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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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
6,753,084 shares outstanding at November 4, 2004
TABLE OF CONTENTS
Part I - Financial Information Page No.
- ------------------------------ --------
Item 1 - Financial Statements 3
Unaudited Consolidated Balance Sheets -
September 30, 2004 and December 31, 2003 3
Unaudited Consolidated Statements of Income -
For the Three Months and Nine Months Ended
September 30, 2004 and September 30, 2003 4
Unaudited Consolidated Statements of Comprehensive Income -
For the Three Months and Nine Months Ended
September 30, 2004 and September 30, 2003 5
Unaudited Consolidated Statements of Cash Flows -
For the Nine Months Ended
September 30, 2004 and September 30, 2003 6
Unaudited Consolidated Statements of Changes in
Shareholders' Equity -
For the Nine Months Ended
September 30, 2004 and September 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 26
Item 4 - Controls and Procedures 27
Part II - Other Information
Item 1 - Legal Proceedings 27
Item 2 - Changes in Securities, Use of Proceeds and Issuer Repurchases
of Equity Securities 27
Item 6 - Exhibits and Reports on Form 8-K 27
Signatures 29
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
UNAUDITED CONSOLIDATED BALANCE SHEETS
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September 30, December 31,
(In thousands, except share data) 2004 2003
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ASSETS
Cash and cash equivalents:
Cash and due from banks $ 87,605 $ 99,628
Interest bearing deposits in other banks 2,117 3,154
Federal funds sold and securities purchased under agreements to resell 13,907 24,434
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Total cash and cash equivalents 103,629 127,216
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Investment securities:
Available for sale, amortized cost of $309,225 (2004) and $354,905 (2003) 312,598 358,169
Held to maturity, fair value of $22,622 (2004) and $26,201 (2003) 21,629 24,789
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Total investment securities 334,227 382,958
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Loans, net of unearned income 872,638 755,945
Allowance for loan losses (13,292) (11,292)
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Loans, net 859,346 744,653
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Premises and equipment, net 27,468 24,115
Company-owned life insurance 26,630 25,510
Goodwill 4,848
Other intangible assets 2,102
Other assets 18,036 14,113
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,376,286 $ 1,318,565
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest bearing $ 210,799 $ 226,650
Interest bearing 900,571 841,672
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Total deposits 1,111,370 1,068,322
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Federal funds purchased and securities sold under agreements to repurchase 63,006 56,698
Other short-term borrowings 1,433 418
Long-term debt 57,524 56,413
Dividends payable 2,223 2,215
Other liabilities 9,542 8,028
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Total liabilities 1,245,098 1,192,094
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SHAREHOLDERS' EQUITY
Common stock, par value $.125 per share
9,608,000 shares authorized; 8,190,145 and 8,160,919
shares issued at September 30, 2004 and December 31, 2003, respectively 1,024 1,020
Capital surplus 19,614 18,670
Retained earnings 149,273 145,489
Treasury stock, at cost
1,447,337 and 1,444,739 shares at September 30, 2004 and
December 31, 2003, respectively (40,916) (40,830)
Accumulated other comprehensive income 2,193 2,122
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 131,188 126,471
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Total liabilities and shareholders' equity $ 1,376,286 $ 1,318,565
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See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 2004 2003 2004 2003
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INTEREST INCOME
Interest and fees on loans $ 12,775 $ 11,921 $ 36,306 $ 36,289
Interest on investment securities:
Taxable 2,094 1,318 6,079 4,818
Nontaxable 999 809 2,930 2,392
Interest on deposits in other banks 11 12 29 49
Interest on federal funds sold and securities
purchased under agreements to resell 51 129 218 506
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Total interest income 15,930 14,189 45,562 44,054
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 3,999 4,033 11,275 12,996
Interest on federal funds purchased and securities
sold under agreements to repurchase 317 182 784 684
Interest on other borrowed funds 572 542 1,567 1,649
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Total interest expense 4,888 4,757 13,626 15,329
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 11,042 9,432 31,936 28,725
- ----------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 666 642 1,479 1,378
