UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
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
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
P.O. Box 309, 202 West Main Street
Frankfort, Kentucky 40602
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 227-1600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes |X| No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $.125 per share
6,729,791 shares outstanding at May 6, 2004
TABLE OF CONTENTS
Part I - Financial Information Page No.
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Item 1 - Financial Statements
Unaudited Consolidated Balance Sheets -
March 31, 2004 and December 31, 2003 3
Unaudited Consolidated Statements of Income -
For the Three Months Ended
March 31, 2004 and March 31, 2003 4
Unaudited Consolidated Statements of Comprehensive Income -
For the Three Months Ended
March 31, 2004 and March 31, 2003 5
Unaudited Consolidated Statements of Cash Flows -
For the Three Months Ended
March 31, 2004 and March 31, 2003 6
Unaudited Consolidated Statements of Changes in
Shareholders' Equity -
For the Three Months Ended
March 31, 2004 and March 31, 2003 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 18
Item 4 - Controls and Procedures 19
Part II - Other Information
Item 1 - Legal Proceedings 19
Item 2 - Changes in Securities, Use of Proceeds and Issuer Repurchases
of Equity Securities 19
Item 6 - Exhibits and Reports on Form 8-K 20
Signatures 21
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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UNAUDITED CONSOLIDATED BALANCE SHEETS
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March 31, December 31,
(In thousands, except share data) 2004 2003
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ASSETS
Cash and cash equivalents:
Cash and due from banks $ 73,465 $ 99,628
Interest bearing deposits in other banks 3,066 3,154
Federal funds sold and securities purchased under
agreements to resell 26,159 24,434
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Total cash and cash equivalents 102,690 127,216
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Investment securities:
Available for sale, amortized cost of $349,676 (2004) and $354,905 (2003) 353,748 358,169
Held to maturity, fair value of $ 24,873 (2004) and $26,201 (2003) 23,548 24,789
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Total investment securities 377,296 382,958
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Loans, net of unearned income 776,895 755,945
Allowance for loan losses (11,294) (11,292)
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Loans, net 765,601 744,653
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Premises and equipment, net 24,167 24,115
Company-owned life insurance 25,915 25,510
Other assets 12,053 14,113
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Total assets $ 1,307,722 $ 1,318,565
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LIABILITIES
Deposits:
Noninterest bearing $ 171,871 $ 226,650
Interest bearing 856,530 841,672
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Total deposits 1,028,401 1,068,322
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Federal funds purchased and securities sold under agreements to repurchase 86,186 56,698
Other short-term borrowings 315 418
Long-term debt 53,744 56,413
Dividends payable 2,220 2,215
Other liabilities 8,220 8,028
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Total liabilities 1,179,086 1,192,094
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SHAREHOLDERS' EQUITY
Common stock, par value $.125 per share
9,608,000 shares authorized; 8,172,119 and 8,160,919
shares issued at March 31, 2004 and December 31, 2003, respectively 1,022 1,020
Capital surplus 19,020 18,670
Retained earnings 146,777 145,489
Treasury stock, at cost 1,444,739 shares at March 31, 2004 and December 31, 2003 (40,830) (40,830)
Accumulated other comprehensive income 2,647 2,122
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Total shareholders' equity 128,636 126,471
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Total liabilities and shareholders' equity $ 1,307,722 $ 1,318,565
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See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
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(In thousands, except per share data)
Three months ended March 31, 2004 2003
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INTEREST INCOME
Interest and fees on loans $ 11,729 $ 12,229
Interest on investment securities:
Taxable 1,964 2,299
Nontaxable 946 803
Interest on deposits in other banks 10 15
Interest of federal funds sold and securities purchased under
agreements to resell 90 162
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Total interest income 14,739 15,508
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INTEREST EXPENSE
Interest on deposits 3,674 4,647
Interest on federal funds purchased and securities sold under
agreements to repurchase 218 259
Interest on other borrowed funds 502 550
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Total interest expense 4,394 5,456
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Net interest income 10,345 10,052
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Provision for loan losses 365 385
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Net interest income after provision for loan losses 9,980 9,667
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NONINTEREST INCOME
Service charges and fees on deposits 1,894 1,835
Other service charges, commissions, and fees 884 920
Data processing income 334 345
Trust income 414 399
Investment securities gains, net 82 147
Gains on sale of mortgage loans, net 44 189
Income from company-owned life insurance 405 265
Other 30 66
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Total noninterest income 4,087 4,166
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NONINTEREST EXPENSE
Salaries and employee benefits 5,394 5,068
Occupancy expenses, net 662 658
Equipment expenses 950 937
Bank franchise tax 341 334
Other 2,335 2,142
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Total noninterest expense 9,682 9,139
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Income before income taxes 4,385 4,694
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Income tax expense 877 1,101
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Net income $ 3,508 $ 3,593
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NET INCOME PER COMMON SHARE
Basic $ .52 $ .53
Diluted .52 .53
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WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 6,723 6,764
Diluted 6,784 6,798
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See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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Three months ended March 31, (In thousands) 2004 2003
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NET INCOME $ 3,508 $ 3,593
Unrealized holding gain (loss) on available for sale
securities arising during the period on securities held
at end of period, net of tax of $302 and $(398), respectively 560 (740)
Reclassification adjustment for prior period unrealized gain
previously reported in other comprehensive income recognized
during current period, net of tax of $19 and $61, respectively (35) (114)
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Other comprehensive income (loss) 525 (854)
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Comprehensive Income $ 4,033 $ 2,739
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See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three months ended March 31, (In thousands) 2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,508 $ 3,593
Depreciation and amortization 721 741
Net amortization of investment security premiums and (discounts):
Available for sale 466 453
