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,126,950 1,076,568 ---------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity 124,414 124,249 ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,251,364 $ 1,200,817 ---------------------------------------------------------------------------------------------------------------------------------- Net interest income 9,888 10,793 TE basis adjustment (456) (523) ---------------------------------------------------------------------------------------------------------------------------------- Net interest income $9,432 $ 10,270 ---------------------------------------------------------------------------------------------------------------------------------- Net interest spread 3.25% 3.57% Impact of noninterest bearing sources of funds .28 .40 ---------------------------------------------------------------------------------------------------------------------------------- Net interest margin 3.53% 3.97% ---------------------------------------------------------------------------------------------------------------------------------- Income and yield stated at a fully tax equivalent basis using the marginal corporate Federal tax rate of 35%. Loan balances include principal balances on nonaccrual loans. Loan fees included in interest income amount to $563 thousand and $518 thousand in 2003 and 2002, respectively.
ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX EQUIVALENT BASIS) ----------------------------------------------------------------------------------------------------------- (In thousands) Variance Variance Attributed to Quarter Ended September 30, 2003/2002 Volume Rate ----------------------------------------------------------------------------------------------------------- INTEREST INCOME Taxable investment securities $(1,260) $ 967 $(2,227) Nontaxable investment securities (49) 34 (83) Time deposits with banks, federal funds sold and securities purchased under agreements to resell (193) (55) (138) Loans2 (1,018) 3,220 (4,238) ----------------------------------------------------------------------------------------------------------- Total interest income (2,520) 4,166 (6,686) ----------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest bearing demand deposits (143) 146 (289) Savings deposits (184) 70 (254) Time deposits (1,190) 1,316 (2,506) Federal funds purchased and securities sold under agreements to repurchase (229) (60) (169) Other borrowed funds 131 227 (96) ----------------------------------------------------------------------------------------------------------- Total interest expense (1,615) 1,699 (3,314) ----------------------------------------------------------------------------------------------------------- Net interest income $ (905) $ 2,467 $(3,372) ----------------------------------------------------------------------------------------------------------- Percentage change 100.0% (272.6)% 372.6% ----------------------------------------------------------------------------------------------------------- The 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. Income stated at fully tax equivalent basis using the marginal corporate Federal tax rate of 35%.
NONINTEREST INCOME ------------------ Noninterest income was $5.2 million for the current quarter, an increase of $810 thousand or 18.7% compared to the third quarter of the prior year. Service charges and fees on deposits, the largest component of noninterest income, decreased $137 thousand or 6.6% to $2.0 million. Overdraft fees declined $15 thousand or 1.2% and service charges on demand deposit accounts declined $12 thousand or 5.0% in the comparison. Fees related to deposit accounts of the Commonwealth of Kentucky also declined $123 thousand or 65.0% and corresponds to the decrease in correspondent bank fees included in noninterest expense. Other service charges, commissions, and fees were up $12 thousand or 1.3% to $909 thousand. Data processing fees were $337 thousand, a decline of less than 1%. Trust income totaled $385 thousand, an increase of $17 thousand or 4.6% compared to $368 thousand a year earlier. Net gains on the sale of available for sale securities totaled $822 thousand, an increase of $382 thousand or 86.8% compared to the comparable period a year ago as the Company sought to manage the composition of its balance sheet in a continuing difficult economic environment. Net gains on the sale of mortgage loans were $276 thousand, an increase of $136 thousand or 97.1% from $140 thousand in the prior year as mortgage loans originated for sale increased $6.1 million in the comparison due to the low interest rate environment. Income from company-owned life insurance, purchased near the end of the first quarter of 2003, was $416 thousand in the current three-month period. Other noninterest income totaled $55 thousand, a decrease of $13 thousand compared to the same period in the prior year. NONINTEREST EXPENSE ------------------- Total noninterest expenses were $9.2 million for the third quarter of 2003, an increase of $166 thousand or 1.8% from the third quarter of 2002. Salaries and employee benefits account for a significant portion of the total increase in noninterest expense. Total salaries and benefits