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Net interest income after provision for loan losses 10,376 8,790 30,457 27,347
- ----------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges and fees on deposits 2,210 1,951 6,193 5,804
Other service charges, commissions, and fees 900 909 2,674 2,682
Data processing income 340 337 1,055 1,071
Trust income 416 385 1,244 1,197
Investment securities gains, net 102 822 167 966
Gains on sale of mortgage loans, net 114 276 229 788
Income from company-owned life insurance 363 416 1,130 1,089
Other 94 55 170 198
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Total noninterest income 4,539 5,151 12,862 13,795
- ----------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 6,070 5,188 16,847 15,469
Occupancy expenses, net 735 621 2,031 1,921
Equipment expenses 1,040 934 2,914 2,795
Bank franchise tax 367 330 1,045 995
Other 2,777 2,136 7,463 6,636
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Total noninterest expense 10,989 9,209 30,300 27,816
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,926 4,732 13,019 13,326
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Income tax expense 727 831 2,571 2,806
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Net income $ 3,199 $ 3,901 $ 10,448 $ 10,520
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Basic $ .47 $ .58 $ 1.55 $ 1.56
Diluted .47 .58 1.54 1.55
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 6,736 6,712 6,730 6,733
Diluted 6,787 6,761 6,781 6,773
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See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,199 $ 3,901 $ 10,448 $ 10,520
Other comprehensive income:
Unrealized holding gain (loss) on available for sale
securities arising during the period, net of tax
of $2,350, $719, $138, and $512, respectively 4,364 (1,335) 257 (950)
Reclassification adjustment for prior period
unrealized loss (gain) recognized during current period,
net of tax of $47, $601, $100, and $662, respectively 88 (1,116) (186) (1,230)
- -------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 4,452 (2,451) 71 (2,180)
- -------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 7,651 $ 1,450 $ 10,519 $ 8,340
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See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, (In thousands) 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,448 $ 10,520
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment 2,241 2,257
Amortization of intangibles 128
Net amortization of investment security premiums and (discounts):
Available for sale 1,222 2,578
Held to maturity (32) (52)
Provision for loan losses 1,479 1,378
Noncash compensation expense 217 319
Mortgage loans originated for sale (14,529) (53,405)
Proceeds from sale of mortgage loans 14,244 54,724
Deferred income tax (benefit) expense (402) 144
Gain on sale of mortgage loans (229) (788)
Gain on sale of premises and equipment (3) (2)
Gain on sale of available for sale investment securities, net (167) (966)
(Increase) decrease in accrued interest receivable (980) 170
Income from company-owned life insurance (1,120) (1,089)
(Increase) decrease in other assets (1,622) (343)
Increase (decrease) in accrued interest payable 221 (445)
Increase in other liabilities 1,907 2,271
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,023 17,271
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities:
Available for sale 215,591 316,365
Held to maturity 3,194 4,348
Proceeds from sale of available for sale investment securities 59,603 108,975
Purchase of available for sale investment securities (218,358) (333,166)
Loans originated for investment, net of principal collected (65,556) (2,502)
Purchase of subsidiary, net of cash acquired (5,818)
Purchase of company-owned life insurance (24,001)
Purchase of premises and equipment (2,831) (2,230)
Proceeds from sale of equipment 83 9
- ------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (14,092) 67,798
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits (19,392) 53,406
Net increase (decrease) in federal funds purchased and securities sold under
agreements to repurchase 6,004 (51,749)
Proceeds from long-term debt 1,800 3,874
Repayments of long-term debt (5,931) (4,377)
Net increase (decrease) in other short-term borrowings 1,015 (8,091)
Dividends paid (6,656) (6,500)
Purchase of common stock (86) (3,118)
Stock issued pursuant to employee stock purchase plan 42
Stock options exercised 686 344
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (22,518) (16,211)
- ------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (23,587) 68,858
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 127,216 67,101
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 103,629 $ 135,959
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 13,405 $ 15,774
Income taxes 2,525 500
Transfers from loans to repossessed assets 3,079 1,729
Cash dividend declared and unpaid 2,223 2,149
- ------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) Accumulated
Other Total