Held to maturity (11) (18)
Provision for loan losses 365 385
Noncash compensation expense 69 107
Mortgage loans originated for sale (3,718) (15,555)
Proceeds from sale of mortgage loans 2,341 13,483
Deferred income tax (benefit) expense (519) 86
Gains on sale of mortgage loans, net (44) (189)
Gains on sale of premises and equipment, net (2)
Gains on sale of available for sale investment securities, net (82) (147)
Decrease in accrued interest receivable 18 234
Income from company-owned life insurance (405) (265)
Decrease (increase) in other assets 1,556 (2,946)
Decrease in accrued interest payable (11) (186)
Increase in other liabilities 928 672
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Net cash provided by operating activities 5,182 446
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities:
Available for sale 62,914 134,522
Held to maturity 1,254 1,204
Proceeds from sale of available for sale investment securities 22,036 74,137
Purchase of available for sale investment securities (80,107) (95,055)
Loans originated for investment, net of principal collected (19,892) 2,339
Purchase of company-owned life insurance (23,949)
Purchase of premises and equipment (778) (785)
Proceeds from sale of equipment 5 3
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Net cash (used in) provided by investing activities (14,568) 92,416
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CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits (39,921) 2,764
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase 29,488 (61,140)
Proceeds from long-term debt 1,683
Repayments of long-term debt (2,699) (665)
Net decrease in other short-term borrowings (103) (566)
Dividends paid (2,215) (2,191)
Purchase of common stock (2,112)
Stock options exercised 280 71
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Net cash used in financing activities (15,140) (62,156)
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Net (decrease) increase in cash and cash equivalents (24,526) 30,706
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Cash and cash equivalents at beginning of year 127,216 67,101
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Cash and cash equivalents at end of period $ 102,690 $ 97,807
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SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 4,405 $ 5,642
Income taxes
Transfers from loans to repossessed assets 31 173
Cash dividend declared and unpaid 2,220 2,158
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See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
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(In thousands, except per share data)
Accumulated
Other Total
Three months ended Common Stock Capital Retained Treasury Stock Comprehensive Shareholders'
March 31, 2004 and 2003 Shares Amount Surplus Earnings Shares Amount Income Equity
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Balance at January 1, 2004 8,161 $1,020 $18,670 $145,489 1,445 $(40,830) $2,122 $126,471
Net income 3,508 3,508
Other comprehensive income 525 525
Cash dividends declared,
$.33 per share (2,220) (2,220)
Stock options exercised,
including related tax benefits 11 2 281 283
Noncash compensation expense
attributed to stock option grants 69 69
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Balance at March 31, 2004 8,172 $1,022 $19,020 $146,777 1,445 $(40,830) $2,647 $128,636
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Balance at January 1, 2003 8,136 $1,017 $17,623 $141,199 1,344 $(37,627) $3,561 $125,773
Net income 3,593 3,593
Other comprehensive loss (854) (854)
Cash dividends declared,
$.32 per share (2,158) (2,158)
Purchase of common stock 68 (2,112) (2,112)
Stock options exercised 3 71 71
Noncash compensation expense
attributed to stock option grants 107 107
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Balance at March 31, 2003 8,139 $1,017 $17,801 $142,634 1,412 $(39,739) $2,707 $124,420
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See accompanying notes to unaudited consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The consolidated financial statements include the accounts of Farmers Capital
Bank Corporation (the "Company"), a financial holding company, and its
wholly-owned six bank and one nonbank subsidiaries. Bank subsidiaries include
Farmers Bank & Capital Trust Co. ("Farmers Bank") in Frankfort, KY; United Bank
& Trust Co. in Versailles, KY; Lawrenceburg National Bank in Harrodsburg, KY;
First Citizens Bank in Shepherdsville, KY; Farmers Bank and Trust Company in
Georgetown, KY; and Kentucky Banking Centers, Inc. in Glasgow, KY. The Company's
nonbank subsidiary is FCB Services, Inc., a data processing subsidiary located
in Frankfort, KY. Intercompany transactions and balances are eliminated in
consolidation. Leasing One Corporation and Farmers Capital Insurance Corporation
are wholly-owned subsidiaries of Farmers Bank.
The Company provides financial services through its 23 locations throughout
Central Kentucky to individual, business, agriculture, government, and
educational customers. Its primary deposit products are checking, savings, and
term certificate accounts. Its primary lending products are residential
mortgage, commercial lending and leasing, and installment loans. Substantially
all loans and leases are secured by specific items of collateral including
business assets, consumer assets, and commercial and residential real estate.
Commercial loans and leases are expected to be repaid from cash flow from
operations of businesses. Farmers Bank has served as the general depository for
the Commonwealth of Kentucky for over 70 years and also provides investment and
other services to the Commonwealth. Other services include, but are not limited
to, cash management services, issuing letters of credit, safe deposit box
rental, and providing funds transfer services. Other financial instruments,
which potentially represent concentrations of credit risk, include deposit
accounts in other financial institutions and federal funds sold.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates used in the preparation of the financial
statements are based on various factors including the current interest rate
environment and the general strength of the local economy. Changes in the
overall interest rate environment can significantly affect the Company's net
interest income and the value of its recorded assets and liabilities. Actual
results could differ from those estimates used in the preparation of the
financial statements.
The financial information presented as of any date other than December 31 has
been prepared from the books and records without audit. The accompanying
consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include
all of the information and the footnotes required by accounting principles
generally accepted in the United States of America for complete statements. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of such financial statements,
have been included. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2003.
2. RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements of prior periods to conform to the current period presentation. These
reclassifications do not affect net income or total shareholders' equity as
previously reported.
3. NET INCOME PER COMMON SHARE
Basic net income per common share is determined by dividing net income by the
weighted average total number of shares of common stock outstanding. Diluted net
income per common share is determined by dividing net income by the total
weighted average number of shares of common stock outstanding, plus the total
weighted average number of shares that would be issued upon exercise of dilutive
stock options assuming proceeds are used to repurchase shares pursuant to the
treasury stock method. Net income per common share computations were as follows
at March 31, 2004 and 2003.
