FARMERS CAPITAL BANK CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

or

[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the transition period from
____________ to ____________

Commission File Number 0-14412

FARMERS CAPITAL BANK CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)

KENTUCKY 61-1017851
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)

P.O. Box 309, 202 West Main Street
Frankfort, Kentucky 40602
- ---------------------------------------- ---------------------------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (502) 227-1600

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

Yes |X| No ____

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Common stock, par value $0.125 per share
6,844,594 shares outstanding at August 8, 2002

TABLE OF CONTENTS

Part I - Financial Information Page No.
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Item 1 - Financial Statements

Unaudited Consolidated Balance Sheets -
June 30, 2002 and December 31, 2001 3

Unaudited Consolidated Statements of Income -
For the Three Months and Six Months Ended
June 30, 2002 and June 30, 2001 4

Unaudited Consolidated Statements of Comprehensive Income -
For the Three Months and Six Months Ended
June 30, 2002 and June 30, 2001 5

Unaudited Consolidated Statements of Cash Flows -
For the Six Months Ended
June 30, 2002 and June 30, 2001 6

Unaudited Consolidated Statements of Changes in Shareholders' Equity -
For the Six Months Ended
June 30, 2002 and June 30, 2001 7

Notes to Unaudited Consolidated Financial Statements 8

Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9

Item 3 - Quantitative and Qualitative Disclosures About Market Risk 20

Part II - Other Information

Item 1 - Legal Proceedings 21

Item 4 - Submission of Matters to a Vote of Security Holders 21

Item 6 - Exhibits and Reports on Form 8-K 22

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
- ----------------------------

UNAUDITED CONSOLIDATED BALANCE SHEETS
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June 30, December 31,
(In thousands, except per share data) 2002 2001
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ASSETS
Cash and cash equivalents:
Cash and due from banks $ 116,143 $ 55,977
Interest bearing deposits in other banks 4,095 3,090
Federal funds sold and securities purchased under
agreements to resell 124,353 47,318
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Total cash and cash equivalents 244,591 106,385
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Investment securities:
Available for sale, amortized cost of $264,557 (2002) and $306,197 (2001) 266,671 308,081
Held to maturity, fair value of $34,042 (2002) and $38,505 (2001) 32,461 37,461
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Total investment securities 299,132 345,542
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Loans, net of unearned income 695,226 701,869
Allowance for loan losses (11,026) (10,549)
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Loans, net 684,200 691,320
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Premises and equipment, net 24,028 24,800
Other assets 14,147 15,483
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Total assets $ 1,266,098 $ 1,183,530
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LIABILITIES
Deposits:
Noninterest bearing $ 166,157 $ 136,001
Interest bearing 774,586 777,484
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Total deposits 940,743 913,485
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Federal funds purchased and securities sold under agreements to repurchase 145,443 113,792
Other short-term borrowings 19,491 12,808
Long-term debt 26,349 10,913
Dividends payable 2,137 2,152
Other liabilities 7,098 6,820
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Total liabilities 1,141,261 1,059,970
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Commitments and contingencies

SHAREHOLDERS' EQUITY
Common stock, par value $0.125 per share
9,608,000 shares authorized; 8,104,735 and 8,058,244
shares issued at June 30, 2002 and December 31, 2001, respectively 1,013 1,007
Capital surplus 16,608 15,179
Retained earnings 140,050 137,227
Treasury stock, at cost
1,243,594 and 1,152,978 shares at June 30, 2002 and
December 31, 2001, respectively (34,210) (31,077)
Accumulated other comprehensive income 1,376 1,224
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Total shareholders' equity 124,837 123,560
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Total liabilities and shareholders' equity $ 1,266,098 $ 1,183,530
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See accompanying notes to unaudited consolidated financial statements.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
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Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share data) 2002 2001 2002 2001
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INTEREST INCOME
Interest and fees on loans $ 12,639 $ 15,315 $ 25,703 $ 30,707
Interest on investment securities:
Taxable 2,601 2,525 5,343 5,165
Nontaxable 938 829 1,849 1,627
Interest on deposits in other banks 133 22 153 47
Interest of federal funds sold and securities
purchased under agreements to resell 244 885 455 2,075
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Total interest income 16,555 19,576 33,503 39,621
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INTEREST EXPENSE
Interest on deposits 5,771 7,661 11,752 15,662
Interest on federal funds purchased and securities
sold under agreements to repurchase 434 971 907 2,227
Interest on other borrowed funds 414 127 753 279
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Total interest expense 6,619 8,759 13,412 18,168
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Net interest income 9,936 10,817 20,091 21,453
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Provision for loan losses 988 1,050 1,109 1,273
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Net interest income after provision for loan losses 8,948 9,767 18,982 20,180
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NONINTEREST INCOME
Service charges and fees on deposits 1,960 1,747 3,779 3,301
Other service charges, commissions, and fees 908 970 1,803 1,893
Data processing income 387 380 723 708
Trust income 361 507 728 893
Investment securities gains, net 396 186 993 465
Gain on sale of mortgage loans 57 65 112 97
Other 72 78 124 148
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Total noninterest income 4,141 3,933 8,262 7,505
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NONINTEREST EXPENSE
Salaries and employee benefits 4,801 4,565 9,951 9,499
Occupancy expenses, net 588 609 1,159 1,193
Equipment expenses 914 774 1,840 1,581
Bank franchise tax 306 297 613 593
Other 2,082 2,089 4,165 4,016
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Total noninterest expense 8,691 8,334 17,728 16,882
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Income before income taxes 4,398 5,366 9,516 10,803
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Income tax expense 1,082 1,470 2,418 3,001
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Net income $ 3,316 $ 3,896 $ 7,098 $ 7,802
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NET INCOME PER COMMON SHARE
Basic $ .48 $ .56 $ 1.03 $ 1.11
Diluted .48 .56 1.02 1.11
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WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 6,889 6,949 6,895 7,023
Diluted 6,941 6,978 6,943 7,050
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See accompanying notes to unaudited consolidated financial statements.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2002 2001 2002 2001
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NET INCOME $ 3,316 $ 3,896 $ 7,098 $ 7,802
Other comprehensive income (loss):
Unrealized holding gain on available for sale
securities arising during the period, net of tax
of $771, $50, $405, and $544, respectively 1,432 98 753 1,056
Reclassification adjustment for prior period
unrealized gain recognized during current period,
net of tax of $57, $52, $324, and $123, respectively (106) (100) (601) (239)
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Other comprehensive income (loss) 1,326 (2) 152 817
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Comprehensive Income $ 4,642 $ 3,894 $ 7,250 $ 8,619
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See accompanying notes to unaudited consolidated financial statements.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, (In thousands) 2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,098 $ 7,802
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,472 1,520
Net amortization (accretion) of investment security premiums and discounts:
Available for sale 342 (223)
Held to maturity (33) (1)
Provision for loan losses 1,109 1,273
Noncash compensation expense 296 464
Mortgage loans originated for sale (14,399) (18,580)
Proceeds from sale of mortgage loans 14,341 18,063
Deferred income tax (benefit) expense (95) 14
Gain on sale of mortgage loans (112) (97)
Gain on sale of premises and equipment (1) (2)
Gain on sale of available for sale investment securities, net (993) (465)
Decrease in accrued interest receivable 1,154 757
Decrease (increase) in other assets 182 (945)
Decrease in accrued interest payable (261) (178)
Increase in other liabilities 556 691
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Net cash provided by operating activities 10,656 10,093
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities:
Available for sale 222,201 217,372
Held to maturity 5,033 7,570
Proceeds from sale of available for sale investment securities 125,436 7,694
Purchase of investment securities:
Available for sale (305,346) (233,817)
Held to maturity (334)
Loans originated for investment, net of principal collected 6,181 (17,728)
Purchase of premises and equipment (701) (1,580)
Proceeds from sale of equipment 2 4
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Net cash provided by (used in) investing activities 52,806 (20,819)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 27,258 (73,184)
Net increase in securities sold under agreements to repurchase 31,651 19,349
Proceeds from long-term debt 16,500
Repayments of long-term debt (1,064) (3,344)
Net increase (decrease) in other short-term borrowings 6,683 (389)
Dividends paid (4,290) (4,299)
Purchase of common stock (3,133) (8,238)
Stock options exercised 1,139 63
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Net cash provided by (used in) financing activities 74,744 (70,042)
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Net increase (decrease) in cash and cash equivalents 138,206 (80,768)
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Cash and cash equivalents at beginning of year 106,385 229,871
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Cash and cash equivalents at end of period $244,591 $149,103
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SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 13,673 $ 18,346
Income taxes 2,490 3,100
Cash dividend declared and unpaid 2,137 2,084
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See accompanying notes to unaudited consolidated financial statements.