increased $155 thousand or 3.1% to $5.2 million in the quarterly comparison. Employee benefit expenses increased $55 thousand or 5.8%. Salary and related payroll expenses increased $126 thousand or 3.2% in the comparison while noncash compensation expense related to the Company's nonqualified stock option plan declined $26 thousand or 19.6% due to the structure of the vesting schedule and forfeitures. The number of full time equivalent employees decreased to 450 from 452 reported in the prior period. Occupancy expense, net of rental income, was virtually unchanged in the comparison and totaled $621 thousand for the current quarter. Equipment expense totaled $934 thousand in the current quarter, an increase of $89 thousand or 10.5% due primarily to increased depreciation expense. Other noninterest expenses, including bank franchise taxes, decreased $76 thousand or 3.0% to $2.5 million. This decrease is due mainly to a $172 thousand decline in correspondent bank fees related to activity attributed to the Commonwealth of Kentucky. INCOME TAXES ------------ Income tax expense for the third quarter of 2003 was $831 thousand, a decrease of $342 thousand or 29.2% from the same period a year earlier. The effective tax rate decreased 740 basis points to 17.56% from 24.96% in 2002. The change in the effective tax rate is due to a combination of factors, primarily including lower revenue from taxable sources, increased credits derived from qualified zone academy bonds, and the addition of nontaxable income accrued from the increase in cash surrender value on life insurance purchased on key employees. FIRST NINE MONTHS OF 2003 VS. FIRST NINE MONTHS OF 2002 ------------------------------------------------------- The Company reported net income of $10.5 million for the nine months ended September 30, 2003, a decrease of $104 thousand or 1.0% compared to $10.6 million for the same period in 2002. Basic and diluted net income per share were $1.56 and $1.55, respectfully, for the current nine months. This represents an increase of $.02 or 1.3% on both a basic and diluted per share basis. The per share earnings increase is a result of fewer common shares outstanding attributed to the Company's share buy back program. A decrease in net interest income had a significant effect on net income in the reporting periods. The continued low interest rate environment, prepayments of certain investment securities, and the sales and maturities of investment securities that were replaced at generally lower yields resulted in lower net interest income in the nine month comparison. Net interest income decreased $1.6 million or 5.4% in the current nine months compared to the same period in 2002. The decline in net interest income for the current period is mainly a result of lower revenues earned on earning assets due to a continued decline in the overall market interest rate environment. Interest rates earned on earning assets have declined more rapidly than the interest rates paid on interest paying liabilities since many of the Company's funding sources, particularly deposits, have approached their repricing floors. The provision for loan losses decreased $600 thousand or 30.3% in the nine month period ended September 30, 2003 compared to the same period in 2002. The improvement in the provision for loan losses is attributed to changes in the general risk characteristics of the Company's entire loan portfolio from the previous period and can not be attributed directly to any particular individual credit. Total noninterest income increased $1.2 million or 9.5% in the nine month comparison despite lower gains reported on the sale of investment securities of $467 thousand in the current period. Income from the purchase of company-owned life insurance, instituted in the first quarter of 2003 to offset the rising costs of the Company's employee benefits plans, totaled $1.1 million for the current nine months. Gains on the sale of mortgage loans also increased $463 thousand in the comparison as the low interest rate environment continued to fuel the Company's secondary market mortgage loan originations. Offsetting the increase in noninterest income were increases in noninterest expenses totaling $1.0 million or 3.9% for the current nine months. Noninterest expenses increased primarily due to higher salaries and employee benefits of $485 thousand or 3.2%. These increases relate primarily to increases in employee benefits and normal salary increases. An increase in correspondent banking fees totaling $104 thousand also contributed to the increase in noninterest expenses. The effective income tax rate declined 420 basis points to 21.06% for the nine months ended September 30, 2003 compared to the same period a year earlier. ROA was 1.13% for the nine months ended September 30, 2003, a decrease of 5 basis points from the same period in 2002. Negatively impacting ROA was a 38 basis point decline in net interest margin to 3.58% and an increase in noninterest expenses of 2 basis points. Partially offsetting these declines that positively effected ROA was an increase in earning assets that contributed 7 basis points, a decrease in the provision for loan losses that contributed 7 basis points, an