Nine months ended Common Stock Capital Retained Treasury Stock Comprehensive Shareholders'
September 30, 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 10,448 10,448
Other comprehensive income 71 71
Cash dividends declared,
$.99 per share (6,664) (6,664)
Purchase of common stock 2 (86) (86)
Stock options exercised 28 4 685 689
Shares issued pursuant to
employee stock purchase plan 1 42 42
Noncash compensation expense
attributed to stock option grants 217 217
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Balance at September 30, 2004 8,190 $1,024 $19,614 $149,273 1,447 $(40,916) $2,193 $131,188
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2003 8,136 $1,017 $17,623 $141,199 1,344 $(37,627) $3,561 $125,773
Net income 10,520 10,520
Other comprehensive income (2,180) (2,180)
Cash dividends declared,
$.96 per share (6,458) (6,458)
Purchase of common stock 98 (3,118) (3,118)
Stock options exercised 14 2 342 344
Noncash compensation expense
attributed to stock option grants 319 319
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Balance at September 30, 2003 8,150 $1,019 $18,284 $145,261 1,442 $(40,745) $1,381 $125,200
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See accompanying notes to unaudited consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Farmers Capital
Bank Corporation (the "Company"), a financial holding company, and its
wholly-owned seven 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 ("First Citizens") in Elizabethtown, KY; Farmers Bank and
Trust Company ("Farmers Georgetown") in Georgetown, KY; Kentucky Banking
Centers, Inc. in Glasgow, KY; and Citizens Bank (Kentucky) Inc., ("Citizens
Georgetown") in Georgetown, KY. On October 22, 2004, the Company merged Citizens
Georgetown into Farmers Georgetown. 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 26 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. Such
reclassifications have no effect on previously reported net income or
shareholders' equity.
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 September 30, 2004 and 2003.
- --------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------
Net income, basic and diluted $ 3,199 $ 3,901 $ 10,448 $ 10,520
- --------------------------------------------------------------------------------------------------------
Average shares outstanding 6,736 6,712 6,730 6,733
Effect of dilutive stock options 51 49 51 40
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Average diluted shares outstanding 6,787 6,761 6,781 6,773
- --------------------------------------------------------------------------------------------------------
Net income per share, basic $ .47 $ .58 $ 1.55 $ 1.56
Net income per share, diluted .47 .58 1.54 1.55
- --------------------------------------------------------------------------------------------------------
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. Options granted
during 1997 are now fully vested and no additional compensation expense will be
recognized pursuant to APB Opinion No. 25 beyond September 30, 2004. The fair
market value of the Company's stock was $24.50 and $39.66 on the grant date and
measurement date, respectively.
The Company granted 54,000 options during 2000. The grant date and the
measurement date for these options are the same, with the fair market value of
$29.75. Pursuant to APB No. 25, there is no compensation expense being
recognized for this grant. Had compensation expense been determined under the
fair value method described in SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, as amended by SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION-TRANSITION AND DISCLOSURE, the Company's net income and income per
common share would have been as shown in the table below.
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
NET INCOME
As reported $ 3,199 $ 3,901 $ 10,448 $ 10,520
Add: Stock-based employee compensation expense
included in reported net income under the
intrinsic value method, net of related tax effects 51 69 141 207
Less: Stock-based compensation expense determined
under fair value based method for all awards, net
of related tax effects (65) (85) (182) (253)
- ------------------------------------------------------------------------------------------------------------------
Proforma $ 3,185 $ 3,885 $ 10,407 $ 10,474
- ------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Basic, as reported $ .47 $ .58 $ 1.55 $ 1.56
Basic, proforma .47 .58 1.55 1.56
Diluted, as reported .47 .58 1.54 1.55
Diluted, proforma .47 .57 1.53 1.55
- ------------------------------------------------------------------------------------------------------------------
The fair value of the options granted are estimated as of the measurement date
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2000 and 1997, respectively: dividend yield of
3.12% and 3.18%; expected volatility of 29.6% and 23.4%; risk-free interest rate
of 6.71% and 5.75%; and expected life of seven years for both grants. The
weighted average fair value of options granted during 2000 and 1997 was $9.25
and $16.11 per share, respectively.