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) Accumulated
Other Total
Six months ended Common Stock Capital Retained Treasury Stock Comprehensive Shareholders'
June 30, 2002 and 2001 Shares Amount Surplus Earnings Shares Amount Income Equity
- ------------------------------------------------------------------------------------------------------------------------------------

Balance at January 1, 2002 8,058 $1,007 $15,179 $ 137,227 1,153 $ (31,077) $ 1,224 $123,560
Net income 7,098 7,098
Other comprehensive income 152 152
Cash dividends declared,
$.62 per share (4,275) (4,275)
Purchase of common stock 91 (3,133) (3,133)
Stock options exercised 47 6 1,133 1,139
Noncash compensation expense
attributed to stock option grants 296 296
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Balance at June 30, 2002 8,105 $1,013 $16,608 $ 140,050 1,244 $ (34,210) $ 1,376 $124,837
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- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2001 8,032 $1,004 $13,634 $ 131,021 860 $ (20,755) $ 557 $125,461
Net income 7,802 7,802
Other comprehensive income 817 817
Cash dividends declared,
$.60 per share (4,228) (4,228)
Purchase of common stock 234 (8,238) (8,238)
Stock options exercised 2 63 63
Noncash compensation expense
attributed to stock option grants 464 464
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Balance at June 30, 2001 8,034 $1,004 $14,161 $ 134,595 1,094 $ (28,993) $ 1,374 $ 122,141
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See accompanying notes to unaudited consolidated financial statements.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Farmers Capital
Bank Corporation (the "Company"), a financial holding company, and its
subsidiaries, including its principal subsidiary, Farmers Bank & Capital Trust
Company. All significant intercompany transactions and accounts have been
eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates used in the preparation of the financial
statements are based on various factors including the current interest rate
environment and the general strength of the local economy. Changes in the
overall interest rate environment can significantly affect the Company's net
interest income and the value of its recorded assets and liabilities. Actual
results could differ from those estimates used in the preparation of the
financial statements.

The financial information presented as of any date other than December 31 has
been prepared from the books and records without audit. The accompanying
consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include
all of the information and the footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of such financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results to be expected for the
full year.

For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2001.

2. RECLASSIFICATIONS

Certain reclassifications have been made to the consolidated financial
statements of prior periods to conform to the current period presentation. Such
reclassifications have no effect on previously reported net income.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties. Although the
Company believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
included herein will prove to be accurate. Factors that could cause actual
results to differ from the results discussed in the forward-looking statements
include, but are not limited to: economic conditions (both generally and more
specifically in the markets in which the Company and its subsidiaries operate);
competition for the Company's customers from other providers of financial
services; government legislation and regulation (which changes from time to time
and over which the Company has no control); changes in interest rates; material
unforeseen changes in the liquidity, results of operations, or financial
condition of the Company's customers; and other risks detailed in the Company's
filings with the Securities and Exchange Commission, all of which are difficult
to predict and many of which are beyond the control of the Company.

RESULTS OF OPERATIONS

SECOND QUARTER 2002 VS. SECOND QUARTER 2001
-------------------------------------------

The Company reported net income of $3.3 million or $.48 per basic and diluted
share for the second quarter of 2002 compared to net income of $3.9 million or
$.56 per basic and diluted share for the second quarter of 2001. This represents
a decrease of 14.3% on a per share basis. Net interest income for the current
quarter totaled $9.9 million, a decrease of $881 thousand or 8.1%. Noninterest
income increased $208 thousand or 5.3%. Noninterest expense increased $357
thousand or 4.3%.

Return on average assets ("ROA") was 1.10% for the current quarter, a decrease
of 29 basis points compared to 1.39% reported for the same period in 2001. The
29 basis point decrease in ROA was attributed to a decrease in net interest
margin of 47 basis points to 3.94%. The lower net interest margin was partially
offset by a decrease in noninterest expense relative to average assets of 10
basis points and a decrease in income tax expense relative to average assets of
14 basis points. Return on average equity was 10.71% for the second quarter of
2002 compared to 12.95% in the same period of 2001.

NET INTEREST INCOME
- -------------------

The interest rate environment has been extremely volatile in the quarterly
comparison, as general market interest rates have dropped significantly since
the second quarter of 2001. Actions taken by the Federal Reserve Board (the
"Fed") to reduce short-term interest rates by 200 basis points since the end of
the second quarter of 2001 have affected the Company's net interest margin, as
well as the net interest margin of many financial institutions in the industry.
The effect of the Fed's actions on the Company has generally led to interest
rates on earning assets declining more rapidly than rates paid on interest
bearing liabilities. During a falling rate environment, the challenge is to
reduce the rates paid on interest bearing liabilities (primarily deposits) to
offset the decline in the yield on variable rate assets (primarily loans) while
remaining competitive in our markets. The Company's tax-equivalent yield on
earning assets for the current three months was 6.43%, a reduction of 141 basis
points from the same period a year ago. The cost of funds for the current three
months was 2.88%, a decline of 131 basis points compared to the same period a
year ago. A goal of the Company in the current interest rate environment is to
increase earning assets and decrease the interest rates paid on interest bearing
liabilities while remaining competitive in our markets. Average earning assets
increased $43.3 million or 4.2% in the quarterly comparison. However, as a
percentage of total average assets, earning assets declined 299 basis points
from 91.37% to 88.38%. Average interest paying liabilities increased $84.0
million or 10.0% in the comparison.