increase in noninterest income contributing 8 basis points, and a decrease in income tax expense that contributed 13 basis points. ROE was 11.27% for the first nine months of 2003 compared to 11.42% 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 ------------------- Continuing weaknesses in the overall economic environment remain present and have impacted the Company's net interest income. The interest rate environment has continued to trend downward after a period of relative stability throughout much of 2002. Additional actions taken by the Fed in the fourth quarter of 2002 and the second quarter of 2003 have resulted in a general reduction in short-term interest rates in the reporting periods. Short-term interest rates, left unchanged since December 2001, were reduced 50 basis points by the Fed in November 2002 and an additional 25 basis points in June 2003. The prime rate as reported in The Wall Street Journal was lowered in an identical manner shortly following the Fed changes. 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 yield on earning assets for the current nine months was 5.4%, a reduction of 101 basis points from 6.4% in the same period a year ago. The cost of funds for the current nine months was 2.2%, a decline of 72 basis points compared to 2.9% 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. However, many of the Company's funding sources, particularly deposits, have approached their repricing floors. Average earning assets increased $46.6 million or 4.3% to $1.1 billion in the comparison. As a percentage of total average assets, earning assets increased to 90.57% from 89.76%. This increase had the effect of adding an additional 7 basis points to ROA in the comparison. Interest income totaled $44.1 million for the first nine months of 2003, a decrease of $6.1 million or 12.1% compared to the same period in the prior year. Interest expense totaled $15.3 million, a decrease of $4.5 million or 22.5%. Net interest income fell $1.6 million or 5.4% in the comparison and totaled $28.7 million at September 30, 2003. Interest and fees on loans totaled $36.3 million, a decrease of $2.3 million mainly due to a decrease in the average rate earned. Average loans increased $42.8 million or 6.2% to $739.5 million in the comparison due to higher loan demand in a lower rate environment. The tax equivalent yield on loans decreased 87 basis points to 6.6% from 7.5% and offset the effects of higher average balances on interest income. Interest on taxable securities was $4.8 million, a decrease of $3.1 million or 39.2% due primarily to a decrease in the average rate earned and the effect of higher premium amortization on mortgage-backed securities. Prepayments on mortgage-backed securities have increased greatly due to corresponding refinancing of home mortgages that serve as collateral for these investment securities. The increase in activity is directly related to the lower interest rate environment. The average rate earned on taxable securities decreased 187 basis points to 2.6% from 4.4% while the average balance increased $11.7 million or 4.9%. Interest on nontaxable securities declined $307 thousand or 11.4% due to a $7.2 million or 9.1% decrease in the average balance to $72.4 million from $79.6 million. Interest on short-term investments, including time deposits in other banks, federal funds sold, and securities purchased under agreements to resell, decreased $387 thousand due primarily to a decrease in the average rate earned on these investments of 79 basis points to 1.2% from 1.9%. Interest expense on deposits decreased $4.3 million or 24.9% to $13.0 million in the nine month 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 a general increase in average balances. The decline in interest expense on deposits was as follows: time deposits $3.3 million or 23.3%; interest bearing demand deposits $518 thousand or 34.5%; and savings deposits $524 thousand or 29.7%. The average rate paid on time deposits, the largest component of interest bearing deposits, was 3.4% for the nine months ended September 30, 2003 compared to 4.7% for the same period of 2002. The average balance of time deposits increased $20.0 million or 5.0% to $423.3 million. The average rate paid on interest bearing demand deposits declined 34 basis points to .6% from .9% while the average balance increased $7.9 million or 3.7% to $223.2 million. The average rate paid on savings deposits decreased 44 basis points to 1.0% from 1.4% while the average balance increased $2.6 million or 1.6% to $167.0 million from $164.4 million. Interest expense on overnight borrowings, consisting of federal funds purchased and securities sold under agreements to repurchase, decreased $634 thousand due to a 60 basis point decline in the average rate paid along with a $22.4 million decline in the average balance. Interest expense on other borrowed funds increased $485 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 $64.8 million, an increase of $22.7 million or 53.9% in the comparison. The average rate paid on other borrowed funds declined 30 basis points to 3.4% from 3.7%. The net interest margin (TE) decreased 38 basis points to 3.58% during the nine months ended September 30, 2003 compared to 3.96% in the same period of 2002. The decrease in net interest margin is primarily attributed to a 29 basis point decline in the spread between rates earned on earning assets and the rates paid on interest bearing liabilities to 3.25% in the current nine months from 3.54% in the same period in 2002. The effect of noninterest bearing sources of funds contributed an additional 9 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 nine months ended September 30.