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(In thousands, except per share data)
Three months ended March 31, 2004 2003
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Net income, basic and diluted $ 3,508 $ 3,593
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Average shares outstanding 6,723 6,764
Effect of dilutive stock options 61 34
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Average diluted shares outstanding 6,784 6,798
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Net income per share, basic $ .52 $ .53
Net income per share, diluted .52 .53
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4. STOCK-BASED COMPENSATION
In 1997, the Company's Board of Directors approved a nonqualified stock option
plan that provides for granting of stock options to key employees and officers
of the Company. The plan was subsequently ratified by the Company's shareholders
at its annual shareholders' meeting held on May 12, 1998, the measurement date
of the plan. All stock options are awarded at a price equal to the fair market
value of the Company's common stock at the date the options are granted. The
Company applies Accounting Principles Board ("APB") Opinion No. 25 and related
interpretations in accounting for its plan. Accordingly, since options were
granted during 1997 at the fair market value of the Company's stock on the grant
date, and the measurement date occurred during 1998, the Company recognizes
noncash compensation expense based on the intrinsic value of the stock options
measured on the date of shareholder ratification of the plan.
The Company granted 54,000 additional options during 2000 in which there is no
compensation expense being recognized pursuant to APB No. 25. Had compensation
expense been determined under the fair value method described in the Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, as amended by SFAS
No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, the
Company's net income and income per common share would have been as shown in the
table below.
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(In thousands, except per share data)
Three months ended March 31, 2004 2003
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NET INCOME
As reported $ 3,508 $ 3,593
Add: Stock-based employee compensation expense
included in reported net income, net of
related tax effects 45 70
Less: Stock-based compensation expense determined
under fair value based method for all awards,
net of related tax effects (59) (85)
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Proforma $ 3,494 $ 3,578
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NET INCOME PER COMMON SHARE
Basic, as reported $ .52 $ .53
Basic, proforma .52 .53
Diluted, as reported .52 .53
Diluted, proforma .52 .53
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The fair value of the options granted are estimated as of the measurement date
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2000 and 1997, respectively: dividend yield of
3.12% and 3.18%; expected volatility of 29.6% and 23.4%; risk-free interest rate
of 6.71% and 5.75%; and expected life of seven years for both grants. The
weighted average fair value of options granted during 2000 and 1997 was $9.25
and $16.11 per share, respectively.
The plan provides for the granting of options to purchase up to 450,000 shares
of the Company's common stock at a price equal to the fair market value of the
Company's common stock on the date the option is granted. The term of the
options expires after ten years from the date on which the options are granted.
Options granted under the plan vest ratably over various time periods ranging
from four to seven years. All options granted must be held for a minimum of one
year before they can be exercised. Forfeited options are available for the
granting of additional stock options under the plan.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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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
First Quarter 2004 vs. First Quarter 2003
-----------------------------------------
The Company reported net income of $3.5 million for the first three months of
2004, a decrease of $85 thousand or 2.4% compared to $3.6 million for the same
period in 2003. Basic and diluted net income per share was $.52 for the current
quarter, a decrease of $.01 or 1.9% compared to $.53 a year earlier. The 1.9%
decrease in net income per share is 50 basis points better than the 2.4%
decrease reported in dollar terms due to the effect of fewer common shares
outstanding pursuant to the Company's stock purchase program.
Net interest income for the current quarter was $10.3 million, an increase of
$293 thousand or 2.9% compared to the same period a year earlier and represents
the highest level of quarterly net interest income since the fourth quarter of
2001. This is significant since 2001 was the year in which the Federal Reserve
Board (the "Fed") cut the federal funds rate eleven times, leading to the lowest
overall market interest rates in recent history. For the Company, this has
resulted in lower net interest margins as, in general, rates earned on earning
assets have decreased more rapidly than rates paid on interest bearing
liabilities.
Offsetting the increase in net interest income was a $79 thousand or 1.9%
decrease in noninterest income coupled with a $543 thousand or 5.9% increase in
noninterest expenses. The decrease in noninterest income is primarily attributed
to a $145 thousand or 76.7% decrease in gains on the sale of mortgage loans due
to lower origination activity and a $65 thousand or 44.2% decrease in gains on
the sale of investment securities. The increase in noninterest expenses is
primarily attributed to a $326 thousand or 6.4% increase in salaries and
employee benefits. Employee benefits account for $274 thousand of the increase.
A significant portion of this increase relates to the new postretirement health
insurance coverage initiated late in the first quarter of 2003. The effective
income tax rate declined to 20.0% from 23.5% in the three month comparison on a
decline in income tax expense of $224 thousand or 20.3%.
The return on average assets ("ROA") was 1.10% for the first quarter of 2004, a
decrease of 7 basis points compared to 1.17% reported for the same period of
2003. Significant components that positively affected ROA in the comparison
include the following: an increase in net interest margin of 12 basis points to
3.83%; a decrease of 2 basis points in the provision for loan losses relative to
average assets; and an 8 basis point decrease in income taxes relative to
average earning assets. Components that had a negative effect on ROA include the
following: a decrease in the earning asset ratio contributing 15 basis points;
an increase of 4 basis points in noninterest expense relative to average assets;
and a 10 basis point decrease in noninterest income relative to average assets.
The return on average equity was 11.09% for the first quarter of 2004 compared
to 11.66% for the same period of 2003. The decrease is due to lower net income
reported in the current period combined with a $2.3 million increase in average
equity compared to the same period a year ago.
NET INTEREST INCOME
- -------------------
Although some economic measures are beginning to improve, continuing weaknesses
in the overall economic environment remain present and have impacted the
Company's net interest income in the reporting periods. The trend of the
interest rate environment for 2003 was downward primarily as a result of
previous short-term interest rate reductions taken by the Fed. The effects of
prior rate reductions by the Fed along with intense competition in the Company's
market areas have tightened recent quarterly net interest margins.
