Back to GetFilings.com
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, 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
- --------------------------------------------- --------------------------------
(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
- --------------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 227-1600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes |X| No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $0.125 per share
6,736,138 shares outstanding at August 4, 2004
TABLE OF CONTENTS
Part I - Financial Information Page No.
- ------------------------------ --------
Item 1 - Financial Statements 3
Unaudited Consolidated Balance Sheets -
June 30, 2004 and December 31, 2003 3
Unaudited Consolidated Statements of Income -
For the Three Months and Six Months Ended
June 30, 2004 and June 30, 2003 4
Unaudited Consolidated Statements of Comprehensive Income -
For the Three Months and Six Months Ended
June 30, 2004 and June 30, 2003 5
Unaudited Consolidated Statements of Cash Flows -
For the Six Months Ended
June 30, 2004 and June 30, 2003 6
Unaudited Consolidated Statements of Changes in
Shareholders' Equity -
For the Six Months Ended
June 30, 2004 and June 30, 2003 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 25
Item 4 - Controls and Procedures 25
Part II - Other Information
Item 1 - Legal Proceedings 25
Item 2 - Changes in Securities, Use of Proceeds and Issuer Repurchases
of Equity Securities 25
Item 4 - Submission of Matters to a Vote of Security Holders 26
Item 6 - Exhibits and Reports on Form 8-K 26
Signatures 28
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
UNAUDITED CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(In thousands, except share data) 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 64,341 $ 99,628
Interest bearing deposits in other banks 2,838 3,154
Federal funds sold and securities purchased under agreements to resell 3,525 24,434
- ---------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 70,704 127,216
- ---------------------------------------------------------------------------------------------------------------------------
Investment securities:
Available for sale, amortized cost of $355,450 (2004) and $354,905 (2003) 351,975 358,169
Held to maturity, fair value of $23,595 (2004) and $26,201 (2003) 22,673 24,789
- ---------------------------------------------------------------------------------------------------------------------------
Total investment securities 374,648 382,958
- ---------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 792,894 755,945
Allowance for loan losses (11,419) (11,292)
- ---------------------------------------------------------------------------------------------------------------------------
Loans, net 781,475 744,653
- ---------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 24,131 24,115
Company-owned life insurance 26,267 25,510
Other assets 16,944 14,113
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,294,169 $ 1,318,565
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest bearing $ 178,486 $ 226,650
Interest bearing 824,095 841,672
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 1,002,581 1,068,322
- ---------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase 101,148 56,698
Other short-term borrowings 1,662 418
Long-term debt 53,601 56,413
Dividends payable 2,221 2,215
Other liabilities 7,573 8,028
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,168,786 1,192,094
- ---------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, par value $.125 per share
9,608,000 shares authorized; 8,177,725 and 8,160,919
shares issued at June 30, 2004 and December 31, 2003, respectively 1,022 1,020
Capital surplus 19,226 18,670
Retained earnings 148,297 145,489
Treasury stock, at cost; 1,446,934 and 1,444,739 shares
at June 30, 2004 and December 31, 2003, respectively (40,903) (40,830)
Accumulated other comprehensive (loss) income (2,259) 2,122
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 125,383 126,471
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,294,169 $ 1,318,565
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share data) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 11,802 $ 12,139 $ 23,531 $ 24,368
Interest on investment securities:
Taxable 2,021 1,201 3,985 3,500
Nontaxable 985 780 1,931 1,583
Interest on deposits in other banks 8 22 18 37
Interest of federal funds sold and securities purchased
under agreements to resell 77 215 167 377
- --------------------------------------------------------------------------------------------------------------------------------
Total interest income 14,893 14,357 29,632 29,865
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 3,602 4,316 7,276 8,963
Interest on federal funds purchased and securities sold
under agreements to repurchase 249 243 467 502
Interest on other borrowed funds 493 557 995 1,107
- --------------------------------------------------------------------------------------------------------------------------------
Total interest expense 4,344 5,116 8,738 10,572
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 10,549 9,241 20,894 19,293
- --------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 448 351 813 736
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 10,101 8,890 20,081 18,557
NONINTEREST INCOME
Service charges and fees on deposits 2,089 2,018 3,983 3,853
Other service charges, commissions, and fees 890 853 1,774 1,773
Data processing income 381 389 715 734
Trust income 414 413 828 812
Investment securities (losses) gains, net (17) (3) 65 144
Gain on sale of mortgage loans 71 323 115 512
Income from company-owned life insurance 362 408 767 673
Other 46 77 76 143
- --------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 4,236 4,478 8,323 8,644
- --------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 5,383 5,213 10,777 10,281
Occupancy expenses, net 634 642 1,296 1,300
Equipment expenses 924 924 1,874 1,861
Bank franchise tax 337 331 678 665
Other 2,351 2,358 4,686 4,500
- --------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 9,629 9,468 19,311 18,607
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,708 3,900 9,093 8,594
- --------------------------------------------------------------------------------------------------------------------------------
Income tax expense 967 874 1,844 1,975
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,741 $ 3,026 $ 7,249 $ 6,619
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Basic $ .56 $ .45 $ 1.08 $ .98
Diluted .55 .45 1.07 .98
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 6,730 6,723 6,727 6,743
Diluted 6,778 6,765 6,780 6,781
- --------------------------------------------------------------------------------------------------------------------------------
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) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------------
Net Income $ 3,741 $ 3,026 $ 7,249 $ 6,619
Other comprehensive income:
Unrealized holding (loss) gain on available for sale
securities arising during the period, net of tax
of $2,633, $606, $2,332, and $207, respectively (4,890) 1,125 (4,330) 385
Reclassification adjustment for prior period
unrealized gain recognized during current period,
net of tax of $9, $0, $27, and $61, respectively (16) (51) (114)
- -------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (4,906) 1,125 (4,381) 271
- -------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ (1,165) $ 4,151 $ 2,868 $ 6,890
- -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, (In thousands) 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,249 $ 6,619
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,437 1,496
Net amortization of investment security premiums and (discounts):
Available for sale 928 1,631
Held to maturity (22) (36)
Provision for loan losses 813 736
Noncash compensation expense 138 213
Mortgage loans originated for sale (9,629) (34,986)
Proceeds from sale of mortgage loans 8,696 33,991
Deferred income tax (benefit) expense (490) 106
Gains on sale of mortgage loans, net (115) (512)
Gains on sale of premises and equipment, net (2) (4)
Gains on sale of available for sale investment securities, net (65) (144)
Decrease in accrued interest receivable 141 596
Income from company-owned life insurance (757) (673)
(Increase) decrease in other assets (1,860) 551
Decrease in accrued interest payable (65) (292)
Increase in other liabilities 1,349 1,337
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,746 10,629
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities:
Available for sale 169,136 223,257
Held to maturity 2,140 2,788
Proceeds from sale of available for sale investment securities 35,039 74,050
Purchase of available for sale investment securities (205,585) (186,561)
Loans originated for investment, net of principal collected (36,587) (3,408)
Purchase of company-owned life insurance (24,001)