Interest income totaled $16.6 million for the second quarter of 2002, a decrease
of $3.0 million or 15.4% compared to the same period in the prior year. Interest
expense totaled $6.6 million, a decrease of $2.1 million or 24.4%. Net interest
income before provision for loan losses declined $881 thousand or 8.1% in the
comparison and totaled $9.9 million at June 30, 2002.

Interest and fees on loans decreased $2.7 million mainly due to a decrease in
the average rate earned. Average loans decreased $5.2 million or 0.75%, while
the yield decreased 148 basis points to 7.41%. Interest on taxable securities
increased $76 thousand or 3.0% due primarily to a $55.8 million or 31.8%
increase in the average balance. The increase in the average balance offset a
126 basis point decline in the average rate earned. Interest on nontaxable
securities increased $109 thousand or 13.1% due to an increase in the average
balance of $9.6 million combined with a 20 basis point increase in the average
rate earned of 6.68%. Interest on short-term investments, including time
deposits in other banks, federal funds sold, and securities purchased under
agreements to resell, decreased $530 thousand due primarily to a 214 basis point
decrease in the average rate earned on these investments as well as a decline in
the average balance of $16.9 million or 21.0%.

Interest expense on deposits decreased $1.9 million or 24.7% to $5.8 million.
This decrease resulted from a general decline in the average rate paid
throughout the deposit portfolio, which offset increases in average balances.
The decline in interest expense on deposits was as follows: time deposits $1.1
million or 19.1%; interest bearing demand deposits $327 thousand or 38.5%; and
savings deposits $467 thousand or 43.9%. The average rate paid on time deposits,
the largest component of interest bearing deposits, was 4.62% for the current
quarter compared to 5.96% for the same period of 2001. The average balance of
time deposits increased $16.6 million or 4.3% to $403.3 million. The average
rate paid on interest bearing demand deposits declined 78 basis points to 0.98%
while the average balance increased $20.0 million or 10.3% to $214.1 million.
The average rate paid on savings deposits decreased 124 basis points to 1.45%
while the average balance increased $7.2 million or 4.5% to $165.9 million.
Interest expense on federal funds purchased and securities sold under agreements
to repurchase decreased $537 thousand due primarily to a 242 basis point
decrease in the average rate paid. The significant decrease in the average rate
paid offset a $2.5 million or 2.7% increase in the average balance. Interest
expense on other borrowed funds increased $287 thousand in the comparison as
additional borrowings from the Federal Home Loan Bank increased the average
balance outstanding. The average rate paid on other borrowed funds declined 285
basis points to 3.64%.

The net interest margin on a tax equivalent basis decreased 47 basis points to
3.94% during the second quarter of 2002 compared to 4.41% in the second quarter
of 2001. The decrease in net interest margin is primarily attributed to a 37
basis point decline in the impact of noninterest bearing sources of funds. The
effect of noninterest bearing sources of funds on net interest margin typically
declines in a falling rate environment. Also contributing to the reduction in
net interest margin is a 10 basis point decline in the spread between rates
earned and paid that totaled 3.55% for the current quarter compared to 3.65% in
the same quarter a year earlier.

The following tables present an analysis of net interest income for the
quarterly periods ended June 30.

DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL
- ------------------------------------------------------------------------------------------------------------------------------
Quarter Ended June 30, 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------

EARNING ASSETS
Investment securities
Taxable $ 231,433 $ 2,601 4.51% $ 175,635 $ 2,525 5.77%
Nontaxable1 82,347 1,372 6.68 72,784 1,175 6.48
Time deposits with banks, federal
funds sold and securities purchased
under agreements to resell 63,383 377 2.39 80,251 907 4.53
Loans1,2,3 691,429 12,775 7.41 696,656 15,437 8.89
- ------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,068,592 $17,125 6.43% 1,025,326 $20,044 7.84%
- ------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (10,393) (10,531)
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Total earning assets, net of
allowance for loan losses 1,058,199 1,014,795
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NONEARNING ASSETS
Cash and due from banks 112,936 67,404
Premises and equipment, net 24,312 25,133
Other assets 13,602 14,853
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Total assets $ 1,209,049 $ 1,122,185
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INTEREST BEARING LIABILITIES
Deposits
Interest bearing demand $ 214,116 $ 523 0.98% $ 194,160 $ 850 1.76%
Savings 165,918 598 1.45 158,745 1,065 2.69
Time 403,276 4,650 4.62 386,641 5,746 5.96
Federal funds purchased and
securities sold under agreements
to repurchase 93,539 434 1.86 91,064 971 4.28
Other borrowed funds 45,576 414 3.64 7,843 127 6.49
- ------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 922,425 $ 6,619 2.88% 838,453 $ 8,759 4.19%
- ------------------------------------------------------------------------------------------------------------------------------
NONINTEREST BEARING LIABILITIES
Commonwealth of Kentucky deposits 39,927 37,743
Other demand deposits 114,413 116,057
Other liabilities 8,095 9,283
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Total liabilities 1,084,860 1,001,536
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Shareholders' equity 124,189 120,649
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 1,209,049 $ 1,122,185
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 10,506 11,285
TE basis adjustment (570) (468)
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 9,936 $10,817
- ------------------------------------------------------------------------------------------------------------------------------
Net interest spread 3.55% 3.65%
Impact of noninterest bearing sources
of funds .39 .76
- ------------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.94% 4.41%
- ------------------------------------------------------------------------------------------------------------------------------

1Income and yield stated at a fully tax equivalent basis using a 35% tax rate.
2Loan balances include principal balances on nonaccrual loans.
3Loan fees included in interest income amount to $476 thousand and $495 thousand in 2002 and 2001, respectively.

ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX EQUIVALENT BASIS)
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands) Variance Variance Attributed to
Quarter ended June 30, 2002/20011 Volume Rate
- ------------------------------------------------------------------------------------------------------------------------------

INTEREST INCOME
Taxable investment securities $ 76 $ 2,668 $ (2,592)
Nontaxable investment securities2 197 159 38
Time deposits with banks, federal funds sold and
securities purchased under agreements to resell (530) (163) (367)
Loans2 (2,662) (115) (2,547)
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income (2,919) 2,549 (5,468)
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest bearing demand deposits (327) 508 (835)
Savings deposits (467) 310 (777)
Time deposits (1,096) 1,488 (2,584)
Federal funds purchased and securities sold under
agreements to repurchase (537) 178 (715)
Other borrowed funds 287 673 (386)
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense (2,140) 3,157 (5,297)
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income $ (779) $ (608) $ (171)
- ------------------------------------------------------------------------------------------------------------------------------
Percentage change 100.0% 78.0% 22.0%
- ------------------------------------------------------------------------------------------------------------------------------

1The changes that are not solely due to rate or volume are allocated on a percentage basis using the absolute values of rate and
volume variances as a basis for allocation.
2Income stated at fully tax equivalent basis using a 35% tax rate.

NONINTEREST INCOME
- ------------------

Noninterest income totaled $4.1 million for the current quarter, an increase of
$208 thousand or 5.3% compared to the prior year. Service charges and fees on
deposits, the largest component of noninterest income, increased $213 thousand
or 12.2% primarily due to the new overdraft policy and related NSF fee structure
that is now fully in place at each of the Company's subsidiary banks. Other
service charges, commissions, and fees decreased $62 thousand or 6.4% due
primarily to a $37 thousand or 33.0% decrease in fee income on loans originated
for sale to unrelated third parties. Trust fees decreased $146 thousand or 28.8%
due primarily to unusually large estate fees collected during the same period a
year earlier. Net gains on the sale of available for sale investment securities
totaled $396 thousand, an increase of $210 thousand.

NONINTEREST EXPENSE
- -------------------

Total noninterest expense increased $357 thousand or 4.3% from the second
quarter of 2001 and totaled $8.7 million. Salaries and employee benefits, the
largest component of noninterest expense, increased $236 thousand or 5.2%.
Employee benefits increased $249 thousand in the quarterly comparison while
salaries and related payroll taxes increased $77 thousand. Noncash compensation
expense attributed to stock option grants decreased $90 thousand. Occupancy
expense, net of rental income, decreased $21 thousand in the comparison and
totaled $588 thousand. Equipment expense totaled $914 thousand, an increase of
$140 thousand or 18.1%. The increase is primarily the result of increased
depreciation. Bank franchise tax increased 3.0% to $306 thousand. Other
noninterest expense decreased less than 1% and totaled $2.1 million.

INCOME TAXES
- ------------

Income tax expense for the second quarter of 2002 was $1.1 million, a decrease
of $388 thousand or 26.4% from the second quarter of 2001. The effective tax
rate was 24.6% for the current quarter, a decrease of 280 basis points from the
second quarter of 2001. The decrease in the effective tax rate is due to a
combination of factors, including the following: tax-exempt investment
securities averaged $82.3 million, an increase of $9.6 million or 13.1% in the
quarterly comparison; tax-exempt municipal loans averaged $19.6 million, an
increase of $7.0 million or 55.8%; and taxable earning assets repriced to a
lower interest rate at a faster pace than tax-exempt earning assets in the
rapidly declining interest rate environment. The result is less taxable income
in proportion to total income.

FIRST SIX MONTHS OF 2002
------------------------

Net income for the six months ended June 30, 2002 was $7.1 million compared to
net income of $7.8 million for the same period in 2001, a decrease of $704
thousand or 9.0%. On a basic and diluted per share basis, net income totaled
$1.03 and $1.02 for the current six-month period, a decrease of $.08 or 7.2% and
$.09 or 8.1%, respectively. The decrease in net income is due primarily to a
decline in net interest income. Net interest income decreased $1.4 million or
6.3% in the six-month comparison.

ROA was 1.19% for the six months ended June 30, 2002, a decrease of 23 basis
points from the same period in 2001. The 23 basis point decrease in ROA was
attributed to a decrease in net interest margin of 46 basis points to 3.97%. The
lower net interest margin was partially offset by a decrease in noninterest
expense relative to average assets of 9 basis points and a decrease in income
tax expense relative to average assets of 12 basis points. Return on average
equity was 11.53%, a decrease of 133 basis points from the first six months of
2001.

NET INTEREST INCOME
- -------------------

The interest rate environment has been extremely volatile in the six-month
comparison, as general market interest rates have dropped significantly since
the second quarter of 2001. Actions taken by the Fed to reduce short-term
interest rates by 200 basis points since the end of the second quarter of 2001
have affected the Company's net interest margin, as well as the net interest
margin of many financial institutions in the industry. The effect of the Fed's
actions on the Company has generally led to interest rates on earning assets
declining more rapidly than rates paid on interest bearing liabilities. During a
falling rate environment, the challenge is to reduce the rates paid on interest
bearing liabilities (primarily deposits) to offset the decline in the yield on
variable rate assets (primarily loans) while remaining competitive in our
markets. The Company's tax-equivalent yield on earning assets for the current
six months was 6.47%, a reduction of 156 basis points from the same period a
year ago. The cost of funds for the current six months was 2.93%, a decline of
148 basis points compared to the same period a year ago. A goal of the Company
in the current interest rate environment is to increase earning assets and
decrease the interest rates paid on interest bearing liabilities while remaining
competitive in our markets. Average earning assets increased $60.2 million or
5.9% in the comparison. However, as a percentage of total average assets,
earning assets declined 208 basis points from 91.71% to 89.63%. Average interest
paying liabilities increased $91.0 million or 11.0% in the comparison.

Interest income totaled $33.5 million for the six months ended June 30, 2002, a
decrease of $6.1 million or 15.4% compared to the same period in 2001. Interest
expense was $13.4 million, a decrease of $4.8 million or 26.2%. Net interest
income declined $1.4 million or 6.3%

Interest and fees on loans decreased $5.0 million or 16.3% primarily due to a
145 basis point decline in the average rate earned of 7.59% in the current six
months. Average loans outstanding were virtually unchanged at $690 million.
Interest on taxable securities increased $178 thousand or 3.4% as a $74.1
million increase in the average balance outstanding offset a decline in yield of
168 basis points. Interest on nontaxable securities increased $222 thousand or
13.6% due to an increase in both the average balance and rate earned of $10.5
million or 14.7% and 16 basis points, respectively. Interest on short-term
investments, including time deposits in other banks, federal funds sold, and
securities purchased under agreements to resell, decreased $1.5 million or 71.4%
due primarily to a 303 basis point decrease in the average rate earned. A $24.3
million decrease in the average balance also contributed to the decrease.