The reported increase in net interest income in the current quarterly comparison
represents the first increase in a quarter-to-quarter comparison since a $139
thousand or 1.3% increase reported in the second quarter of 2001 compared to the
second quarter of 2000. The increase in net interest income in the current
quarterly comparison was driven by a $1.1 million decrease in interest expense
primarily attributed to lower interest rates on time deposits. The decrease in
interest expense more than offset a decline in interest income of $769 thousand.
For the current period, this reverses the recent trend of rates on earning
assets, in general, declining more rapidly than rates paid on interest bearing
liabilities associated with the general decline in the interest rate environment
over the past two years. During the falling rate environment, the challenge has
been 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 5.37%, a reduction of 27 basis points from 5.64% in the same
period a year ago. The cost of funds for the current three months was 1.80%, a
decline of 51 basis points compared to 2.31% in the same period a year earlier.
A goal of the Company in the current interest rate environment is to increase
earning assets and decrease the interest rates paid on interest bearing
liabilities. Average earning assets were relatively unchanged at $1.1 billion in
the quarterly comparison. As a percentage of total average assets, earning
assets decreased 345 basis points to 88.90% from 92.35%. This decrease had a
negative 15 basis point effect on ROA in the comparison.
Interest income totaled $14.7 million for the first quarter of 2004, a decrease
of $769 thousand or 5.0% compared to the same period in the prior year. Interest
expense totaled $4.4 million, a decrease of $1.1 million or 19.5%. Net interest
income increased $293 thousand or 2.9% in the comparison and totaled $10.3
million at March 31, 2004.
Interest and fees on loans totaled $11.7 million, a decrease of $500 thousand
mainly due to a decrease in the average rate earned. Average loans increased
$28.1 million or 3.8% to $764.2 million in the comparison due to higher loan
demand in a lower rate environment. The tax equivalent yield on loans decreased
58 basis points to 6.2% from 6.8% and offset the effects of higher average
balances on interest income. Interest on taxable securities was $2.0 million, a
decrease of $335 thousand or 14.6% due primarily to a $34.6 million or 12.2%
decrease in the average balance. An 11 basis point decline in the average rate
to 3.2% from 3.3% also contributed to the decrease in interest on taxable
securities. Interest on nontaxable securities increased $143 thousand or 17.8%
due to a $20.4 million increase in the average balance to $92.1 million from
$71.6 million. This increase offset a decline in the tax equivalent yield of 57
basis points to 6.1% from 6.7%. Interest on short-term investments, including
time deposits in other banks, federal funds sold, and securities purchased under
agreements to resell, decreased $77 thousand, which is due to both an $18.1
million or 30.7% decrease in the average balance and a 24 basis point decline in
the average rate earned on these investments to 1.0% from 1.2%.
Interest expense on deposits decreased $973 thousand or 20.9% to $3.7 million in
the quarterly comparison. This decrease resulted from a general decline in the
average rate paid throughout the deposit portfolio and correlates with the
general decline in market interest rates in the reporting periods. The decline
in the average rates paid offset increases in average balances. The decline in
interest expense on deposits was as follows: time deposits $857 thousand or
22.3%; interest bearing demand deposits $72 thousand or 20.3%; and savings
deposits $44 thousand or 9.7%. The average rate paid on time deposits, the
largest component of interest bearing deposits, was 2.8% for the first quarter
of 2004 compared to 3.7% for the same period of 2003. The average balance of
time deposits increased $8.2 million or 2.0% to $425.8 million. The average rate
paid on interest bearing demand deposits declined 16 basis points to .5% from
..6% while the average balance increased $12.2 million or 5.5% to $235.1 million.
The average rate paid on savings deposits decreased 21 basis points to .9% from
1.1% while the average balance increased $19.2 million or 11.3% to $189.4
million from $170.2 million. Interest expense on overnight borrowings,
consisting of federal funds purchased and securities sold under agreements to
repurchase, decreased $41 thousand due to an 18 basis point decline in the
average rate paid along with a $2.4 million decline in their average balance.
Interest expense on other borrowed funds decreased $48 thousand in the
comparison as lower borrowings from the Federal Home Loan Bank ("FHLB")
decreased the average balance outstanding. The average balance of other borrowed
funds totaled $55.1 million, a decrease of $10.6 million or 16.1% in the
comparison. The average rate paid on other borrowed funds increased 27 basis
points to 3.7% from 3.4%.
The net interest margin (TE) increased 12 basis points to 3.83% during the first
quarter of 2004 compared to 3.71% in the first quarter of 2003. The increase in
net interest margin is primarily attributed to a 24 basis point increase in the
spread between rates earned on earning assets and the rates paid on interest
bearing liabilities to 3.57% in the current quarter from 3.33% in the first
quarter of 2003. A 12 basis point reduction from the benefit of noninterest
bearing sources of funds offset the 24 basis point increase in spread, resulting
in the increased net interest margin. The effect of noninterest bearing sources
of funds on net interest margin typically declines in a falling rate
environment.