Purchase of premises and equipment (1,454) (1,562)
Proceeds from sale of equipment 3 6
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (37,308) 84,569
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits (65,741) 22,881
Net increase (decrease) in securities sold under agreements to repurchase 44,450 (42,340)
Proceeds from long-term debt 1,800 3,874
Repayments of long-term debt (4,612) (1,654)
Net increase (decrease) in other short-term borrowings 1,244 (32)
Dividends paid (4,435) (4,349)
Purchase of common stock (73) (2,539)
Stock options exercised 417 163
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in provided by financing activities (26,950) (23,996)
- -----------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (56,512) 71,202
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 127,216 67,101
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 70,704 $ 138,303
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures Cash paid during the period for:
Interest $ 8,803 $ 10,864
Income taxes 1,450 500
Transfers from loans to repossessed assets 2,954 183
Cash dividend declared and unpaid 2,221 2,151
- -----------------------------------------------------------------------------------------------------------------------------------
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, 2004 and 2003 Shares Amount Surplus Earnings Shares Amount Income Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2004 8,161 $1,020 $18,670 $145,489 1,445 $(40,830) $ 2,122 $126,471
Net income 7,249 7,249
Other comprehensive income (4,381) (4,381)
Cash dividends declared,
$.66 per share (4,441) (4,441)
Purchase of common stock 2 (73) (73)
Stock options exercised,
including related tax benefits 17 2 418 420
Noncash compensation expense
attributed to stock option grants 138 138
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2004 8,178 $1,022 $19,226 $148,297 1,447 $(40,903) $(2,259) $125,383
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2003 8,136 $1,017 $17,623 $141,199 1,344 $(37,627) $ 3,561 $125,773
Net income 6,619 6,619
Other comprehensive income 271 271
Cash dividends declared,
$.64 per share (4,309) (4,309)
Purchase of common stock 81 (2,539) (2,539)
Stock options exercised 6 1 162 163
Noncash compensation expense
attributed to stock option grants 213 213
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2003 8,142 $1,018 $17,998 $143,509 1,425 $(40,166) $ 3,832 $126,191
- ------------------------------------------------------------------------------------------------------------------------------------
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. Pro Mortgage Partners, LLC is a
wholly-owned subsidiary of Farmers Bank and Trust Company.
The Company provides financial services through its 28 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 June 30, 2004 and 2003.
- -------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share data) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------
Net income, basic and diluted $ 3,741 $ 3,026 $ 7,249 $ 6,619
- -------------------------------------------------------------------------------------------------------
Average shares outstanding 6,730 6,723 6,727 6,743
Effect of dilutive stock options 48 42 53 38
- -------------------------------------------------------------------------------------------------------
Average diluted shares outstanding 6,778 6,765 6,780 6,781
- -------------------------------------------------------------------------------------------------------
Net income per share, basic $ .56 $ .45 $ 1.08 $ .98
Net income per share, diluted .55 .45 1.07 .98
- -------------------------------------------------------------------------------------------------------
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.
- -----------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share data) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------
NET INCOME
As reported $ 3,741 $ 3,026 $ 7,249 $ 6,619
Add: Stock-based employee compensation expense
included in reported net income, net of
related tax effects 45 68 90 138
Less: Stock-based compensation expense determined
under fair value based method for all awards, net
of related tax effects (58) (83) (117) (168)
- -----------------------------------------------------------------------------------------------------------------
Proforma $ 3,728 $ 3,011 $ 7,222 $ 6,589
- -----------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Basic, as reported $ .56 $ .45 $ 1.08 $ .98
Basic, proforma .55 .45 1.07 .98
Diluted, as reported .55 .45 1.07 .98
Diluted, proforma .55 .44 1.07 .97
- -----------------------------------------------------------------------------------------------------------------
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.
5. EMPLOYEE STOCK PURCHASE PLAN
The Company's 2004 Employee Stock Purchase Plan was approved by its shareholders
at the Company's 2004 annual meeting on May 11, 2004. This Plan is effective
beginning July 1, 2004.
6. SUBSEQUENT EVENT - CITIZENS BANK (KENTUCKY), INC.
On July 2, 2004 the Company announced that the required approvals from the
appropriate regulatory authorities were received and that the acquisition of
100% of the outstanding common shares of Citizens Bank (Kentucky), Inc. in
Georgetown, Kentucky had been completed. The results presented in the
consolidated financial statements herein do not include any results related to
this acquisition, which occurred during the third quarter of 2004.
The total cost related to this acquisition, which has been paid entirely in
cash, was approximately $14.6 million. The following table presents the
estimated fair value of the assets acquired and the liabilities assumed at the
date of purchase. Additional legal expenses incurred but unbilled will result in
further purchase price and goodwill adjustments.
At July 1, 2004 ($000's)
- ------------------------------------------------------------------------------
ASSETS
Cash & equivalents $ 8,768
Investment securities 11,600
Loan, net of unearned income & allowance for loan losses 50,102
Goodwill 5,183
Core deposit intangible 2,230
Other assets 4,897
- ------------------------------------------------------------------------------
Total assets $ 82,780
- ------------------------------------------------------------------------------
LIABILITIES
Deposits $ 62,440
Short-term borrowings 304
Long-term borrowings 5,242
Other liabilities 239
- ------------------------------------------------------------------------------
Total liabilities 68,225
- ------------------------------------------------------------------------------
NET ASSETS ACQUIRED $ 14,555
- ------------------------------------------------------------------------------
7. SUBSEQUENT EVENT - FINANCIAL NATIONAL ELECTRONIC TRANSFER, INC.
On July 2, 2004 the Company announced that First Citizens Bank had signed a
definitive agreement to acquire Financial National Electronic Transfer, Inc.
("FINET") in a cash transaction for $6.5 million. FINET is a data processing
company that specializes in the processing of federal benefit payments and
military allotments and is headquartered in Radcliff, Kentucky. The results
presented herein do not include any results related to this acquisition, which
is expected to close late during the third quarter or in the fourth quarter of
2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties. Although the
Company believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
included herein will prove to be accurate. Factors that could cause actual
results to differ from the results discussed in the forward-looking statements
include, but are not limited to: economic conditions (both generally and more
specifically in the markets in which the Company and its subsidiaries operate);
competition for the Company's customers from other providers of financial
services; government legislation and regulation (which changes from time to time
and over which the Company has no control); changes in interest rates; material
unforeseen changes in the liquidity, results of operations, or financial
condition of the Company's customers; and other risks detailed in the Company's
filings with the Securities and Exchange Commission, all of which are difficult
to predict and many of which are beyond the control of the Company. The Company
expressly disclaims any intent or obligation to update any forward-looking
statements after the date hereof to conform such statements to actual results or
to changes in our opinions or expectations.
RESULTS OF OPERATIONS
SECOND QUARTER 2004 VS. SECOND QUARTER 2003
-------------------------------------------
The Company reported net income of $3.7 million for the second quarter of 2004,
an increase of $715 thousand or 23.6% compared to $3.0 million for the second
quarter of 2003. Basic and diluted net income per share for the current quarter
was $.56 and $.55, an increase of $.11 or 24.4% and $.10 or 22.2%, respectively.