Interest expense on deposits declined $3.9 million or 25.0% to $11.8 million.
This decrease resulted from a general decline in the average rate paid
throughout the deposit portfolio, which offset increases in average balances.
The decline in interest expense on deposits was as follows: time deposits $1.9
million or 16.9%; interest bearing demand deposits $834 thousand or 43.5%; and
savings deposits $1.2 million or 48.7%. The average rate paid on time deposits,
the largest component of interest bearing deposits, was 4.75% for the current
six months compared to 6.02% for the same period of 2001. The average balance of
time deposits increased $20.2 million or 5.3% to $401.6 million. The average
rate paid on interest bearing demand deposits declined 97 basis points to 1.01%
while the average balance increased $20.0 million or 10.3% to $215.3 million.
The average rate paid on savings deposits decreased 153 basis points to 1.49%
while the average balance increased $6.8 million or 4.3% to $164.3 million.
Interest expense on federal funds purchased and securities sold under agreements
to repurchase decreased $1.3 million or 59.3% due primarily to a 324 basis point
decrease in the average rate paid. The significant decrease in the average rate
paid offset a $12.0 million or 13.5% increase in the average balance. Interest
expense on other borrowed funds increased $474 thousand in the comparison as
additional borrowings from the Federal Home Loan Bank increased the average
balance outstanding. The increase in the average balance outstanding offset a
287 basis point decline in the average rate paid.

The net interest margin on a tax equivalent basis decreased 46 basis points to
3.97% during the first six months of 2002 compared to the same period of 2001.
The decrease in net interest margin is primarily attributed to a 38 basis point
decline in the impact of noninterest bearing sources of funds. The effect of
noninterest bearing sources of funds on net interest margin typically declines
in a falling rate environment. Also contributing to the reduction in net
interest margin is an 8 basis point decline in the spread between rates earned
and paid that totaled 3.54% for the current six months compared to 3.62% in the
same period a year earlier.

The following tables present an analysis of net interest income for the six
months ended June 30.

DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL
- ----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------

EARNING ASSETS
Investment securities
Taxable $ 246,098 $ 5,343 4.38% $ 171,957 $ 5,165 6.06%
Nontaxable1 81,876 2,699 6.65 71,379 2,298 6.49
Time deposits with banks, federal
funds sold and securities purchased
under agreements to resell 60,279 608 2.03 84,614 2,122 5.06
Loans1,2,3 690,242 25,968 7.59 690,379 30,948 9.04
- ----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,078,495 $ 34,618 6.47% 1,018,329 $ 40,533 8.03%
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (10,476) (10,469)
- ----------------------------------------------------------------------------------------------------------------------------------
Total earning assets, net of
allowance for loan losses 1,068,019 1,007,860
- ----------------------------------------------------------------------------------------------------------------------------------
NONEARNING ASSETS
Cash and due from banks 99,222 65,055
Premises and equipment, net 24,502 25,088
Other assets 11,511 12,433
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,203,254 $ 1,110,436
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Deposits
Interest bearing demand $ 215,265 $ 1,082 1.01% $ 195,240 $ 1,916 1.98%
Savings 164,324 1,211 1.49 157,489 2,361 3.02
Time 401,646 9,459 4.75 381,439 11,385 6.02
Federal funds purchased and
securities sold under agreements
to repurchase 101,037 907 1.81 89,012 2,227 5.05
Other borrowed funds 40,432 753 3.76 8,482 279 6.63
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 922,704 $ 13,412 2.93% 831,662 $ 18,168 4.41%
- ----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST BEARING LIABILITIES
Commonwealth of Kentucky deposits 35,146 35,185
Other demand deposits 114,910 114,490
Other liabilities 6,355 6,776
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,079,115 988,113
- ----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 124,139 122,323
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 1,203,254 $ 1,110,436
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 21,206 22,365
TE basis adjustment (1,115) (912)
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 20,091 $ 21,453
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest spread 3.54% 3.62%
Impact of noninterest bearing sources
of funds .43 .81
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.97% 4.43%
- ----------------------------------------------------------------------------------------------------------------------------------

1Income and yield stated at a fully tax equivalent basis using a 35% tax rate.
2Loan balances include principal balances on nonaccrual loans.
3Loan fees included in interest income amount to $906 thousand and $921 thousand in 2002 and 2001, respectively.

ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX EQUIVALENT BASIS)
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands) Variance Variance Attributed to
Six Months Ended June 30, 2002/20011 Volume Rate
- ----------------------------------------------------------------------------------------------------------------------------------

INTEREST INCOME
Taxable investment securities $ 178 $ 3,625 $ (3,447)
Nontaxable investment securities2 401 343 58
Time deposits with banks, federal funds sold and
securities purchased under agreements to resell (1,514) (491) (1,023)
Loans2 (4,980) (6) (4,974)
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest income (5,915) 3,471 (9,386)
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest bearing demand deposits (834) 511 (1,345)
Savings deposits (1,150) 289 (1,439)
Time deposits (1,926) 1,558 (3,484)
Federal funds purchased and securities sold under
agreements to repurchase (1,320) 773 (2,093)
Other borrowed funds 474 861 (387)
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest expense (4,756) 3,992 (8,748)
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ (1,159) $ (521) $ (638)
- ----------------------------------------------------------------------------------------------------------------------------------
Percentage change 100.0% 45.0% 55.0%
- ----------------------------------------------------------------------------------------------------------------------------------

1The changes that are not solely due to rate or volume are allocated on a percentage basis using the absolute values of rate and
volume variances as a basis for allocation.
2Income stated at fully tax equivalent basis using a 35% tax rate.

NONINTEREST INCOME
- ------------------

Noninterest income was $8.3 million for the first six months of 2002, an
increase of $757 thousand or 10.1% compared to the same period in 2001. Service
charges and fees on deposits, the largest component of noninterest income,
increased $478 thousand or 14.5% primarily due to the new overdraft policy and
related NSF fee structure that is now fully in place at each of the Company's
subsidiary banks. Other service charges, commissions, and fees decreased $90
thousand or 4.8% to $1.8 million primarily due to a decrease in custodial
safekeeping fees from the Commonwealth of Kentucky. Trust fees decreased $165
thousand or 18.5% due primarily to unusually large estate fees collected during
the same period in 2001. Net gains on the sale of available for sale investment
securities totaled $993 thousand in the current period, an increase of $528
thousand compared to a year earlier.

NONINTEREST EXPENSE
- -------------------

Total noninterest expense increased $846 thousand or 5.0% and totaled $17.7
million for the first six months of 2002. Salaries and employee benefits, the
largest component of noninterest expense, increased $452 thousand or 4.8% in the
six-month comparison. Employee benefits increased $351 thousand in the
comparison while salaries and related payroll taxes increased $269 thousand.
Noncash compensation expense attributed to stock option grants decreased $168
thousand. Occupancy expense, net of rental income, decreased $34 thousand or
2.8% in the comparison. Equipment expense increased $259 thousand or 16.4%
primarily due to an increase in depreciation expense. Bank franchise tax expense
and other noninterest expense increased $169 thousand or 3.7% to $4.8 million.
The increase in other noninterest expense is primarily attributable to a $146
thousand increase in losses on foreclosed assets.