The following tables present an analysis of net interest income for the
quarterly periods ended March 31.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL
- -----------------------------------------------------------------------------------------------------------------------------------
Three months ended March 31, 2004 2003
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Investment securities
Taxable $ 247,953 $ 1,964 3.19% $ 282,563 $ 2,299 3.30%
Nontaxable1 92,073 1,398 6.11 71,648 1,181 6.68
Time deposits with banks,
federal funds sold and
securities purchased
under agreements to resell 40,879 100 .98 59,027 177 1.22
Loans1,2,3 764,161 11,818 6.22 736,039 12,339 6.80
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,145,066 $ 15,280 5.37% 1,149,277 $ 15,996 5.64%
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (11,404) (11,279)
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets, net
of allowance for loan losses 1,133,662 1,137,998
- -----------------------------------------------------------------------------------------------------------------------------------
NONEARNING ASSETS
Cash and due from banks 93,893 64,383
Premises and equipment, net 24,191 24,045
Other assets 36,363 18,109
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,288,109 $ 1,244,535
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Deposits
Interest bearing demand $ 235,050 $ 282 .48% $ 222,879 $ 354 .64%
Savings 189,426 409 .87 170,183 453 1.08
Time 425,781 2,983 2.82 417,581 3,840 3.73
Federal funds purchased
and securities sold
under agreements to repurchase 78,427 218 1.12 80,828 259 1.30
Other borrowed funds 55,050 502 3.67 65,609 550 3.40
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 983,734 $ 4,394 1.80% 957,080 $ 5,456 2.31%
- -----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST BEARING LIABILITIES
Commonwealth of Kentucky deposits 36,384 32,918
Other demand deposits 132,825 121,013
Other liabilities 7,914 8,535
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,160,857 1,119,546
- -----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 127,252 124,989
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 1,288,109 $ 1,244,535
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 10,886 10,540
TE basis adjustment (541) (488)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 10,345 $ 10,052
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest spread 3.57% 3.33%
Impact of noninterest bearing
sources of funds .26 .38
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.83% 3.71%
- -----------------------------------------------------------------------------------------------------------------------------------
1Income and yield stated at a fully tax equivalent basis using the marginal corporate Federal tax rate of 35%.
2Loan balances include principal balances on nonaccrual loans.
3Loan fees included in interest income amounted to $619 thousand and $521 thousand in 2004 and 2003, respectively.
ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX EQUIVALENT BASIS)
- --------------------------------------------------------------------------------------------------------
(In thousands) Variance Variance Attributed to
Three months ended March 31, 2004/20031 Volume Rate
- --------------------------------------------------------------------------------------------------------
INTEREST INCOME
Taxable investment securities $ (335) $ (263) $ (72)
Nontaxable investment securities2 217 795 (578)
Time deposits with banks, federal funds sold and
securities purchased under agreements to resell (77) (47) (30)
Loans2 (521) 2,480 (3,001)
- --------------------------------------------------------------------------------------------------------
Total interest income (716) 2,965 (3,681)
- --------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest bearing demand deposits (72) 115 (187)
Savings deposits (44) 247 (291)
Time deposits (857) 503 (1,360)
Federal funds purchased and securities sold under
agreements to repurchase (41) (7) (34)
Other borrowed funds (48) (269) 221
- --------------------------------------------------------------------------------------------------------
Total interest expense (1,062) 589 (1,651)
- --------------------------------------------------------------------------------------------------------
Net interest income $ 346 $ 2,376 $ (2,030)
- --------------------------------------------------------------------------------------------------------
Percentage change 100.0% 686.7% (586.7)%
- --------------------------------------------------------------------------------------------------------
1The changes that are not solely due to rate or volume are allocated on a
percentage basis using the absolute values of rate and volume variances as a
basis for allocation.
2Income stated at fully tax equivalent basis using the marginal corporate
Federal tax rate of 35%.
NONINTEREST INCOME
- ------------------
Noninterest income was $4.1 million for the current quarter, a decrease of $79
thousand or 1.9% compared to the first quarter of the prior year. The largest
component of noninterest income, service charges and fees on deposits, totaled
$1.9 million at March 31, 2004, an increase of $59 thousand or 3.2% due to
increased overdraft volumes. Other service charges, commissions, and fees were
$884 thousand, a decline of $36 thousand or 3.9%. Leading the decrease in other
service charges, commissions, and fees was a $24 thousand decline in credit life
insurance fees. Data processing fees were $334 thousand, a decrease of $11
thousand from $345 thousand in the prior year. Trust income grew to $414
thousand from $399 thousand, an increase of $15 thousand or 3.8% as a result of
an increase in assets under management. Net gains on the sale of available for
sale securities for the current quarter were $82 thousand compared to $147
thousand in the prior year as the Company continually seeks to properly manage
its balance sheet composition in the current economic environment. Net gains on
the sale of mortgage loans were $44 thousand, a decrease of $145 thousand from
$189 thousand in the prior year. Mortgage loans originated for sale, which
declined sharply in the fourth quarter of 2003, declined $11.8 million or 76.1%
in the current quarterly comparison. Mortgage loan activity in the current
quarter is reflective of lower refinancing activity. Income from company-owned
life insurance, purchased during the first quarter of 2003, was $405 thousand in
the current period, an increase of $140 thousand or 52.8%. The increase is the
result of a full quarter of income being recognized in the current period
compared to a partial quarter of income in the prior period due to the timing of
the purchase. Other noninterest income totaled $30 thousand, a decrease of $36
thousand compared to a year earlier.
NONINTEREST EXPENSE
- -------------------
Total noninterest expenses were $9.7 million for the first quarter of 2004, an
increase of $543 thousand or 5.9% compared to the first quarter of 2003.
Salaries and employee benefits account for a significant portion of the
increase. Driven mainly by an increase in employee benefit expenses, salaries
and employee benefits increased a total of $326 thousand or 6.4%. Employee
benefit related expenses were $274 thousand higher in the current period mainly
due to an increase related to the new postretirement health insurance coverage
initiated late in the first quarter of 2003. Salaries and related payroll taxes
increased $87 thousand or 2.1% to $4.2 million mainly due to normal salary
increases. Noncash compensation expense related to the Company's nonqualified
stock option plan declined $36 thousand or 34.3% due to the structure of the
vesting schedule. The number of full time equivalent employees was 455,
relatively unchanged from the same period a year earlier. Occupancy expense, net
of rental income, was also relatively unchanged at $662 thousand as increased
utilities costs were offset by lower depreciation and maintenance costs.