The plan provides for the granting of options to purchase up to 450,000 shares
of the Company's common stock at a price equal to the fair market value of the
Company's common stock on the date the option is granted. The term of the
options expires after ten years from the date on which the options are granted.
Options granted under the plan vest ratably over various time periods ranging
from four to seven years. All options granted must be held for a minimum of one
year before they can be exercised. Forfeited options are available for the
granting of options under the plan.
5. EMPLOYEE STOCK PURCHASE PLAN
The Company's 2004 Employee Stock Purchase Plan ("Plan") was approved by its
shareholders at the Company's 2004 annual meeting on May 11, 2004. The purpose
of the Plan is to provide a means by which eligible employees may purchase, at a
discount, shares of common stock of the Company through payroll withholding. The
purchase price of the shares is equal to 85% of their fair market value on
specified dates as defined in the Plan. This Plan was effective beginning July
1, 2004.
6. BUSINESS COMBINATION - 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 include the results of Citizens
Georgetown for the three months ended September 30, 2004. On October 22, 2004,
the Company merged Citizens Georgetown into Farmers Georgetown.
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. The core deposit intangible of $2.2 million at acquisition is
being amortized over a life of 7.5 years under a declining amortization schedule
through year 2010 with the remaining 10% amortized during year 2011. Goodwill is
not subject to periodic amortization in the consolidated financial statements,
but will be deductible for federal income tax purposes over a period of 15
years. Management expects certain minor adjustments to the total acquisition
costs, and thus goodwill, as execution cost amounts are finalized.
(In thousands) July 1, 2004
----------------------------------------------------------------------------
ASSETS
Cash & equivalents $ 8,768
Investment securities 12,213
Loan, net of unearned income & allowance for loan losses 50,102
Goodwill 4,848
Core deposit intangible 2,230
Other assets 4,650
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Total assets $ 82,811
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LIABILITIES
Deposits $ 62,440
Short-term borrowings 304
Long-term borrowings 5,242
Other liabilities 239
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Total liabilities 68,225
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NET ASSETS ACQUIRED $ 14,586
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7. BUSINESS COMBINATION - FINANCIAL NATIONAL ELECTRONIC TRANSFER, INC.
On October 8, 2004 the Company announced that First Citizens had completed the
acquisition of 100% of the outstanding common shares of Financial National
Electronic Transfer, Inc. ("FINET") in a cash transaction. 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 in the consolidated financial statements herein do not include
any results related to this acquisition since it closed during the fourth
quarter of 2004.
The total cost related to this acquisition, which has been paid entirely in
cash, was approximately $6.6 million. The following table presents the estimated
fair value of the assets acquired and the liabilities assumed at the date of
purchase. The customer list intangible of $2.4 million at acquisition is being
amortized over a life of 10.5 years under a declining amortization schedule
through year 2013 with the remaining 11% amortized during year 2014. Goodwill is
not subject to periodic amortization in the consolidated financial statements,
but will be deductible for federal income tax purposes over a period of 15
years. Management expects certain minor adjustments to the total acquisition
costs, and thus goodwill, as execution cost amounts are finalized.
(In thousands) October 8, 2004
- -----------------------------------------------------------------------
ASSETS
Goodwill $ 3,864
Customer list intangible 2,414
Other assets 300
- -----------------------------------------------------------------------
Total assets $ 6,578
- -----------------------------------------------------------------------
LIABILITIES
- -----------------------------------------------------------------------
NET ASSETS ACQUIRED $ 6,578
- -----------------------------------------------------------------------
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. In general,
forward-looking statements relate to a discussion of future financial results or
projections, future economic performance, future operational plans and
objectives, and statements regarding the underlying assumptions of such
statements. 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) and lower interest margins; competition
for the Company's customers from other providers of financial services; deposit
outflows or reduced demand for financial services and loan products; government
legislation, regulation, and changes in monetary and fiscal policies (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; the capability of
the Company to successfully enter into a definitive agreement for and close
anticipated transactions; the possibility that acquired entities may not perform
as well as expected; unexpected claims or litigation against the Company;
technological or operational difficulties; and other risks or uncertainties
detailed in the Company's filings with the Securities and Exchange Commission,
all of which are difficult to predict and many of which are beyond the control
of the Company. The Company expressly disclaims any intent or obligation to
update any forward-looking statements after the date hereof to conform such
statements to actual results or to changes in our opinions or expectations.