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL ----------------------------------------------------------------------------------------------------------------------------------- Nine Months Ended September 30, 2003 2002 ----------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average (In thousands) Balance Interest Rate Balance Interest Rate ----------------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Investment securities Taxable $ 250,403 $ 4,818 2.57% $ 238,733 $ 7,921 4.44% Nontaxable 72,405 3,523 6.51 79,621 3,943 6.62 Time deposits with banks, federal funds sold and securities purchased under agreements to resell 64,310 555 1.15 64,964 942 1.94 Loans 739,505 36,575 6.61 696,679 38,977 7.48 ----------------------------------------------------------------------------------------------------------------------------------- Total earning assets 1,126,623 $ 45,471 5.40% 1,079,997 $ 51,783 6.41% ----------------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses (11,244) (10,705) ----------------------------------------------------------------------------------------------------------------------------------- Total earning assets, net of allowance for loan losses 1,115,379 1,069,292 ----------------------------------------------------------------------------------------------------------------------------------- NONEARNING ASSETS Cash and due from banks 74,655 98,272 Premises and equipment, net 24,206 24,261 Other assets 29,634 11,386 ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 1,243,874 $ 1,203,211 ----------------------------------------------------------------------------------------------------------------------------------- INTEREST BEARING LIABILITIES Deposits Interest bearing demand $ 223,166 $ 982 .59% $ 215,263 $ 1,500 .93% Savings 167,014 1,240 .99 164,443 1,764 1.43 Time 423,319 10,774 3.40 403,358 14,038 4.65 Federal funds purchased and securities sold under agreements to repurchase 74,668 684 1.22 97,079 1,318 1.82 Other borrowed funds 64,750 1,649 3.40 42,071 1,164 3.70 ----------------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 952,917 $ 15,329 2.15% 922,214 $ 19,784 2.87% ----------------------------------------------------------------------------------------------------------------------------------- NONINTEREST BEARING LIABILITIES Commonwealth of Kentucky deposits 34,130 33,479 Other demand deposits 125,224 115,741 Other liabilities 6,843 7,344 ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,119,114 1,078,778 ----------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity 124,760 124,433 ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,243,874 $ 1,203,211 ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 30,142 31,999 TE basis adjustment (1,417) (1,638) ----------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 28,725 $ 30,361 ----------------------------------------------------------------------------------------------------------------------------------- Net interest spread 3.25% 3.54% Impact of noninterest bearing sources of funds .33 .42 ----------------------------------------------------------------------------------------------------------------------------------- Net interest margin 3.58% 3.96% ----------------------------------------------------------------------------------------------------------------------------------- Income and yield stated at a fully tax equivalent basis using the marginal corporate Federal tax rate of 35%. Loan balances include principal balances on nonaccrual loans. Loan fees included in interest income amount to $1.7 million and $1.4 million in 2003 and 2002, respectively.
ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX EQUIVALENT BASIS) --------------------------------------------------------------------------------------------- (In thousands) Variance Variance Attributed to Nine Months Ended September 30, 2003/2002 Volume Rate --------------------------------------------------------------------------------------------- INTEREST INCOME Taxable investment securities $(3,103) $ 606 $(3,709) Nontaxable investment securities (420) (355) (65) Time deposits with banks, federal funds sold and securities purchased under agreements to resell (387) (10) (377) Loans2 (2,402) 3,361 (5,763) --------------------------------------------------------------------------------------------- Total interest income (6,312) 3,602 (9,914) --------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest bearing demand deposits (518) 86 (604) Savings deposits (524) 45 (569) Time deposits (3,264) 1,060 (4,324) Federal funds purchased and securities sold under agreements to repurchase (634) (261) (373) Other borrowed funds 485 641 (156) --------------------------------------------------------------------------------------------- Total interest expense (4,455) 1,571 (6,026) --------------------------------------------------------------------------------------------- Net interest income $(1,857) $ 2,031 $(3,888) --------------------------------------------------------------------------------------------- Percentage change 100.0% (109.4)% 209.4% --------------------------------------------------------------------------------------------- The 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. Income stated at fully tax equivalent basis using the marginal corporate Federal tax rate of 35%.