Equipment expenses totaled $950 thousand, up $13 thousand or 1.4%. Other
noninterest expenses, including bank franchise taxes, were $2.7 million, an
increase of $200 thousand or 8.1% from $2.5 million in the prior year. The
increase in other noninterest expenses was lead by a $100 thousand increase in
losses attributed to (non real estate) foreclosed assets.
INCOME TAXES
- ------------
Income tax expense for the first quarter of 2004 was $877 thousand, a decrease
of $224 thousand or 20.3% from the same period a year earlier. The effective tax
rate decreased 346 basis points to 20.0% from 23.5% in 2003. The change in the
effective tax rate is due to lower forecasted annualized net income in the
current three months compared to the same period a year ago combined with higher
nontaxable interest income from municipal bonds and nontaxable income from the
increase in cash surrender value of company-owned life insurance.
FINANCIAL CONDITION
Total assets were $1.3 billion on March 31, 2004, a decrease of $10.8 million or
..8% from December 31, 2003. The decrease in assets primarily includes a $24.5
million or 19.3% lower balance in cash and cash equivalents and a decrease in
investment securities of $5.7 million or 1.5% offset by an increase in net loans
of $21.0 million or 2.8%. The decrease in total assets relates to a $39.9
million or 3.7% decline in deposits offset by a $26.7 million or 23.5% increase
in other borrowings and a $2.2 million or 1.7% increase in shareholders' equity.
The makeup of the balance sheet continually changes as the Company responds to
extremely competitive market forces.
Management of the Company considers it noteworthy to understand the relationship
between the Company's principal subsidiary, Farmers Bank & Capital Trust Co.,
and the Commonwealth of Kentucky. Farmers Bank provides various services to
state agencies of the Commonwealth. As the depository for the Commonwealth,
these agencies issue checks drawn on Farmers Bank, including paychecks and state
income tax refunds. Farmers Bank also processes vouchers of the WIC (Women,
Infants and Children) program for the Cabinet for Human Resources. The Bank's
investment department also provides services to the Teacher's Retirement
systems. As the depository for the Commonwealth, large fluctuations in deposits
are likely to occur on a daily basis. Therefore, reviewing average balances is
also important to understanding the financial condition of the Company.
On an average basis, total assets were $1.3 billion for the first three months
of 2004, an increase of $37.4 million or 3.0% from year-end 2003. Average
earning assets, primarily loans and securities, were $1.1 billion at March 31,
2004, an increase of $17.7 million or 1.6% from year-end 2003. Average earning
assets represent 88.9% of total average assets on March 31, 2004, a decrease of
124 basis points compared to 90.1% at year-end 2003.
LOANS
- -----
Loans, net of unearned income, totaled $776.9 million at March 31, 2004, an
increase of $21.0 million or 2.8% from year-end 2003. The composition of the
loan portfolio is summarized in the table below.
- --------------------------------------------------------------------------------
March 31, 2004 December 31, 2003
(Dollars in thousands) Amount % Amount %
- --------------------------------------------------------------------------------
Commercial, financial,
and agriculture $ 122,441 15.7% $ 110,657 14.6%
Real estate - construction 48,063 6.2 45,390 6.0
Real estate mortgage - residential 275,534 35.5 270,638 35.8
Real estate mortgage farmland and
other commercial enterprises 225,269 29.0 222,100 29.4
Installment 70,568 9.1 71,565 9.5
Lease financing 35,020 4.5 35,595 4.7
- --------------------------------------------------------------------------------
Total $ 776,895 100.0% $ 755,945 100.0%
- --------------------------------------------------------------------------------
On average, loans represented 66.7% of earning assets during the current period
compared to 65.8% for year-end 2003. 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 $11.3 million at March 31, 2004, relatively
unchanged from the prior year-end. The allowance for loan losses was 1.45% of
loans net of unearned income at March 31, 2004, a decrease of 4 basis points
compared to December 31, 2003. The provision for loan losses decreased $20
thousand or 5.2% in the current three-month period compared to the same period
in 2003. The Company had net charge-offs of $363 thousand in the first three
months of 2004 compared to net charge-offs of $317 thousand in the same period
of 2003, an increase of $46 thousand or 14.5%. Annualized net charge-offs
represent .19% and .17% of average net loans for three months ended March 31,
2004 and 2003 respectively, as compared to .32% at year-end 2003. The allowance
for loan losses as a percentage of nonperforming loans totaled 121.1% and 123.9%
at March 31, 2004 and December 31, 2003, respectively. 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 consist of
nonaccrual loans, restructured loans, and loans past due ninety days or more on
which interest is still accruing. Nonperforming assets totaled $10.7 million at
March 31, 2004, a decrease of $508 thousand or 4.5% from the prior year-end.
Nonperforming loans totaled $9.3 million at March 31, 2004, a $212 thousand or
2.3% increase compared to year-end 2003. Nonperforming loans include a pool of
constructions loans secured by residential real estate to a financially troubled
builder. This pool of loans totaled $4.1 million at March 31, 2004 a decline of
$100 thousand from year-end 2003. Nonperforming loans as a percentage of net
loans were 1.2% at March 31, 2004, a decrease of 1 basis point compared to
year-end 2003.
Other real estate owned, which had a balance of $1.8 million at year-end 2003,
decreased $580 thousand or 32.2% to $1.2 million on March 31, 2004.
TEMPORARY INVESTMENTS
- ---------------------
Temporary investments consist of interest bearing deposits with other banks,
federal funds sold, and securities purchased under agreements to resell and
totaled $29.2 million at March 31, 2004, an increase of $1.6 million or 5.9%
from year-end 2003. Temporary investments averaged $40.9 million for the first
three months of 2004, a decrease of $18.5 million or 31.2% from year-end 2003.