The increase in net income for the three months ended June 30, 2004 is primarily
attributed to an increase in net interest income. Net interest income for the
current quarter was $10.5 million, an increase of $1.3 million or 14.2% compared
to the same period a year earlier. The increase in net interest income in the
quarterly comparison can be attributed to both an increase in interest income
totaling $536 thousand or 3.7% along with a decline in interest expense of $772
thousand or 15.1%.
Lower noninterest income and an increase in noninterest expenses partially
offset the reported increase in net interest income in the current three-month
reporting period. Noninterest income declined $242 thousand or 5.4% in the
three-month comparison primarily due to lower gains on the sale of mortgage
loans of $252 thousand. The decline is the result of lower origination activity
in the current period. Noninterest expenses increased $161 thousand or 1.7% due
mainly to increases in salaries and employee benefits of $170 thousand or 3.3%.
The increase in salaries and employee benefits was affected by normal salary
increases and an increase in the average number of full time equivalent
employees of seven. The effective income tax rate declined 187 basis points to
20.5% for the three months ended June 30, 2004 compared to the same period a
year earlier.
The return on average assets ("ROA") was 1.15% for the current quarter, an
increase of 17 basis points compared to .98% reported for the same period in
2003. The increase in ROA was driven by a 35 basis point increase in net
interest margin to 3.83% from 3.48%. The increase in net interest margin, along
with a decrease in noninterest expenses as a percentage of average total assets,
more than offset the following which negatively impacted ROA: a decrease in the
earning asset ratio contributing nine basis points; an increase in the provision
for loan losses contributing three basis points; a decrease in noninterest
income contributing 15 basis points; and an increase in income taxes
contributing three basis points. Return on average equity ("ROE") was 11.93% for
the second quarter of 2004 compared to 9.71% in the same period of 2003. This
represents an increase of 222 basis points and is attributed to higher net
income reported in the current period coupled with an increase in financial
leverage compared to the same period a year ago. Financial leverage represents
the degree in which borrowed funds, as opposed to equity, are used in the
funding of assets. Financial leverage increased to 10.8% from 9.8% in the
comparison.
NET INTEREST INCOME
- -------------------
Although many economic measures are beginning to improve, weaknesses remain in
the overall economic environment. The general trend of the interest rate
environment for 2003 was downward primarily as a result of previous short-term
interest rate reductions taken by the Federal Reserve Board ("Fed"). The effects
of the downward trend in general interest rates for 2003 have began to
positively affect the Company's net interest income during 2004. A significant
amount of time deposits, the largest component of interest bearing liabilities,
have repriced to lower rates and have contributed to an increase in net interest
income for the current period. The repricing of time deposits for the Company
have generally taken longer to occur than for other interest paying liabilities
and interest earning assets due to their fixed nature and maturity
characteristics. The increase in the short-term federal funds rate of 25 basis
points by the Fed near the end of current quarter did not significantly impact
the Company's net interest income during the reporting periods.
The Company's tax equivalent ("TE") yield on earning assets for the current
three months was 5.3%, unchanged from the same period a year ago. The cost of
funds for the current three months was 1.8%, a decline of 42 basis points
compared to 2.2% in the same period a year earlier. A goal of the Company in the
current interest rate environment is to increase earning assets while
maintaining relatively low interest rates paid on interest bearing liabilities.
However, many of the Company's funding sources, particularly deposits, have
neared their repricing floors. Average earning assets increased $49.2 million or
4.4% to $1.2 billion in the quarterly comparison. As a percentage of total
average assets, earning assets decreased 137 basis points to 89.06% from 90.43%.
This decrease had the effect of reducing ROA by nine basis points in the
quarterly comparison.
Interest income totaled $14.9 million for the second quarter of 2004, an
increase of $536 thousand or 3.7% compared to the same period in the prior year.
Interest expense totaled $4.3 million, a decrease of $772 thousand or 15.1%. Net
interest income rose $1.3 million or 14.2% in the comparison and totaled $10.5
million for the three months ended June 30, 2004.
Interest and fees on loans totaled $11.8 million, a decrease of $337 thousand
mainly due to a decrease in the average rate earned. Average loans increased
$40.9 million or 5.5% to $783.1 million in the comparison due to increased loan
demand in a low rate environment. The tax equivalent yield on loans decreased 52
basis points to 6.1% from 6.6% and offset the effects of higher average balances
on interest income. Interest on taxable securities was $2.0 million, an increase
of $820 thousand or 68.3% due primarily to an increase in the average rate
earned, which was negatively affected by the unusually high premium amortization
on mortgage-backed securities in the prior year. Prepayments on mortgage-backed
securities in the prior year increased greatly due to corresponding refinancing
of home mortgages that serve as collateral for these investment securities. The
increase in activity was directly related to the historic low interest rate
environment that existed throughout much of 2003. The average rate earned on
taxable securities increased 114 basis points to 3.2% from 2.1% while the
average balance increased to $252.5 million from $231.3 million. Interest on
nontaxable securities increased $205 thousand or 26.3% due to a $26.0 million
increase in the average balance to $96.2 million from $70.1 million. The
increase in average nontaxable securities offset a 47 basis point decline in
yield to 6.1% from 6.6%. Interest on short-term investments, including time
deposits in other banks, federal funds sold, and securities purchased under
agreements to resell, decreased $152 thousand due primarily to a combination of
both a decrease in the average balance to $34.6 million from $73.6 million and a
decrease in average rate earned on these investments of 30 basis points to 1.0%
from 1.3%.
Interest expense on deposits decreased $714 thousand or 16.5% to $3.6 million in
the quarterly comparison. This decrease resulted from a general decline in the
average rate paid throughout the deposit portfolio, particularly time deposits,
and correlates with the general decline in market interest rates in the
reporting periods. The decline in the average rates paid offset a general
increase in average balances. The decline in interest expense on deposits was as
follows: time deposits $649 thousand or 18.3%; interest bearing demand deposits
$62 thousand or 17.6%; and savings deposits $3 thousand or 0.7%. The average
rate paid on time deposits, the largest component of interest bearing deposits,
was 2.7% for the second quarter of 2004 compared to 3.3% for the same period of
2003. The average balance of time deposits increased $4.3 million or 1.0% to
$430.5 million. The average rate paid on interest bearing demand deposits
declined 16 basis points to .49% from .65% while the average balance increased
$17.8 million or 8.1% to $236.8 million. The average rate paid on savings
deposits decreased 16 basis points to .8% from 1.0% while the average balance
increased $29.1 million or 17.9% to $192.1 million from $163.0 million. Interest
expense on overnight borrowings, consisting of federal funds purchased and
securities sold under agreements to repurchase, increased $6 thousand as a $16.1
million increase in the average balance offset a decline in the average rate
paid of 24 basis points to 1.2% from 1.4%. Interest expense on other borrowed
funds decreased $64 thousand in the comparison due mainly to a reduction in the
outstanding average balance, which offset a 30 basis point increase in the
average rate paid to 3.7% from 3.4%. The average balance of other borrowed funds
totaled $54.3 million, a decrease of $12.4 million or 18.6% in the comparison.