NONINTEREST INCOME ------------------ Noninterest income was $13.8 million for the first nine months of 2003, an increase of $1.2 million or 9.5% compared to the same period in 2002. The largest component of noninterest income, service charges and fees on deposits, decreased $63 thousand or 1.1% to $5.8 million. Overdraft fees declined $121 thousand or 3.2% and service charges on demand deposit accounts declined $56 thousand or 7.6% in the comparison. Offsetting these declines was an increase in fees related to the Commonwealth of Kentucky of $61 thousand or 22.5% and corresponds to the increase in correspondent bank fees included in noninterest expense. Other service charges, commissions, and fees increased $55 thousand or 2.1% to $2.7 million. Data processing fees were relatively unchanged at $1.1 million. Trust fees increased $101 thousand or 9.2% to $1.1 million. Net gains on the sale of available for sale securities was $966 thousand for the current nine months, a decrease of $467 thousand or 32.6% compared to $1.4 million in the comparable period a year ago as the Company sought to manage the composition of its balance sheet in a continuing difficult economic environment. Net gains on the sale of mortgage loans were $788 thousand, an increase of $463 thousand from $325 thousand in the prior year as mortgage loans originated for sale increased $26.7 million in the comparison due to the low interest rate environment. Income from company-owned life insurance, purchased near the end of the first quarter of 2003, was $1.1 million. Other noninterest income totaled $198 thousand, relatively unchanged from $192 thousand in the prior year. NONINTEREST EXPENSE ------------------- Noninterest expenses totaled $27.8 million for the first nine months of 2003, an increase of $1.0 million or 3.9% compared to the same period in 2002. Salaries and employee benefits, the largest component of noninterest expense, increased $485 thousand or 3.2% and totaled $15.5 million at September 30, 2003. Employee benefit expenses increased $237 thousand primarily due to the new postretirement health insurance coverage initiated during the first quarter of 2003. Salary and related payroll expenses increased $362 thousand or 3.0% in the comparison while noncash compensation expense related to the Company's nonqualified stock option plan declined $115 thousand or 26.6% due to the structure of the vesting schedule and forfeitures. The number of full time equivalent employees decreased to 450 from 452 reported in the prior period. Occupancy expense, net of rental income, increased $139 thousand or 7.8% and totaled $1.9 million. The increase in net occupancy expense is attributed to increases in maintenance and repairs, utilities costs, and depreciation. Equipment expense was $2.8 million, an increase of $110 thousand or 4.1% due to higher depreciation and maintenance related to additional asset purchases. Other noninterest expenses, including bank franchise taxes, increased $311 thousand or 4.2% to $7.6 million mainly due to a $104 thousand increase in correspondent bank fees related to activity attributed to the Commonwealth of Kentucky. INCOME TAXES ------------ Income tax expense for the first nine months of 2003 was $2.8 million, a decrease of $785 thousand or 21.9% from the same period a year earlier. The effective tax rate decreased 420 basis points to 21.06% from 25.26% in 2002. The change in the effective tax rate is due to a combination of factors, primarily including lower revenue from taxable sources, increased credits derived from qualified zone academy bonds, and the addition of nontaxable income accrued from the increase in cash surrender value on life insurance purchased on key employees. FINANCIAL CONDITION Total assets were $1.3 billion on September 30, 2003, a decrease of $6.8 million or .5% from December 31, 2002. The decrease in assets includes a $101.4 million lower balance in the securities portfolio, offset by a $68.9 million increase in cash and cash equivalents and a $25.8 million increase in all other assets resulting primarily from the purchase of company-owned life insurance during the first quarter of 2003. Fed funds purchased and securities sold under agreements to repurchase declined $51.7 million while net deposits and other borrowings increased $44.8 million. 