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 $377.3 million on March 31, 2004, a decrease of $5.7
million or 1.5% from year-end 2003. Available for sale and held to maturity
securities were $353.7 million and $23.5 million, respectively. Investment
securities averaged $340.0 million for the first quarter of 2004, an increase of
$14.3 million or 4.4% from year-end 2003. 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. The Company had an
unrealized gain on available for sale investment securities of $4.1 million at
March 31, 2004 compared to $3.3 million at year-end 2003. The increase is due
primarily to the impact of changing economic conditions and changes in the
market interest rates on the Company's available for sale investment portfolio.
COMPANY-OWNED LIFE INSURANCE
- ----------------------------
The Company purchased life insurance policies on certain key employees, with
their knowledge and consent, during the first quarter of 2003. Company-owned
life insurance is recorded at its cash surrender value, i.e. the amount that can
be realized, on the consolidated balance sheets. The related change in cash
surrender value and proceeds received under the policies are reported on the
consolidated statements of income under the caption "Income from company-owned
life insurance". 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 the new postretirement health
insurance program during 2003. Company-owned life insurance totaled $25.9
million at March 31, 2004, an increase of $405 thousand or 1.6% from year-end
2003.
DEPOSITS
- --------
Total deposits were $1.0 billion at March 31, 2004, a decrease of $39.9 million
or 3.7% from year-end 2003. Noninterest bearing deposits declined $54.8 million
or 24.2% in the comparison. This decline 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 $169.2 million during the current period, an increase of $7.2
million or 4.5%. End of period interest bearing deposit balances increased $14.9
million or 1.8% during the three months ended March 31, 2004. Increases were
seen in each of the deposit categories as follows: interest bearing demand
deposits of $7.4 million or 3.2%, money market deposit accounts of $2.0 million
or 1.7%, and time deposits of $6.5 million or 1.5%. Savings deposits declined
$1.0 million or 1.4% in the comparison. On average, interest bearing deposits
were $850.3 million in the current period, an increase of $28.3 million or 3.5%
from year-end 2003. The increase in average interest bearing deposits is
attributable to increases in all deposit categories as follows: interest bearing
demand deposits of $7.8 million or 3.5%, time deposits of $3.0 million or .7%,
money market deposit accounts of $11.7 million or 10.9%, and savings deposits of
$5.8 million or 9.0%. Total deposits averaged $1.0 billion, an increase of $35.6
million or 3.6% from year-end 2003.
BORROWED FUNDS
- --------------
Borrowed funds totaled $140.2 million at March 31, 2004, an increase of $26.7
million or 23.5% from $113.5 million at year-end 2003. A $2.7 million or 4.7%
decrease in long-term borrowings was offset by a $29.4 million or 51.4% increase
in short-term borrowings. Federal funds purchased and securities sold under
agreements to repurchase increased $29.5 million or 52.0% due primarily to
increased correspondent banking activity. Other short-term borrowings decreased
$103 thousand or 24.6% due to net repayments of other short-term borrowings. The
$2.7 million decrease in long-term borrowings is mainly attributed to repayments
of borrowed funds from the FHLB. Total borrowed funds averaged $133.5 million,
relatively unchanged from $133.2 million from year-end 2003.
LIQUIDITY
The Parent Company's primary use of cash consists of dividend payments to its
common shareholders, purchases of its common stock, corporate acquisitions, and
other general operating purposes. Liquidity of the Parent Company depends
primarily on the receipt of dividends from its subsidiary banks and cash
balances maintained. As of March 31, 2004 combined retained earnings of the
subsidiary banks were $45.9 million, of which $1.5 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 2004 sufficient to meet its liquidity needs. The Parent Company
had cash balances of $26.8 million at March 31, 2004, a decrease of $2.4 million
or 8.4% from year-end 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; FHLB borrowings; and federal funds purchased and securities sold under
agreements to repurchase. As of March 31, 2004 the Company had approximately
$184.5 million in additional borrowing capacity under various FHLB, federal
funds, and other borrowing agreements. There is no guarantee that these sources
of funds will continue to be available to the Company, or that current
borrowings can be refinanced upon maturity, although the Company is not aware of
any events or uncertainties that are likely to cause a decrease in our liquidity
from these sources.
For the longer term, the liquidity position is managed by balancing the maturity
structure of the balance sheet. This process allows for an orderly flow of funds
over an extended period of time. The Company's Asset and Liability Management
Committee meets regularly and monitors the composition of the balance sheet to
ensure comprehensive management of interest rate risk and liquidity.
Liquid assets consist of cash, cash equivalents, and securities available for
sale. At March 31, 2004, such assets totaled $456.4 million, a decrease of $28.9
million or 6.0% from year-end 2003. The decrease in liquid assets is attributed
to the overall funding position of the Company, including deposit activity of
the Commonwealth of Kentucky. Net cash provided by operating activities was $5.2
million in the first three months of 2004, an increase of $4.7 million compared
to the same period last year. Net cash used in investing activities was $14.6
million in the current period compared to net cash inflows of $92.4 million in
the same period last year. The most significant item included in the $107.0
million decline in cash flows from investing activities is a net decrease from
investment securities transactions of $108.7 million. The prior year investing
activity also included a net cash outflow from investing activities of $23.4
million for the purchase of company-owned life insurance while there were no
purchases in the current year. Activity related to loans originated for
investment, net of principal payments collected, used an additional $22.2
million in cash in the comparison. Net cash used in financing activities was
$15.1 million for the three months ended March 31, 2004 compared to $62.2
million in the same period a year earlier. This represents a decline of cash
outflows of $47.0 million and is related to federal funds purchased and deposit
activity in the comparable periods.
Commitments to extend credit are considered in addressing the Company's
liquidity management. The Company does not expect these commitments to
significantly effect the liquidity position in future periods.