INCOME TAXES
- ------------

Income tax expense for the first six months of 2002 was $2.4 million, a decrease
of $583 thousand or 19.4% compared to the same period in 2001. The effective tax
rate was 25.4% for the first six months of 2002, a decrease of 240 basis points
from the prior year. The decrease in the effective tax rate is due to a
combination of factors, including the following: tax-exempt investment
securities averaged $81.9 million, an increase of $10.5 million or 14.7% in the
comparison; tax-exempt municipal loans averaged $18.3 million, an increase of
$6.4 million or 53.3%; and taxable earning assets repriced to a lower interest
rate at a faster pace than tax-exempt earning assets in the rapidly declining
interest rate environment. The result is less taxable income in proportion to
total income.

FINANCIAL CONDITION

Total assets were $1.3 billion on June 30, 2002, an increase of $82.6 million or
7.0% from December 31, 2001. Fluctuations in assets and deposits are typical due
to the relationship between the Company's principal subsidiary, Farmers Bank &
Capital Trust Company and the Commonwealth of Kentucky. Farmers Bank provides
various services to state agencies of the Commonwealth. As the depository for
the Commonwealth, these agencies issue checks drawn on Farmers Bank, including
paychecks and state income tax refunds. Farmers Bank also processes vouchers of
the WIC (Women, Infants and Children) program for the Cabinet for Human
Resources. The Bank's investment department provides services to the Teacher's
Retirement systems. As the depository for the Commonwealth, large fluctuations
in deposits are likely to occur on a daily basis. On an average basis, total
assets were $1.2 billion for the first six months of 2002, an increase of $59.6
million or 5.2% from year-end 2001. Average earning assets were 89.6% of average
total assets at June 30, 2002, a decrease of 172 basis points compared to
year-end 2001

LOANS
- -----

Loans, net of unearned income, totaled $695.2 million at June 30, 2002, a
decrease of $6.6 million or 0.9% from year-end 2001. This reduction in loans
outstanding is primarily the result of decreases in commercial and industrial
loans of $7.5 million or 9.7% and lease financing of $2.5 million or 6.1%. Loans
to states and political subdivision increased $4.1 million or 27.9%. Average net
loans for the six-month period ended June 30, 2002 were $690.2 million, a
decrease of $8.5 million or 1.2% compared to the year-end 2001 average. On
average, loans represented 64.0% of earning assets during the current period
compared to 66.9% for year-end 2001. As loan demand fluctuates, the available
funds are redirected between either temporary investments or investment
securities.

ALLOWANCE FOR LOAN LOSSES
- -------------------------

The allowance for loan losses was $11.0 million at June 30, 2002, an increase of
$477 thousand or 4.5% from the prior year-end. The allowance for loan losses was
1.59% of net loans at June 30, 2002, an increase of nine basis points compared
to December 31, 2001. The increase in the allowance for loan losses is primarily
attributed to the significant increase in nonperforming loans, as discussed
below, and the related estimated credit risk within the loan portfolio. In
management's opinion, the allowance for loan losses is adequate to cover losses
inherent in the loan portfolio. The provision for loan losses decreased $62
thousand and $164 thousand in the current three and six-month periods compared
to the same periods in 2001. The Company had net charge-offs of $291 thousand
and $632 thousand in the current three and six month periods of 2002 compared to
net charge-offs of $946 thousand and $1.0 million in the same periods of 2001.
Annualized net charge-offs represented 0.17% and 0.18% of average net loans for
the current three and six-month periods, respectively, compared to 0.31% at
year-end 2001. Management continues to emphasize collection efforts and
evaluation of risks within the loan portfolio.

NONPERFORMING ASSETS
- --------------------

Nonperforming assets for the Company include nonperforming loans, other real
estate owned, and other foreclosed assets. Nonperforming loans consists of
nonaccrual loans, restructured loans, and loans past due ninety days or more on
which interest is still accruing. Nonperforming assets totaled $21.1 million at
June 30, 2002, an increase of $14.8 million from the prior year-end.
Nonperforming loans totaled $20.7 million at June 30, 2002 an increase of $15.5
million compared to year-end 2001. Nonperforming loans as a percentage of net
loans were 2.97% at June 30, 2002 compared to 0.74% at year-end 2001. The
increase in nonperforming loans is primarily due to a $14.5 million increase in
loans on nonaccrual status that totaled $18.1 million at June 30, 2002. Loans on
nonaccrual status include $15.3 million of constructions loans secured by
residential real estate to a financially troubled builder. The Company has
performed a detailed review of this credit and, under the information currently
known by management, believes no further provisions for loan losses related to
this credit are necessary. Interest income lost on this group of loans due to
their nonaccrual status totaled $302 thousand during the six months ended June
30, 2002. A portion of this total, $92 thousand, represents interest income
accrued during the first quarter of 2002, before the loan was placed on
nonaccrual status, which was reversed in the second quarter of 2002. It is
currently estimated that a total of $210 thousand of interest income in each of
the remaining quarters of 2002 will be lost related to this credit should it
remain on nonaccrual status through year-end 2002.

Other real estate owned, which had a balance of $715 thousand at year-end 2001,
decreased $391 thousand or 54.7% and totaled $324 thousand on June 30, 2002.

TEMPORARY INVESTMENTS
- ---------------------

Temporary investments consist of interest bearing deposits with other banks,
federal funds sold, and securities purchased under agreements to resell and
totaled $128.4 million at June 30, 2002, an increase of $78.0 million from
year-end 2001. Temporary investments averaged $60.3 million for the first six
months of 2002, a decrease of $22.5 million from year-end 2001. This decrease is
primarily a result of the Company's net funding position and the relationship
between its principal subsidiary and the Commonwealth of Kentucky as described
in preceding sections of this report. Temporary investments are reallocated as
loan demand and other investment alternatives present the opportunity.

INVESTMENT SECURITIES
- ---------------------

Investment securities were $299.1 million on June 30, 2002, a decrease of $46.4
million or 13.4% from year-end 2001. Available for sale and held to maturity
securities were $266.7 million and $32.4 million, respectively. Investment
securities averaged $328.0 million for the first six months of 2002, an increase
of $64.8 million or 24.6% from year-end 2001. The increase in average investment
securities is attributable to the Company's continued efforts to manage its net
interest margin during a period of relatively low market interest rates and
correlates with the increase in borrowed funds. The Company had an unrealized
gain on available for sale investment securities of $2.1 million at June 30,
2002 compared to $1.9 million at year-end 2001.