The net interest margin (TE) increased 35 basis points to 3.83% during the
second quarter of 2004 compared to 3.48% in the second quarter of 2003. The
increase in net interest margin is primarily attributed to a 43 basis point
increase in the spread between rates earned on earning assets and the rates paid
on interest bearing liabilities to 3.58% in the current quarter from 3.15% in
the second quarter of 2003. The effect of noninterest bearing sources of funds
offset the 43 basis point increase in spread by 8 basis points, resulting in the
increase in net interest margin. The effect of noninterest bearing sources of
funds on net interest margin typically declines in a falling rate environment.
The following tables present an analysis of net interest income for the
quarterly periods ended June 30.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL
- -----------------------------------------------------------------------------------------------------------------------------------
Quarter Ended June 30, 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Investment securities
Taxable $ 252,474 $ 2,021 3.22% $ 231,260 $ 1,201 2.08%
Nontaxable1 96,168 1,456 6.09 70,133 1,147 6.56
Time deposits with banks, federal
funds sold and securities purchased
under agreements to resell 34,595 85 .99 73,562 237 1.29
Loans1,2,3 783,088 11,885 6.10 742,142 12,245 6.62
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,166,325 $ 15,447 5.33% 1,117,097 $ 14,830 5.32%
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (11,383) (11,248)
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets, net of
allowance for loan losses 1,154,942 1,105,849
- -----------------------------------------------------------------------------------------------------------------------------------
NONEARNING ASSETS
Cash and due from banks 91,741 70,281
Premises and equipment, net 24,242 24,314
Other assets 38,611 34,838
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,309,536 $ 1,235,282
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Deposits
Interest bearing demand $ 236,795 $ 291 .49% $ 219,011 $ 353 .65%
Savings 192,147 415 .87 163,032 418 1.03
Time 430,452 2,896 2.71 426,174 3,545 3.34
Federal funds purchased and
securities sold under agreements
to repurchase 84,941 249 1.18 68,815 243 1.42
Other borrowed funds 54,309 493 3.65 66,747 557 3.35
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 998,644 $ 4,344 1.75% 943,779 $ 5,116 2.17%
- -----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST BEARING LIABILITIES
Commonwealth of Kentucky deposits 41,075 38,662
Other demand deposits 134,952 122,979
Other liabilities 8,734 4,845
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,183,405 1,110,265
- -----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 126,131 125,017
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 1,309,536 $ 1,235,282
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 11,103 9,714
TE basis adjustment (554) (473)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 10,549 $ 9,241
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest spread 3.58% 3.15%
Impact of noninterest bearing sources
of funds .25 .33
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.83% 3.48%
- -----------------------------------------------------------------------------------------------------------------------------------
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 $625 thousand and $612 thousand in 2004 and 2003, respectively.
ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX EQUIVALENT BASIS)
- -----------------------------------------------------------------------------------------------------
(In thousands) Variance Variance Attributed to
Quarter Ended June 30, 2004/20031 Volume Rate
- -----------------------------------------------------------------------------------------------------
INTEREST INCOME
Taxable investment securities $ 820 $ 118 $ 702
Nontaxable investment securities2 309 812 (503)
Time deposits with banks, federal funds sold and
securities purchased under agreements to resell (152) (106) (46)
Loans2 (360) 3,036 (3,396)
- -----------------------------------------------------------------------------------------------------
Total interest income 617 3,860 (3,243)
- -----------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest bearing demand deposits (62) 159 (221)
Savings deposits (3) 278 (281)
Time deposits (649) 239 (888)
Federal funds purchased and securities sold under
agreements to repurchase 6 195 (189)
Other borrowed funds (64) (314) 250
- -----------------------------------------------------------------------------------------------------
Total interest expense (772) 557 (1,329)
- -----------------------------------------------------------------------------------------------------
Net interest income $ 1,389 $ 3,303 $ (1,914)
- -----------------------------------------------------------------------------------------------------
Percentage change 100.0% 237.8% (137.8)%
- -----------------------------------------------------------------------------------------------------
1The changes that are not solely due to rate or volume are allocated on a percentage basis using the
absolute values of rate and volume variances as a basis for allocation.
2Income stated at fully tax equivalent basis using the marginal corporate Federal tax rate of 35%.
NONINTEREST INCOME
- ------------------
Noninterest income was $4.2 million for the current quarter, a decrease of $242
thousand or 5.4% compared to the second quarter of the prior year. The largest
component of noninterest income, service charges and fees on deposits, totaled
$2.1 million at June 30, 2004, an increase of $71 thousand or 3.5% due to
increased overdraft volumes. Other service charges, commissions, and fees
increased $37 thousand or 4.3% to $890 thousand. Data processing fees dipped
slightly to $381 thousand from $389 thousand in the comparison. Trust income was
relatively unchanged at $414 thousand compared to $413 thousand in the same
quarter a year earlier. Net losses on the sale of available for sale securities
for the current quarter were $17 thousand compared to net losses of $3 thousand
in the prior year as the Company continues its efforts to properly manage its
balance sheet composition in the current economic environment. Net gains on the
sale of mortgage loans were $71 thousand, a decrease of $252 thousand from $323
thousand in the prior year. Mortgage loans originated for sale, which began to
decline in the fourth quarter of 2003, declined $13.5 million or 69.6% in the
current quarterly comparison. Mortgage loan activity in the current quarter is
reflective of lower refinancing activity compared to the same period a year
earlier. Consumer refinancing activity in the prior year was driven by
historically low interest rates. Income from the purchase of company-owned life
insurance declined $46 thousand or 11.3% to $362 thousand in the current
three-month period as a result of the structure of fee vesting schedules. Other
noninterest income totaled $46 thousand, a decrease of $31 thousand compared to
the prior period.
NONINTEREST EXPENSE
- -------------------
Total noninterest expenses were $9.6 million for the second quarter of 2004, an
increase of $161 thousand or 1.7% compared to the second quarter of 2003.
Salaries and employee benefits rose $170 thousand or 3.3% while other
noninterest expense categories remained relatively flat or have decreased in the
comparison. Employee salaries and payroll taxes increased $221 thousand or 5.4%
while benefit expenses and noncash compensation expense related to the Company's
nonqualified stock option plan declined $13 thousand or 1.3% and $37 thousand or
35.2%, respectively. The increase in salary expense is attributed to normal
salary increases along with an increase in the average number of full time
equivalent employees of seven. The slight decline in benefit expenses is
attributed to lower health insurance costs during the current period. The number
of full time equivalent employees as of June 30, 2004 was 469 compared to 462 a
year earlier.
INCOME TAXES
- ------------
Income tax expense for the second quarter of 2004 was $967 thousand, an increase
of $93 thousand or 10.6% from the same period a year earlier. The effective tax
rate decreased 187 basis points to 20.5% from 22.41% in 2003. The decrease in
the effective tax rate is due to additional revenues from investments in
municipal securities and a reduction of net revenue expected from taxable
sources.