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 important to understanding the financial condition of the Company. On an average basis, total assets were $1.2 billion for the first nine months of 2003, an increase of $37.5 million or 3.1% from year-end 2002. Average earning assets, primarily loans and securities, were $1.1 billion at September 30, 2003, an increase of $36.2 million or 3.3% from year-end 2002. Average earning assets represent 90.57% of total average assets on September 30, 2003, an increase of 18 basis points compared to 90.39% at year-end 2002. LOANS ----- Loans, net of unearned income, totaled $739.3 million at September 30, 2003, an increase of $659 thousand or .1% from year-end 2002. The composition of the loan portfolio is summarized in the table below. -------------------------------------------------------------------------------- September 30, 2003 December 31, 2002 (Dollars in thousands) Amount % Amount % -------------------------------------------------------------------------------- Commercial, financial, and agriculture $ 105,331 14.3% $ 110,056 14.9% Real estate - construction 52,926 7.1 55,896 7.6 Real estate - mortgage 473,900 64.1 459,620 62.2 Installment 71,588 9.7 76,162 10.3 Lease financing 35,553 4.8 36,905 5.0 -------------------------------------------------------------------------------- Total $ 739,298 100.0% $ 738,639 100.0% -------------------------------------------------------------------------------- On average, loans represented 65.6% of earning assets during the current nine month period compared to 64.7% for year-end 2002. As loan demand fluctuates, the available funds are reallocated between loans and 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 September 30, 2003, an increase of $66 thousand or .6% from the prior year-end. The allowance for loan losses was 1.51% of loans net of unearned income at September 30, 2003, an increase of 1 basis point from 1.50% at December 31, 2002. The provision for loan losses decreased $227 thousand and $600 thousand in the current three-month and nine-month periods, respectively, compared to the same periods in 2002. The improvement in the provision for loan losses is attributed to changes in the general risk characteristics of the Company's entire loan portfolio from the previous periods and cannot be attributed directly to any particular individual credit. The Company had net charge-offs of $671 thousand and $1.3 million in the current three and nine months of 2003, respectively, compared to net charge-offs of $277 thousand and $909 thousand in the same periods of 2002. Annualized net charge-offs represent .36% and .24% of average net loans for three and nine months ended September 30, 2003, respectively, compared to .60% at year-end 2002. The allowance for loan losses as a percentage of nonperforming loans totaled 80.5% and 57.3% at September 30, 2003 and December 31, 2002, respectively. The increase is primarily reflective of the decline in nonaccrual loans of $4.7 million in the comparison. Management continues to emphasize collection efforts and evaluation of risks within the loan portfolio. In management's opinion, the provision for loan losses represents incurred credit losses during the periods presented and 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 $15.5 million at September 30, 2003, a decrease of $4.3 million or 21.9% from the prior year-end. Nonperforming loans totaled $13.8 million at September 30, 2003 a decrease of $5.5 million or 28.4% 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 $9.4 million at September 30, 2003. Interest income lost on this group of loans due to their nonaccrual status totaled $154 thousand and $520 thousand during the three and nine months ended September 30, 2003, respectively. At its current outstanding balance, it is estimated that a total of $137 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 1.9% at September 30, 2003, a decrease of 74 basis points from 2.6% compared to year-end 2002. Other real estate owned ("OREO"), which had a balance of $385 thousand at year-end 2002, increased $916 thousand and totaled $1.3 million at September 30, 2003. The increase in OREO is mainly due to the transfer to the Company of approximately $1.2 million in real estate that served as collateral for a portion of the pool of construction loans identified in the preceding paragraph. TEMPORARY INVESTMENTS --------------------- Temporary investments consist of interest bearing deposits with other banks, federal funds sold, and securities purchased under agreements to resell and totaled $30.3 million at September 30, 2003. This represents an increase of $7.2 million or 31.5% from year-end 2002. Temporary investments averaged $64.3 million for the first nine months of 2003, a decrease of $4.6 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 $340.1 million on September 30, 2003, a decrease of $101.4 million or 23.0% from year-end 2002. Available for sale and held to maturity securities were $315.9 million and $24.2 million, respectively. Investment securities averaged $322.8 million for the first nine months of 2003, an increase of $6.4 million or 2.0% 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 $2.1 million at September 30, 2003 compared to $5.5 million at year-end 2002. The decrease is primarily the result of a lower balance in the available for sale portfolio attributed to the sale of investment securities during the current period. COMPANY-OWNED LIFE INSURANCE ---------------------------- The Company purchased life insurance policies on certain key employees, with their knowledge and consent, during the current year at a cost of $24.0 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 $1.1 million for the current nine-month period. 