DEPOSITS
- --------

Total deposits were $940.7 million at June 30, 2002, an increase of $27.3
million or 3.0% from year-end 2001. Noninterest bearing deposits increased $30.2
million or 22.2% in the comparison. This increase is primarily due to the
relationship between the Company's principal subsidiary and the Commonwealth of
Kentucky as described in preceding sections of this report. Commonwealth of
Kentucky deposits increased $27.9 million on June 30, 2002 compared to December
31, 2001. On average, noninterest bearing deposits were $150.1 million during
the current period, an increase of $1.3 million or 0.9%. End of period interest
bearing deposit balances decreased $2.9 million or 0.4% compared to the prior
year end and are summarized as follows: interest bearing checking accounts
decreased $2.7 million to $209.9 million; money market deposit accounts
decreased $4.1 million to $99.8 million; savings accounts decreased $7.5 million
to $58.9 million; and time deposits increased $11.4 million to $406.0 million.
On average, interest bearing deposits were $781.2 million in the current
six-month period, an increase of $33.9 million from year-end 2001. The increase
in average interest bearing deposits is attributable to increases in interest
bearing demand deposits of $16.2 million or 8.1%, time deposits of $16.0 million
or 4.2%, and money market deposit accounts of $3.3 million or 3.3%. Average
savings deposits decreased $1.7 million or 2.8%. Total deposits averaged $931.3
million, an increase of $35.2 million or 3.9% from year-end 2001.

BORROWED FUNDS
- --------------

Borrowed funds totaled $191.3 million at June 30, 2002, an increase of $53.8
million or 39.1% from year-end 2001. Increases in short-term borrowings of $38.4
million along with an increase in long-term borrowings of $15.4 million account
for the total increase in borrowed funds. Federal funds purchased and securities
sold under agreements to repurchase accounted for most of the increase in
borrowed funds with an increase of $31.7 million or 27.8%. This increase is due
primarily to the overall funding needs of the Company as well as the
relationship between the Company's principal subsidiary and the Commonwealth of
Kentucky as described in preceding sections of this report. Other short-term
borrowings increased $6.7 million mainly due to an increase in borrowed funds
from the Federal Home Loan Bank ("FHLB"). The $15.4 million increase in
long-term borrowings is attributed to additional advances from the FHLB with
varying interest rate terms and maturing within 10 years. Recent FHLB advances
have been used to fund the purchase of additional investment securities and to
aid the efforts of asset and liability management. Total borrowed funds averaged
$141.5 million, an increase of $24.5 million or 20.9% from year-end 2001.

LIQUIDITY

The Parent Company's primary use of cash consists of dividend payments to its
common shareholders, purchases of its common stock, and other general operating
purposes. Liquidity of the Parent Company depends primarily on the receipt of
dividends from its subsidiary banks and cash balances maintained. As of June 30,
2002 combined retained earnings of the subsidiary banks were $69.1 million, of
which $17.3 million was available for the payment of dividends to the Parent
Company without obtaining prior approval from bank regulatory agencies. As a
practical matter, payment of future dividends is also subject to the maintenance
of other capital ratio requirements. Management expects that in the aggregate,
its subsidiary banks will continue to have the ability to pay dividends in order
to provide funds to the Parent Company during the remainder of 2002 sufficient
to meet its liquidity needs. The Parent Company had cash balances of $8.3
million at June 30, 2002.

The Company's objective as it relates to liquidity is to insure that subsidiary
banks have funds available to meet deposit withdrawals and credit demands
without unduly penalizing profitability. In order to maintain a proper level of
liquidity, the banks have several sources of funds available on a daily basis,
which can be used for liquidity purposes. These sources of funds primarily
include the subsidiary banks' core deposits, consisting of both business and
nonbusiness deposits; cash flow generated by repayment of loan principal and
interest; and federal funds purchased and securities sold under agreements to
repurchase. The terms of the recent FHLB advances have been taken into
consideration in relation to the overall funding needs of the Company.

For the longer term, the liquidity position is managed by balancing the maturity
structure of the balance sheet. This process allows for an orderly flow of funds
over an extended period of time. The Company's Asset and Liability Management
Committee meets regularly and monitors the composition of the balance sheet to
ensure comprehensive management of interest rate risk and liquidity.

Liquid assets consist of cash, cash equivalents, and securities available for
sale. At June 30, 2002, such assets totaled $511.3 million, an increase of $96.8
million or 23.4% from year-end 2001. The increase in liquid assets is attributed
to the overall funding position of the Company combined with the current
interest rate environment. Net cash provided by operating activities was $10.7
million in the first six months of 2002, an increase of $563 thousand or 5.6%
compared to the same period last year. Net cash provided by investing activities
was $52.8 million, an increase of $73.6 million due primarily to a $51.0 million
decrease in net purchases and calls of available for sale investment securities.
A decrease in loan volume during the six-month periods contributed an additional
$23.9 million in the comparison. Net cash provided by financing activities was
$74.7 million for the period ended June 30, 2002. In the same period of the
prior year, financing activities used $70.0 million, a difference of $144.7
million relating primarily to deposit account activity.

CAPITAL RESOURCES

Shareholders' equity was $124.8 million on June 30, 2002, an increase of $1.3
million or 1.0% from year-end 2001. The Company purchased 91 thousand shares of
its outstanding common stock during the first six months of 2002 for a total
cost of $3.1 million.

The Company issued 47 thousand shares of common stock during the first six
months pursuant to its nonqualified stock option plan. Dividends of $4.3 million
or $.62 per share were declared during the first six months of 2002, an increase
of 3.3% per share compared to the prior year. Accumulated other comprehensive
income, consisting of the unrealized holding gain on available for sale
investment securities (net of tax) increased $152 thousand from year-end 2001.

Consistent with the objective of operating a sound financial organization, the
Company's goal is to maintain capital ratios well above the regulatory minimum
requirements. The Company's capital ratios as of June 30, 2002, the regulatory
minimums and the regulatory standard for a "well capitalized" institution are as
follows:

Farmers Capital Regulatory Well
Bank Corporation Minimum Capitalized
- ------------------------------------------------------------------------------
Tier 1 risk based 16.30% 4.00% 6.00%
Total risk based 17.55% 8.00% 10.00%
Leverage 10.28% 4.00% 5.00%
- ------------------------------------------------------------------------------

The capital ratios of all the subsidiary banks, on an individual basis, were in
excess of the applicable minimum regulatory capital ratio requirements at June
30, 2002.

EFFECT OF IMPLEMENTING RECENTLY ISSUED ACCOUNTING STANDARDS

Effective January 1, 2002, the Company adopted Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values and reviewed for impairment in
accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. The adoption of SFAS No. 142 did
not have an effect on the consolidated financial statements of the Company.

Effective January 1, 2002, the Company adopted SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, it retains many
of the fundamental provisions of that Statement.

SFAS No. 144 also supersedes the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, REPORTING THE RESULTS OF
OPERATIONS-REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for
the disposal of a segment of a business. However, it retains the requirement in
Opinion No. 30 to report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held for sale.
By broadening the presentation of discontinued operations to include more
disposal transactions, the FASB has enhanced management's ability to provide
information that helps financial statement users to assess the effects of a
disposal transaction on the ongoing operations of an entity. The adoption of
SFAS No. 144 did not have an effect on the consolidated financial statements of
the Company.