FIRST SIX MONTHS OF 2004 VS. FIRST SIX MONTHS OF 2003
-----------------------------------------------------
Net income for the six months ended June 30, 2003 was $7.2 million compared to
net income of $6.6 million for the same period in 2003, an increase of $630
thousand or 9.5%. Basic and diluted net income per share was $1.08 and $1.07 for
the current six months, an increase of $.10 or 10.2% and $.09 or 9.2%,
respectively. The increase in net income is primarily attributed to an increase
in net interest income. Net interest income for the current six-month period was
$20.9 million an increase of $1.6 million or 8.3% compared to the same six
months in 2003. The increase in net interest income is due to the reduction in
interest expense of $1.8 million or 17.3%, which offset a slight decline in
interest income of $233 thousand or .8%.
Lower noninterest income and an increase in noninterest expenses partially
offset the reported increase in net interest income in the current six-month
reporting period. Noninterest income declined $321 thousand or 3.7% in the
comparison primarily due to lower gains on the sale of mortgage loans of $397
thousand. The decline is the result of lower origination activity in the current
period. Noninterest expenses increased $704 thousand or 3.8% in the current
six-month period due mainly to increases in salaries and employee benefits of
$496 thousand or 4.8%. The increase in salaries and employee benefits was
affected by normal salary increases and an increase in the average number of
full time equivalent employees of three. The effective income tax rate declined
270 basis points to 20.3% for the six months ended June 30, 2004 compared to the
same period a year earlier.
ROA was 1.12% for the six months ended June 30, 2004, an increase of five basis
points compared to 1.07% reported for the same period in 2003. The increase in
ROA was driven by a 22 basis point increase in net interest margin to 3.83% from
3.61%. The increase in net interest margin, along with a decrease in noninterest
expenses and income tax expense as a percentage of average total assets, more
than offset the following which negatively impacted ROA: a decrease in the
earning asset ratio contributing 10 basis points; an increase in the provision
for loan losses contributing one basis point; and a decrease in noninterest
income contributing 11 basis points. ROE was 11.51% for the first six months of
2004 compared to 10.68% in the same period of 2003. This represents an increase
of 83 basis points and is attributed to higher net income reported in the
current period coupled with an increase in financial leverage compared to the
same period a year ago. Financial leverage represents the degree in which
borrowed funds, as opposed to equity, are used in the funding of assets.
Financial leverage increased to 10.3% from 9.9% in the comparison.
NET INTEREST INCOME
- -------------------
Although many economic measures are beginning to improve, weaknesses remain in
the overall economic environment. The general 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 the downward trend in
general interest rates for 2003 have began to positively affect the Company's
net interest income during 2004. A significant amount of time deposits, the
largest component of interest bearing liabilities, have repriced to lower rates
and have contributed to an increase in net interest income for the current
period. The repricing of time deposits for the Company have generally taken
longer to occur than for other interest paying liabilities and interest earning
assets due to their fixed nature and maturity characteristics. The increase in
the short-term federal funds rate of 25 basis points by the Fed near the end of
current quarter did not significantly impact the Company's net interest income
during the reporting periods
The Company's tax equivalent yield on earning assets for the current six months
was 5.4%, a reduction of 14 basis points from 5.5% in the same period a year
ago. The cost of funds for the current six months was 1.8%, a decline of 47
basis points compared to 2.2% in the same period a year earlier. A goal of the
Company in the current interest rate environment is to increase earning assets
while maintaining relatively low interest rates paid on interest bearing
liabilities. However, many of the Company's funding sources, particularly
deposits, have approached their repricing floors. Average earning assets
increased $22.5 million or 2.0% to $1.2 billion in the comparison. As a
percentage of total average assets, earning assets declined 218 basis points to
89.06% from 91.24%. This increase had the effect of reducing ROA by 10 basis
points in the six-month comparison.
Interest income totaled $29.6 million for the first six months of 2004, a
decrease of $233 thousand or .8% compared to the same period in the prior year.
Interest expense totaled $8.7 million, a decrease of $1.8 million or 17.3%. Net
interest income increased $1.6 million or 8.3% in the comparison and totaled
$20.9 million at June 30, 2004.
Interest and fees on loans totaled $23.5 million, a decrease of $837 thousand
mainly due to a decrease in the average rate earned. Average loans increased
$34.5 million or 4.7% to $773.6 million in the comparison due to higher loan
demand in a continued low rate environment. The tax equivalent yield on loans
decreased 55 basis points to 6.2% from 6.7% and offset the effects of higher
loan demand on interest income. Interest on taxable securities was $4.0 million,
an increase of $485 thousand or 13.9% due primarily to an increase in the
average rate earned, which was negatively affected by the unusually high premium
amortization on mortgage-backed securities in the prior year. Prepayments on
mortgage-backed securities in the prior year increased greatly due to
corresponding refinancing of home mortgages that serve as collateral for these
investment securities. The increase in activity was directly related to the
historic low interest rate environment that existed throughout much of 2003. The
average rate earned on taxable securities increased 45 basis points to 3.2% from
2.8% while the average balance declined $6.7 million or 2.6%. Interest on
nontaxable securities increased $348 thousand or 22.0% due to a $23.2 million or
32.8% increase in the average balance to $94.1 million from $70.9 million.
Interest on short-term investments, including time deposits in other banks,
federal funds sold, and securities purchased under agreements to resell,
decreased $229 thousand due to a decrease in the average balance of $28.6
million or 43.1% combined with a decrease in the average rate earned on these
investments of 27 basis points to 1.0% from 1.3%.
Interest expense on deposits decreased $1.7 million or 18.8% to $7.3 million in
the six-month comparison. This decrease resulted from a general decline in the
average rate paid throughout the deposit portfolio, particularly time deposits,
and correlates with the general decline in market interest rates in the
reporting periods. The decline in the average rates paid offset a general
increase in average balances. The decline in interest expense on deposits was as
follows: time deposits $1.5 million or 20.4%; interest bearing demand deposits
$134 thousand or 19.0%; and savings deposits $47 thousand or 5.4%. The average
rate paid on time deposits, the largest component of interest bearing deposits,
was 2.8% for the six months ended June 30, 2004 compared to 3.5% for the same
period of 2003. The average balance of time deposits increased $6.2 million or
1.5% to $428.2 million. The average rate paid on interest bearing demand
deposits declined 16 basis points to .49% from .65% while the average balance
increased $15.0 million or 6.8% to $235.9 million. The average rate paid on
savings deposits decreased 18 basis points to .9% from 1.1% while the average
balance increased $24.2 million or 14.5% to $190.8 million from $166.6 million.
Interest expense on overnight borrowings, consisting of federal funds purchased
and securities sold under agreements to repurchase, decreased $35 thousand due
to a 20 basis point decline in the average rate paid, which offset a $6.9
million increase in the average balance. Interest expense on other borrowed
funds decreased $112 thousand in the comparison as net repayments decreased the
average outstanding balance by $11.5 million or 17.4%. The decline in the
average balance outstanding offset an increase in the average rate paid on other
borrowed funds of 29 basis points to 3.7% from 3.4%.