RESULTS OF OPERATIONS
THIRD QUARTER 2004 VS. THIRD QUARTER 2003
-----------------------------------------
The Company reported net income for the three months ended September 30, 2004 of
$3.2 million, a decrease of $702 thousand or 18.0% compared to $3.9 million for
the same period in 2003. On a basic and diluted per share basis, net income was
$.47 for the current three month period, a decrease of $.11 or 19.0% compared to
the prior year. The operating results related to the previously disclosed
acquisition of Citizens Georgetown are included in the financial results
presented herein beginning as of July 1, 2004. Net loans and deposits acquired
from Citizens Georgetown on the date of purchase were $50.1 million and $62.4
million, respectively.
The Company reported growth in net interest income in the three month
comparison. The increase in net interest income was driven by increases in
interest income on loans and securities, with the Citizens Georgetown
acquisition accounting for most of the increased interest income on loans. Lower
noninterest income in the current three month reporting period offset the growth
in net interest income and is due primarily to a decrease in net securities
gains and net gains on the sale of mortgage loans as compared to a year earlier.
An increase in other operating expenses, particularly personnel costs and
amortization expense negatively impacted net income in the current three month
reporting period.
For the three month period ended September 30, 2004, net interest income
increased $1.6 million or 17.1% to $11.0 million. Approximately $364 thousand or
22.6% of the increase is attributed to the results of Citizens Georgetown. Other
noninterest income declined $612 thousand or 11.9% to $4.5 million in the three
month comparison. The decline is due to lower net securities gains of $720
thousand or 87.6% in the current quarter along with a $162 thousand or 58.7%
decline in net gains on the sale of mortgage loans. Origination activity for
mortgage loans originated for sale declined sharply in the quarterly comparison
due to lower refinancing activity. Salaries and employee benefits increased $882
thousand or 17.0% to $6.1 million. Approximately $323 thousand or 36.6% of the
increase in salaries and employee benefits is attributed to the results of
Citizens Georgetown. The remaining increase is due primarily to rising benefits
costs and normal salary increases. Core deposit intangible amortization related
to the Citizens Georgetown acquisition totaled $128 thousand in the current
three month period. There is no related core deposit intangible amortization for
the prior period.
Return on average assets ("ROA") was .93% for the current quarter, a decrease of
31 basis points compared to 1.24% reported for the same period in 2003. The
decrease in ROA is attributed to the impact of lower noninterest income relative
to average assets of 31 basis points combined with the increase in noninterest
expense relative to average assets of 27 basis points. Partially offsetting
these negative effects was a 25 basis point increase in net interest margin to
3.78% from 3.53%. Return on average equity ("ROE") was 9.98% for the third
quarter of 2004 compared to 12.44% in the same period of 2003. The decrease is
due to lower net income reported in the current period coupled with a $3.1
million or 2.5% increase in average equity capital.
NET INTEREST INCOME
- -------------------
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 continue 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 50 basis points by the Fed during the current quarter did
not significantly impact the Company's net interest income during the reporting
periods.
The net interest margin (TE) of the current quarter declined 5 basis points to
3.78% from the second quarter of 2004 reported amount of 3.83%. This decline is
mainly attributed to an increase in the overall cost of funds in the current
quarter compared to the preceding quarter and was driven primarily by the
Citizens Georgetown acquisition. The decline in net interest margin reverses a
trend of four consecutive quarters whereby net interest margin has either
increased or remained level with its preceding quarter.