CAPITAL RESOURCES
Shareholders' equity was $128.6 million on March 31, 2004, an increase of $2.2
million or 1.7% from year-end 2003 primarily due to a $1.3 million increase in
retained earnings. Retained earnings increased as a result of $3.5 million in
net income offset by $2.2 million, or $0.33 per share, in dividends declared
during the first quarter of 2004. The Company issued 11 thousand shares of
common stock during the first three months of 2004 pursuant to its nonqualified
stock option plan. The issuance of these shares increased shareholders' equity
by $283 thousand. Accumulated other comprehensive income, consisting of
unrealized holding gains on available for sale investment securities (net of
tax), increased shareholders' equity $525 thousand from year-end 2003 due to the
impact of changing economic conditions and changes in market interest rates on
the Company's available for sale portfolio. The Company did not purchase any
shares of its outstanding common stock during the first three months of 2004.
Consistent with the objective of operating a sound financial organization, the
Company's goal is to maintain capital ratios well above the regulatory minimum
requirements. The Company's capital ratios as of March 31, 2004, 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 15.02% 4.00% 6.00%
Total risk based 16.28% 8.00% 10.00%
Leverage 9.78% 4.00% 5.00%
- ----------------------------------------------------------------------------
As of March 31, 2004, all of the Company's subsidiary banks were in excess of
the well-capitalized regulatory ratio requirements as calculated under
guidelines established by federal banking agencies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company uses a simulation model as a tool to monitor and evaluate interest
rate risk exposure. The model is designed to measure the sensitivity of net
interest income and net income to changing interest rates over future time
periods. Forecasting net interest income and its sensitivity to changes in
interest rates requires the Company to make assumptions about the volume and
characteristics of many attributes, including assumptions relating to the
replacement of maturing earning assets and liabilities. Other assumptions
include, but are not limited to, projected prepayments, projected new volume,
and the predicted relationship between changes in market interest rates and
changes in customer account balances. These effects are combined with the
Company's estimate of the most likely rate environment to produce a forecast of
net interest income and net income. The forecasted results are then adjusted for
the effect of a gradual increase and decrease in market interest rates on the
Company's net interest income and net income. Because assumptions are inherently
uncertain, the model cannot precisely estimate net interest income or net income
or the effect of interest rate changes on net interest income and net income.
Actual results could differ significantly from simulated results.
At March 31, 2004, the model indicated that if rates were to gradually increase
by 150 basis points during the calendar year, then net interest income and net
income would increase 1.6% and 3.6%, respectively for the year ending December
31, 2004. 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 3.3% and 7.5%, respectively.
In the current low interest rate environment, it is not practical or possible to
reduce certain deposit rates by the same magnitude as rates on earning assets.
The average rate paid on some of the Company's deposits is well below 1.5%. This
situation magnifies the model's predicted results when modeling a decrease in
interest rates, as earning assets with higher yields have more of an opportunity
to reprice at lower rates than lower-rate deposits.
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------
The Registrant's Chief Executive Officer and Chief Financial Officer have
reviewed and evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of the end of the period covered by this report, and have
concluded that the Registrant's disclosure controls and procedures were adequate
and effective to ensure that all material information required to be disclosed
in this annual report has been made known to them in a timely fashion.
There were no significant changes in the Registrant's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the Chief Executive Officer and Chief Financial Officers evaluation, nor
were there any significant deficiencies or material weaknesses in the controls
which required corrective action.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
As of March 31, 2004, there were various pending legal actions and proceedings
against the Company arising from the normal course of business and in which
claims for damages are asserted. Management, after discussion with legal
counsel, believes that these actions are without merit and that the ultimate
liability resulting from these legal actions and proceedings, if any, will not
have a material effect upon the consolidated financial statements of the
Company.
ITEM 2 - CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER REPURCHASES OF EQUITY
- --------------------------------------------------------------------------------
SECURITIES
- ----------
The following table provides information with respect to shares of common stock
repurchased by the Company during the quarter ended March 31, 2004.
- --------------------------------------------------------------------------------------------------------------------------------
Total Number of Shares Maximum Number of Shares
Purchased as Part of that May Yet Be
Total Number of Average Price Paid Publicly Announced Plans Purchased Under the
Period Shares Purchased per Share or Programs Plans or Programs
- --------------------------------------------------------------------------------------------------------------------------------
January, 2004
(January 1, 2004 through
January 31, 2004) 201,321
- --------------------------------------------------------------------------------------------------------------------------------
February, 2004
(February 1, 2004 through
February 29, 2004) 201,321
- --------------------------------------------------------------------------------------------------------------------------------
March, 2004
(March 1, 2004 through
March 31, 2004) 201,321
- --------------------------------------------------------------------------------------------------------------------------------
Total 0 0 0
- --------------------------------------------------------------------------------------------------------------------------------
On January 27, 2003, the Company's Board of Directors authorized the purchase of up to 300,000 shares of the Company's
outstanding common stock. No stated expiration date was established under this plan.
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 on Form 10-Q for
the quarterly period ended March 31, 2003).
31.1 CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (page 22)
31.2 CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (page 23)
32 CEO and CFO Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Page 24)
b) Reports on Form 8-K
-------------------
On January 20, 2004, the Registrant filed a report on Form 8-K under
Item 12 reporting its earnings for the twelve months ended December
31, 2003. There were no financial statements filed with this Form 8-K.
On February 20, 2004, the Registrant filed a report on Form 8-K under
Item 7 reporting it had reached an agreement to acquire Citizens Bank
(Kentucky), Inc. There were no financial statements filed with this
Form 8-K.
On April 20, 2004, the Registrant filed a report on Form 8-K under
Item 12 reporting its earnings for the first quarter of 2004. There
were no financial statements filed with this Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 7, 2004 /s/ G. Anthony Busseni
-------------------- -----------------------------------------------
G. Anthony Busseni,
President and CEO (Principal Executive Officer)
Date: 5-7-04 /s/ C Douglas Carpenter
-------------------- -----------------------------------------------
C. Douglas Carpenter,
Vice President, Secretary, and CFO
(Principal Financial and Accounting Officer)