The net interest margin (TE) increased 22 basis points to 3.83% during the six
months ended June 30, 2004 compared to 3.61% in the same period of 2003. The
increase in net interest margin is primarily attributed to a 33 basis point rise
in the spread between rates earned on earning assets and the rates paid on
interest bearing liabilities to 3.58% in the current six months from 3.25% in
the same period in 2003. The effect of noninterest bearing sources of funds
offset the 33 basis point increase in spread by 11 basis points, resulting in
the increase in net interest margin. The effect of noninterest bearing sources
of funds on net interest margin typically declines in a falling rate
environment.
The following tables present an analysis of net interest income for the six
months ended June 30.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL
- --------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Investment securities
Taxable $ 250,214 $ 3,985 3.20% $ 256,913 $ 3,500 2.75%
Nontaxable1 94,121 2,854 6.10 70,891 2,328 6.62
Time deposits with banks, federal
funds sold and securities purchased
under agreements to resell 37,737 185 .99 66,295 414 1.26
Loans1,2,3 773,642 23,703 6.16 739,127 24,584 6.71
- --------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,155,714 $ 30,727 5.35% 1,133,226 $ 30,826 5.49%
- --------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (11,394) (11,263)
- --------------------------------------------------------------------------------------------------------------------------------
Total earning assets, net of
allowance for loan losses 1,144,320 1,121,963
- --------------------------------------------------------------------------------------------------------------------------------
NONEARNING ASSETS
Cash and due from banks 92,817 67,332
Premises and equipment, net 24,216 24,180
Other assets 36,268 28,576
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,297,621 $ 1,242,051
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Deposits
Interest bearing demand $ 235,922 $ 573 .49% $ 220,945 $ 707 .65%
Savings 190,787 824 .87 166,608 871 1.05
Time 428,162 5,879 2.76 421,920 7,385 3.53
Federal funds purchased and
securities sold under agreements
to repurchase 81,684 467 1.15 74,823 502 1.35
Other borrowed funds 54,679 995 3.66 66,179 1,107 3.37
- --------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 991,234 $ 8,738 1.77% 950,475 $ 10,572 2.24%
- --------------------------------------------------------------------------------------------------------------------------------
NONINTEREST BEARING LIABILITIES
Commonwealth of Kentucky deposits 38,729 35,790
Other demand deposits 133,889 121,996
Other liabilities 7,121 8,821
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,170,973 1,117,082
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 126,648 124,969
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 1,297,621 $ 1,242,051
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 21,989 20,254
TE basis adjustment (1,095) (961)
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 20,894 $ 19,293
- --------------------------------------------------------------------------------------------------------------------------------
Net interest spread 3.58% 3.25%
Impact of noninterest bearing sources
of funds .25 .36
- --------------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.83% 3.61%
- --------------------------------------------------------------------------------------------------------------------------------
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 $1.2 million and $1.1 million in 2004 and 2003, respectively.
ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX EQUIVALENT BASIS)
- ------------------------------------------------------------------------------------------------------------
(In thousands) Variance Variance Attributed to
Six Months Ended June 30, 2004/20031 Volume Rate
- ------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Taxable investment securities $ 485 $ (251) $ 736
Nontaxable investment securities2 526 1,019 (493)
Time deposits with banks, federal funds sold and
securities purchased under agreements to resell (229) (153) (76)
Loans2 (881) 2,631 (3,512)
- ------------------------------------------------------------------------------------------------------------
Total interest income (99) 3,246 (3,345)
- ------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest bearing demand deposits (134) 123 (257)
Savings deposits (47) 254 (301)
Time deposits (1,506) 317 (1,823)
Federal funds purchased and securities sold under
agreements to repurchase (35) 101 (136)
Other borrowed funds (112) (332) 220
- ------------------------------------------------------------------------------------------------------------
Total interest expense (1,834) 463 (2,297)
- ------------------------------------------------------------------------------------------------------------
Net interest income $ 1,735 $ 2,783 $ (1,048)
- ------------------------------------------------------------------------------------------------------------
Percentage change 100.0% 160.4% (60.4)%
- ------------------------------------------------------------------------------------------------------------
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 $8.3 million for the first six months of 2004, a decrease
of $321 thousand or 3.7% compared to the same period in 2003. The largest
component of noninterest income, service charges and fees on deposits, increased
$130 thousand or 3.4% to $4.0 million due primarily to a $118 thousand or 4.9%
increase in overdraft activity. Other service charges, commissions, and fees
were flat at $1.8 million. Data processing fees fell $19 thousand or 2.6% to
$715 thousand due mainly to lower transaction volumes. Trust fees increased $16
thousand or 2.0%. Net gains on the sale of available for sale securities was $65
thousand for the current six months, a decrease of $79 thousand or 54.9%
compared to $144 thousand in the comparable period a year ago as the Company
continues its efforts to properly manage the composition of its balance sheet in
the current economic environment. Net gains on the sale of mortgage loans were
$115 thousand, a decrease of $397 thousand from $512 thousand in the prior year.
Mortgage loans originated for sale, which began to decline in the fourth quarter
of 2003, declined $25.4 million or 72.5% in the six-month comparison. The
decrease in mortgage loan origination is reflective of the lower refinancing
activity compared to the same period a year earlier. Consumer refinancing
activity in the prior year was driven by historically low interest rates. Income
from the purchase of company-owned life insurance was $767 thousand, an increase
of $94 thousand or 14.0%. The increase is attributed to a full six months of
income being recognized in the current period compared to a shorter time period
in the prior year due to the timing of the purchase. Other noninterest income
totaled $76 thousand, a decrease of $67 thousand compared to $143 thousand in
the prior year. This decrease is attributable to the operations of the Company's
investment in a low income tax partnership.
NONINTEREST EXPENSE
- -------------------
Noninterest expenses totaled $19.3 million for the first six months of 2004, an
increase of $704 thousand or 3.8% compared to the same period in 2003. Salaries
and employee benefits, the largest component of noninterest expense, increased
$496 thousand or 4.8% and totaled $10.8 million at June 30, 2004. Employee
benefit expenses increased $261 thousand or 13.6% primarily due to increased
health insurance costs, including the timing effect of additional amounts
associated with the new postretirement health insurance coverage initiated late
in the first quarter of 2003. Salary and related payroll expenses increased $308
thousand or 3.8% in the comparison while noncash compensation expense related to
the Company's nonqualified stock option plan declined $74 thousand or 34.8% due
to the structure of the fee vesting schedule. The number of full time equivalent
employees increased to 469 at June 30, 2004 from 462 reported on the same date
in the prior period. On average, the number of full time equivalent employees
increased to 461 from 458 in the comparison. All other noninterest expenses
increased $208 thousand or 2.5%, with $96 thousand in higher telephone expenses
driving the increase. The increase is the result of adding higher data
transmission capacity for both internal and external usage.