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 $1.0 billion at September 30, 2003, an increase of $53.4 million or 5.6% from year-end 2002. Noninterest bearing deposits increased $57.6 million or 40.8% 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 $159.4 million during the current period, an increase of $8.5 million or 5.7%. End of period interest bearing deposit balances decreased $4.2 million or .5% during the nine months ended September 30, 2003 due primarily to a decrease in money market deposit accounts of $11.5 million or 10.0%. Other savings and interest bearing demand accounts were relatively unchanged at $65.5 million and $223.2 million, respectively. Time deposits increased $7.4 million or 1.8% in the end of period comparisons. On average, interest bearing deposits were $813.5 million in the current period, an increase of $26.0 million or 3.3% from year-end 2002. The increase in average interest bearing deposits is attributable to increases in interest bearing demand deposits of $7.4 million or 3.4%, time deposits of $18.7 million or 4.6%, and savings accounts of $3.0 million or 5.0%. Average money market deposit accounts declined $3.1 million or 2.9% in the comparison. Total deposits averaged $972.9 million, an increase of $34.6 million or 3.7% from year-end 2002. BORROWED FUNDS -------------- Borrowed funds totaled $122.0 million at September 30, 2003, a decrease of $60.3 million or 33.1% from $182.3 million at year-end 2002. A $59.8 million net decrease in short term borrowings coupled with a net decrease in long-term borrowings of $503 thousand account for the total decrease in borrowed funds. Federal funds purchased and securities sold under agreements to repurchase, which are included in short-term borrowings, decreased $51.7 million or 44.6% 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, primarily short-term borrowings from the Federal Home Loan Bank ("FHLB") declined $8.1 million to $1.1 million from $9.2 million. Total borrowed funds averaged $139.4 million, an increase of $3.4 million or 2.5% 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 September 30, 2003 combined retained earnings of the subsidiary banks were $45.6 million, of which $4.0 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. During the current nine months ended September 30, 2003 the Parent Company received dividends of $30.8 million. 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 $26.3 million at September 30, 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 September 30, 2003, such assets totaled $451.9 million, a decrease of $28.3 million or 5.9% from year-end 2002. The decrease in liquid assets is attributed to the overall funding position of the Company combined with the purchase of company-owned life insurance on key employees during the current nine months. Net cash provided by operating activities was $17.3 million in the first nine months of 2003, an increase of $3.6 million or 26.3% compared to $13.7 million in the same period last year. Net cash provided by investing activities was $67.8 million, an increase of $29.6 million due primarily to a $40.1 million increase from investments securities transactions, lower net loans originated for investment in the current nine months of $14.9 million, and the purchase of company-owned life insurance on key employees of $24.0 million. Net cash used in financing activities was $16.2 million for the nine months ended September 30, 2003. In the prior nine-month comparison financing activities provided $84.1 million. The change is mainly due to lower funding activity during the current nine-month period compared to the activity in the same period a year earlier. CAPITAL RESOURCES Shareholders' equity was $125.2 million on September 30, 2003, a decrease of $573 thousand or .5% from year-end 2002. Treasury stock purchases along with a decline in unrealized gains on available for sale investment securities offset increases in other equity components. The Company purchased 98 thousand shares of its outstanding common stock during the first nine months of 2003 for a total cost of $3.1 million. The Company issued 14 thousand shares of common stock during this same period pursuant to its nonqualified stock option plan. Dividends of $6.5 million or $.96 per share were declared during the first nine months of 2003, an increase of 3.2% per share compared to the prior year. Accumulated other comprehensive income, consisting of the unrealized holding gain on available for sale investment securities (net of tax) decreased $2.2 million from year-end 2002 primarily as a result of a lower balance in the available for sale investment portfolio attributed to the sale of investment securities during the current period. 