In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS NO.
4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS.
This Statement rescinds FASB Statement No. 4, REPORTING GAINS AND LOSSES FROM
EXTINGUISHMENT OF DEBT, and an amendment of that Statement, FASB Statement No.
64, EXTINGUISHMENTS OF DEBT MADE TO SATISFY SINKING-FUND REQUIREMENTS. This
Statement also rescinds FASB Statement No. 44, ACCOUNTING FOR INTANGIBLE ASSETS
OF MOTOR CARRIERS. This Statement amends FASB Statement No. 13, ACCOUNTING FOR
LEASES, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The provisions of SFAS
No. 145 related to SFAS No. 4 and SFAS No. 13 are effective for fiscal years
beginning and transactions occurring after May 15, 2002, respectively. All other
provisions of this Statement are effective for financial statements issued on or
after May 15, 2002. The adoption of this Statement will not have a material
effect on the Company's consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH
EXIT OR DISPOSAL ACTIVITIES. This Statement requires that a liability for costs
associated with an exit or disposal activity to be recognized when incurred
rather than at the date commitment to an exit or disposal plan. This Statement
replaces EITF 94-3 and is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The adoption of this Statement
will not have a material effect on the Company's consolidated financial
statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------

The Company uses a simulation model as a tool to monitor and evaluate interest
rate risk exposure. The model is designed to measure the sensitivity of net
interest income and net income to changing interest rates over future time
periods. Forecasting net interest income and its sensitivity to changes in
interest rates requires the Company to make assumptions about the volume and
characteristics of many attributes, including assumptions relating to the
replacement of maturing earning assets and liabilities. Other assumptions
include, but are not limited to, projected prepayments, projected new volume,
and the predicted relationship between changes in market interest rates and
changes in customer account balances. These effects are combined with the
Company's estimate of the most likely rate environment to produce a forecast of
net interest income and net income. The forecasted results are then adjusted for
the effect of a gradual increase and decrease in market interest rates on the
Company's net interest income and net income. Because assumptions are inherently
uncertain, the model cannot precisely estimate net interest income or net income
or the effect of interest rate changes on net interest income and net income.
Actual results could differ significantly from simulated results.

At June 30, 2002, the model indicated that if rates were to gradually increase
by 150 basis points during the remainder of the calendar year, then net interest
income and net income would decrease 0.66% and 1.62%, respectively, for the year
ending December 31, 2002. The model indicated that if rates were to gradually
decrease by 150 basis points over the same period, then net interest income and
net income would decrease 0.20% and 0.41%, respectively.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
- --------------------------

In the case of EARL H. SHILLING ET AL. V. FARMERS BANK & Capital Trust Company,
on May 10, 2002, the Kentucky Court of Appeals affirmed the Jefferson Circuit
Court's judgment in favor of the Bank. The plaintiff bondholders filed a motion
for discretionary review to the Supreme Court on June 7, 2002. It is not
possible at this stage of the proceedings to make any prediction as to the
outcome, however the Supreme Court must grant the plaintiff bondholders' motion
to review the appeal, or the affirmed judgment in favor of the Bank will become
the final outcome of the case.

There were various other pending legal actions and proceedings against the
Company arising from the normal course of business and in which claims for
damages are asserted. Management, after discussion with legal counsel, believes
that these actions are without merit and that the ultimate liability resulting
from these legal actions and proceedings, if any, will not have a material
adverse effect upon the consolidated financial statements of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------

The annual meeting of shareholders was held May 14, 2002. The matters that were
voted upon included the election of four directors for three-year terms ending
in 2005 or until their successors have been elected and qualified.

The outcome of the voting was as follows:
NAME FOR AGAINST WITHHELD ABSTAINED
Gerald R. Hignite 5,609,477 0 1,982 110,115
G. Anthony Busseni 5,445,249 0 166,210 110,115
Shelley S. Sweeney 5,609,477 0 1,982 110,115
Michael M. Sullivan 5,609,669 0 1,790 110,115

Listed below are the names of each director whose term of office continued after
the meeting.

Lloyd C. Hillard, Jr. J. Barry Banker
Harold G. Mays W. Benjamin Crain
Robert Roach, Jr. Glenn Birdwhistell
Frank W. Sower, Jr.

In addition to the directors above, Dr. John P. Stewart, Chairman Emeritus, E.
Bruce Dungan, and Charles T. Mitchell serve as advisory directors for the
Company.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------

a) List of Exhibits
----------------

11 Statement re computation of per share earnings
99.1 CEO Certification
99.2 CFO Certification

b) Reports on Form 8-K
-------------------

None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Date: 8-8-02 /s/ G. Anthony Busseni
----------------------- --------------------------------------------
G. Anthony Busseni,
President and CEO
(Principal Executive Officer)

Date: 8-8-02 /s/ C. Douglas Carpenter
----------------------- --------------------------------------------
C. Douglas Carpenter,
Vice President, Secretary, and CFO
(Principal Financial and Accounting Officer)

Exhibit 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
----------------------------------------------

- --------------------------------------------------------------------------------
Three Months Six Months
Ended Ended
June 30 June 30
(In thousands, except per share data) 2002 2001 2002 2001
- --------------------------------------------------------------------------------

Net income, basic and diluted $3,316 $3,896 $7,098 $7,802
- --------------------------------------------------------------------------------

Average shares outstanding 6,889 6,949 6,895 7,023
Effect of dilutive stock options 52 29 48 27
- --------------------------------------------------------------------------------
Average diluted shares outstanding 6,941 6,978 6,943 7,050
- --------------------------------------------------------------------------------

Net income per share, basic $ .48 $ .56 $ 1.03 $ 1.11
Net income per share, diluted .48 .56 1.02 1.11
- --------------------------------------------------------------------------------

Exhibit 99.1

CERTIFICATION OF PERIODIC REPORT
--------------------------------

I, G. Anthony Busseni, President and Chief Executive Officer of Farmers Capital
Bank Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350, that:

1) the Quarterly Report on Form 10-Q of the Company for the quarterly
period ended June 30, 2002 (the "Report") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and

2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.

Date: 8-8-02 /s/ G. Anthony Busseni
--------------------------- --------------------------------------
G. Anthony Busseni
President and CEO

Exhibit 99.2

CERTIFICATION OF PERIODIC REPORT
--------------------------------

I, C. Douglas Carpenter, Vice President, Secretary, and Chief Financial Officer
of Farmers Capital Bank Corporation, certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

1) the Quarterly Report on Form 10-Q of the Company for the quarterly
period ended June 30, 2002 (the "Report") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and

2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.

Date: 8-8-02 /s/ C. Douglas Carpenter
--------------------------- ---------------------------------------
C. Douglas Carpenter
Vice President, Secretary, and CFO