INCOME TAXES
- ------------
Income tax expense for the first six months of 2004 was $1.8 million, a decrease
of $131 thousand or 6.6% from the same period a year earlier. The effective tax
rate decreased 270 basis points to 20.3% from 23.0% in 2003. The decrease in the
effective tax rate is due to additional revenues from investments in municipal
securities and a reduction of net revenue expected from taxable sources.
FINANCIAL CONDITION
Total assets were $1.3 billion on June 30, 2004, a decrease of $24.4 million or
1.9% from December 31, 2003. The decrease in assets primarily includes a $56.5
million or 44.4% lower balance in cash and cash equivalents and a decrease in
investment securities of $8.3 million or 2.2% offset by an increase in net loans
of $36.8 million or 4.9%. The decrease in total assets is related to the
corresponding decline in the Company's funding sources. The decline in funding
sources includes a $65.7 million or 6.2% decrease in deposits offset by a $42.9
million or 37.8% increase in other borrowings. Total shareholders' equity
declined $1.1 million or .9% due to an increase in unrealized holding losses in
the available for sale investment securities portfolio. 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 six months of
2004, an increase of $46.9 million or 3.7% from year-end 2003. Average earning
assets, primarily loans and securities, were $1.2 billion at June 30, 2004, an
increase of $28.3 million or 2.5% from year-end 2003. Average earning assets
represent 89.06% of total average assets on June 30, 2004, a decrease 108 basis
points compared to 90.14% at year-end 2003.
LOANS
- -----
Loans, net of unearned income, totaled $792.9 million at June 30, 2004, an
increase of $36.9 million or 4.9% from year-end 2003. The composition of the
loan portfolio is summarized in the table below.
- --------------------------------------------------------------------------------
June 30, 2004 December 31, 2003
(Dollars in thousands) Amount % Amount %
- --------------------------------------------------------------------------------
Commercial, financial,
and agriculture $ 119,292 15.0% $ 110,657 14.6%
Real estate - construction 49,714 6.3 45,390 6.0
Real estate mortgage - residential 286,885 36.2 270,638 35.8
Real estate mortgage farmland and
other commercial enterprises 230,718 29.1 222,100 29.4
Installment 69,693 8.8 71,565 9.5
Lease financing 36,592 4.6 35,595 4.7
- --------------------------------------------------------------------------------
Total $ 792,894 100.0% $ 755,945 100.0%
- --------------------------------------------------------------------------------
On average, loans represented 66.9% of earning assets during the current six
month period compared to 65.9% 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 have lower credit risk and
lower yields.
ALLOWANCE FOR LOAN LOSSES
- -------------------------
The allowance for loan losses was $11.4 million at June 30, 2004, an increase of
$127 thousand or 1.1% from the prior year-end. The allowance for loan losses was
1.44% of loans net of unearned income at June 30, 2004, a decrease of five basis
points from 1.49% from December 31, 2003. The provision for loan losses
increased $97 thousand or 27.6% and $77 thousand or 10.5% in the current
three-month and six-month period, respectively, compared to the same periods in
2003. The Company had net charge-offs of $324 thousand and $687 thousand in the
current three and six months of 2004, respectively, compared to net charge-offs
of $324 thousand and $642 thousand in the same periods of 2003. Annualized net
charge-offs represent .17% and .18% of average net loans for three and six
months ended June 30, 2004, respectively compared to .32% at year-end 2003. The
allowance for loan losses as a percentage of nonperforming loans totaled 141.3%
and 123.9% at June 30, 2004 and December 31, 2003, respectively. The increase is
primarily reflective of the decline in nonperforming assets of $1.0 million in
the comparison. 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 $12.1 million at
June 30, 2004, an increase of $936 thousand or 8.4% from the prior year-end.
Nonperforming loans totaled $8.1 million at June 30, 2004 a decrease of $1.0
million or 11.3% 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 $1.3 million at June 30, 2004, a
decrease of $2.9 million or 68.3% from the prior year end. Nonperforming loans
as a percentage of net loans were 1.0% at June 30, 2004, a decrease of 20 basis
points from 1.2% compared to year-end 2003.
Other real estate owned, which had a balance of $1.8 million at year-end 2003,
increased $2.1 million to $3.9 million on June 30, 2004. The increase in other
real estate owned is reflective of $2.8 million of the underlying real estate
collateral on the pool of loans to a financially troubled builder mentioned
above being transferred to the Company through foreclosure.
TEMPORARY INVESTMENTS
- ---------------------
Temporary investments consist of interest bearing deposits with other banks,
federal funds sold, and securities purchased under agreements to resell and
totaled $6.4 million at June 30, 2004, a decrease of $21.2 million or 76.9% from
year-end 2003. Temporary investments averaged $37.7 million for the first six
months of 2004, a decrease of $21.7 million or 36.5% 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 $374.6 million on June 30, 2004, a decrease of $8.3
million or 2.2% from year-end 2003. Available for sale and held to maturity
securities were $352.0 million and $22.6 million, respectively. Investment
securities averaged $344.3 million for the first six months of 2004, an increase
of $18.6 million or 5.7% from year-end 2003. The increase in average investment
securities was driven by an $18.5 million or 24.4% increase in nontaxable
securities and 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 loss on available for sale investment securities of $3.5
million at June 30, 2004 compared to an unrealized gain of $3.3 million at
year-end 2003. The change is due primarily to the impact of changing economic
conditions, including an increase in short-term market interest rates near the
end of the current quarter. The market value of fixed rate investments is
inversely related to changes in market interest rates.
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 the new postretirement health insurance
program implemented during 2003. Company-owned life insurance totaled $26.3
million at June 30, 2004, an increase of $757 thousand or 3.0% from year-end
2003.
DEPOSITS
- --------
Total deposits were $1.0 billion at June 30, 2004, a decrease of $65.7 million
or 6.2% from year-end 2003. Noninterest bearing deposits decreased $48.2 million
or 21.3% in the comparison. This decrease 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 $172.6 million during the current period, an increase of $10.7
million or 6.6% from year-end 2003. End of period interest bearing deposit
balances decreased $17.6 million or 2.1% during the six months ended June 30,
2004 due to decreases in interest bearing checking accounts of $10.3 million or
4.4%, money market deposit accounts of $9.3 million or 8.1%, and savings
accounts of $2.5 million or 3.4%. Time deposits increased $4.5 million or 1.1%
in the end of period comparisons. On average, interest bearing deposits were
$854.9 million in the current period, an increase of $33.0 million or 4.0% from
year-end 2003. The increase in average interest bearing deposits is attributable
to growth throughout the entire deposit portfolio represented as follows:
interest bearing demand deposits of $8.7 million or 3.8%, money market deposit
accounts of $10.8 million or 10.0%, time deposits of $5.4 million or 1.3%, and
savings accounts of $18.8 million or 11.0%. Total deposits averaged $1.0
billion, an increase of $43.6 million or 4.4% from year-end 2003.