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 September 30, 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 15.42% 4.00% 6.00% Total risk based 16.67% 8.00% 10.00% Leverage 9.95% 4.00% 5.00% The capital ratios of all the subsidiary banks, on an individual basis, were in excess of the applicable minimum regulatory capital ratio requirements at September 30, 2003. RECENTLY ISSUED ACCOUNTING STANDARDS In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51. This Interpretation provides new guidance for the consolidation of variable interest entities ("VIEs") and requires such entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risk among parties involved. The Interpretation also adds disclosure requirements for investors that are involved with unconsolidated VIEs. The consolidation requirements apply immediately to VIEs created after January 31, 2003 and are effective for the first fiscal year or interim period ending after December 15, 2003 for VIEs acquired before February 1, 2003. The adoption of this interpretation is not expected have a significant impact on the Company's financial condition of results of operations. In April 2003, The FASB issued Statement of Financial Accounting Standards ("SFAS") No. 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement is effective for contracts entered into or modified after June 30, 2003. Because the Company does not have these instruments or is only nominally involved in these instruments, management expects the adoption of this statement will not have a material effect on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. This statement affects the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. This statement requires that freestanding financial instruments that embody obligations for the issuer be classified as liabilities on the balance sheet. Most of this statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Because the Company does not have these instruments or is only nominally involved in these instruments, management expects the adoption of this statement will not have a material effect on the Company's consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------------------------------------- The Company uses a simulation model as a tool to monitor and evaluate interest rate risk exposure. The model is designed to measure the sensitivity of net interest income and net income to changing interest rates over future time periods. Forecasting net interest income and its sensitivity to changes in interest rates requires the Company to make assumptions about the volume and characteristics of many attributes, including assumptions relating to the replacement of maturing earning assets and liabilities. Other assumptions include, but are not limited to, projected prepayments, projected new volume, and the predicted relationship between changes in market interest rates and changes in customer account balances. These effects are combined with the Company's estimate of the most likely rate environment to produce a forecast of net interest income and net income. The forecasted results are then adjusted for the effect of a gradual increase and decrease in market interest rates on the Company's net interest income and net income. Because assumptions are inherently uncertain, the model cannot precisely estimate net interest income or net income or the effect of interest rate changes on net interest income and net income. Actual results could differ significantly from simulated results. At September 30, 2003, the model indicated that if rates were to gradually increase by 75 basis points during the calendar year, then net interest income and net income would increase .11% and .25%, respectively for the year ending December 31, 2003. The model indicated that if rates were to gradually decrease by 75 basis points over the same period, then net interest income and net income would decrease .07% and .13%, 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 rates paid on some of the Company's deposits are below 1.0%. 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 as of the end of the period covered by 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 -------------------------- Previously filed in Part II, Item 1 of Farmers Capital Bank Corporation's quarterly report on Form 10-Q for the period ended June 30, 2003 and incorporated herein by reference. 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 (incorporated by reference to Quarterly Report of Form 10-Q for the quarterly period ended March 31, 2003). 31.1 CEO Certification (page 28) 31.2 CFO Certification (page 29) 32 CEO & CFO Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (page 30) b) Reports on Form 8-K ------------------- On October 20, 2003, the Registrant filed a report on Form 8-K under Item 12 reporting its earnings for the third quarter of 2003. There were no financial statements filed with this Form 8-K. On October 28, 2003, the Registrant filed a report on Form 8-K under item 5 reporting an increase in its quarterly dividend. 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: 11/12/03 /s/ G. Anthony Busseni -------------------- -------------------------------------------- G. Anthony Busseni, President and CEO (Principal Executive Officer) Date: 11-12-03 /s/ C Douglas Carpenter -------------------- -------------------------------------------- C. Douglas Carpenter, Vice President, Secretary, and CFO (Principal Financial and Accounting Officer)