BORROWED FUNDS
- --------------
Borrowed funds totaled $156.4 million at June 30, 2004, an increase of $42.8
million or 37.8% from $113.5 million at year-end 2003. A $2.8 million net
decrease in long-term borrowings was offset by a $45.7 million increase in
short-term borrowings. Federal funds purchased and securities sold under
agreements to repurchase increased $44.5 million or 78.4% due primarily to
increased correspondent banking activity and 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 $1.2
million to $1.7 million due primarily to additional net borrowings from the
Federal Home Loan Bank ("FHLB") of $1.0 million. The $2.8 million decrease in
long-term borrowings is mainly attributed to net repayments of borrowed funds
from the FHLB. Total borrowed funds averaged $136.4 million, an increase of $3.1
million or 2.3% 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 June 30, 2004 combined retained earnings of the
subsidiary banks were $45.4 million, of which $2.3 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. During the
current six months ended June 30, 2004 the Parent Company received dividends of
$4.3 million. Management expects that in the aggregate, its subsidiary banks
will continue to have the ability to pay dividends in order to provide funds to
the Parent Company during the remainder of 2004 sufficient to meet its liquidity
needs. The Parent Company had cash balances of $28.1 million at June 30, 2004.
Additionally, the Parent Company has a $10.0 million unsecured line of credit
with an unrelated financial institution available for general corporate
purposes. This line of credit will mature on May 31, 2005.
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 June 30, 2004 the Company had approximately
$173.6 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 June 30, 2004, such assets totaled $422.7 million, a decrease of $62.7
million or 12.9% 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 $7.7
million in the first six months of 2004, a decrease of $2.9 million from $10.6
million in the same period last year. Net cash used in investing activities was
$37.3 million compared to net cash provided by investing activities of $84.6
million in the prior year six-month period. The $121.9 decrease is due primarily
to a $112.8 million decrease from investment securities transactions and $33.2
million related to loan growth. The purchase of company-owned life insurance in
the prior year created an additional $24.0 million cash outflow while there were
no purchases in the current six months. Net cash used in financing activities
was $27.0 million for the six months ended June 30, 2004 compared to $24.0
million in the prior year. The $3.0 million increase in net cash used is related
to higher net cash outflows of deposits and repayments of borrowed funds during
the current six-month period compared to the activity in the same period a year
earlier.
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 $125.4 million on June 30, 2004, a decrease of $1.1
million or 1.0% from year-end 2003 primarily due to a $4.4 million decrease in
accumulated comprehensive income. Accumulated other comprehensive income,
consisting of unrealized holding gains on available for sale investment
securities (net of tax), decreased as a result of changing economic conditions
and changes in market interest rates on the Company's available for sale
investment securities portfolio. An increase in short-term market interest rates
near the end of the current quarter was a significant factor affecting the
decrease in the unrealized holding gains on the available for sale portfolio.
The market value of fixed rate investments is inversely related to changes in
market interest rates. Retained earnings increased $2.8 million or 1.9% as a
result of $7.2 million in net income offset by $4.4 million, or $.66 per share,
in dividends declared during the first six months of 2004. The Company issued 17
thousand shares of common stock during the first six months of 2004 pursuant to
its nonqualified stock option plan. The issuance of these shares increased
shareholders' equity by $420 thousand. The Company purchased 2 thousand shares
of its outstanding common stock during the first six months of 2004 for a total
cost of $73 thousand.
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, 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 14.96% 4.00% 6.00%
Total risk based 16.22% 8.00% 10.00%
Leverage 9.84% 4.00% 5.00%
As of June 30, 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 June 30, 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 .4% and 1.0%, 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 2.0% and 4.5%, 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 rates paid on some of the Company's deposits are 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 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 material weaknesses in the controls which required corrective
action.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
As of June 30, 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 adverse 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 June 30, 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
- -----------------------------------------------------------------------------------------------------------------------------------
April 1, 2004 to April 30, 2004 2,195 $ 33.32 2,195 199,126
- -----------------------------------------------------------------------------------------------------------------------------------
May 1, 2004 to May 31, 2004 199,126
- -----------------------------------------------------------------------------------------------------------------------------------
June 1, 2004 to June 30, 2004 199,126
- -----------------------------------------------------------------------------------------------------------------------------------
Total 2,195 $ 33.32 2,195
- -----------------------------------------------------------------------------------------------------------------------------------
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
The annual meeting of shareholders was held May 11, 2004. The matters that were
voted upon included the election of four directors for three-year terms ending
in 2007 or until their successors have been elected and qualified and the
approval of the Company's 2004 Employee Stock Purchase Plan.
The outcome of the voting was as follows:
ELECTION OF DIRECTORS
NAME FOR AGAINST WITHHELD ABSTAINED
- --------------------------------------------------------------------------------
Lloyd C. Hillard, Jr. 5,306,676 0 349,205 0
Harold G. Mays 5,655,381 0 500 0
Robert Roach, Jr. 5,518,981 0 136,900 0
Cecil D. Bell, Jr. 5,655,591 0 300 0
APPROVAL OF THE COMPANY'S 2004
EMPLOYEE STOCK PURCHASE PLAN 4,063,534 554,196 0 118,344
Listed below are the names of each director whose term of office continued after
the meeting.
Frank W. Sower, Jr. Shelley S. Sweeney
J. Barry Banker Dr. Donald J. Mullineaux
Dr. John D. Sutterlin Michael M. Sullivan
Gerald R. Hignite G. Anthony Busseni
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
----------------
3i. Amended and Restated Articles of Incorporation of Farmers Capital
Bank Corporation (incorporated by reference to Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1998).
3ii. Amended and Restated By-Laws of Farmers Capital Bank Corporation
(incorporated by reference to Annual Report of Form 10-K for the
fiscal year ended December 31, 1997.
3iia Amendments to By-Laws of Farmers Capital Bank Corporation
(incorporated by reference to Quarterly Report of Form 10-Q for
the quarterly period ended March 31, 2003).
31.1 CEO Certification (page 29)
31.2 CFO Certification (page 30)
32 CEO & CFO Certifications Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (page 31)
b) Reports on 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.
On July 6, 2004, the Registrant filed a report on Form 8-K under Items
five and seven announcing that First Citizens Bank, a wholly-owned
subsidiary of the Company, has signed a definitive agreement to
acquire Financial National Electronic Transfer, Inc. There were no
financial statements filed with this Form 8-K.
On July 6, 2004, the Registrant filed a report on Form 8-K under Items
five and seven announcing the completion of its acquisition of
Citizens Bank (Kentucky), Inc. There were no financial statements
filed with this Form 8-K.
On July 19, 2004 the Registrant filed a report on Form 8-K under Item
12 reporting its earning for the second 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: 8-5-04 /s/ G. Anthony Busseni
-------------------- --------------------------------------------
G. Anthony Busseni,
President and CEO
(Principal Executive Officer)
Date: 8-5-04 /s/ C Douglas Carpenter
-------------------- --------------------------------------------
C. Douglas Carpenter,
Vice President, Secretary, and CFO
(Principal Financial and Accounting Officer)