The Company's tax equivalent ("TE") yield on earning assets for the current
three months was 5.4%, an increase of 16 basis points from 5.2% from the same
period a year ago. The cost of funds for the current three months was 1.9%, a
decline of 11 basis points compared to 2.0% 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 and are beginning to
edge upward. Average earning assets, helped by the Citizens Georgetown
acquisition, increased $104.9 million or 9.4% to $1.2 billion in the quarterly
comparison. As a percentage of total average assets, earning assets increased 3
basis points to 89.0% from 88.97%.
Interest income totaled $15.9 million for the third quarter of 2004, an increase
of $1.7 million or 12.3% compared to the same period in the prior year. The
increase was due mainly to higher loan balances resulting from both the Citizens
Georgetown acquisition and internally generated loan growth, along with an
increase from securities due to a higher average rate earned. Interest expense
totaled $4.9 million, an increase of $131 thousand or 2.8% as the growth in
deposit accounts were nearly offset by lower average rates on time deposits. Net
interest income increased $1.6 million or 17.1% in the comparison and totaled
$11.0 million for the three months ended September 30, 2004.
Interest and fees on loans totaled $12.8 million, an increase of $854 thousand
or 7.2% mainly due to an increase in average loans outstanding, which offset a
decline in the average rate earned. Average loans increased $113.2 million or
15.3% to $853.4 million in the comparison. Approximately $51.1 million or 45% of
the increase in average loans outstanding is attributed to the Citizens
Georgetown acquisition and the remaining increase is due to increased loan
demand in a low rate environment. The tax equivalent yield on loans decreased 44
basis points to 6.0% from 6.4% and offset the effects of higher average balances
on interest income. The decrease in yield is reflective primarily of the
competitive markets where we operate. The Citizens Georgetown acquisition also
contributed to a slight decline in the yield earned on the loan portfolio
resulting from fair market value purchase adjustments. Interest on taxable
securities was $2.1 million, an increase of $776 thousand or 58.9% due to both
increases in the average balance outstanding and the average rate earned. A
higher average rate earned in the current period accounted for most of the
increase in interest income, as the prior period average rate was negatively
affected by unusually high premium amortization on mortgage-backed securities.
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 prepayment 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 109 basis
points to 3.3% from 2.2% while the average balance increased $15.8 million to
$253.2 million compared to $237.4 million. Interest on nontaxable securities
increased $190 thousand or 23.5% due to a $21.9 million increase in the average
balance to $97.4 million from $75.4 million. The increase in average nontaxable
securities offset a 26 basis point decline in yield to 6.0% from 6.3%. Interest
on short-term investments, including time deposits in other banks, federal funds
sold, and securities purchased under agreements to resell, decreased $79
thousand due primarily to a decrease in the average balance to $14.3 million
from $60.3 million that offset a 79 basis point increase in the average rate
earned on these investments of to 1.7% from .9%.
Interest expense on deposits decreased $34 thousand or .8% to $4.0 million in
the quarterly comparison. The slight decrease resulted from a decline in the
average rate paid on time deposits that have generally repriced to lower rates
in the comparison. The decline in the average rates paid on time deposits were
partially offset by increased average rates on interest bearing demand and
savings deposits, which generally reprice more quickly than time deposits and
have moved higher as a result of the recent rate increases by the Fed. The
average balance outstanding in each of the deposit categories increased in the
quarterly comparison as follows: interest bearing demand $17.1 million or 7.5%;
savings $17.0 million or 10.1%; and time $47.8 million or 11.2%. The Citizens
Georgetown acquisition accounted for $8.2 million or 47.8% of the increase in
average interest bearing demand, $7.3 million or 42.8% of the increase in
average savings, and $37.0 million or 77.3% of average time deposits
outstanding. The change in interest expense on deposits was as follows: time
deposits $172 thousand or 5.1% decline; interest bearing demand deposits $78
thousand or 28.4% increase; and savings deposits $60 thousand or 16.3% increase.
The average rate paid on time deposits, the largest component of interest
bearing deposits, was 2.7% for the third quarter of 2004 compared to 3.2% for
the same period of 2003. The average balance of time deposits increased $47.8
million or 11.2% to $473.9 million driven by a $37.0 million increase due to the
Citizens Georgetown acquisition. The average rate paid on interest bearing
demand deposits increased 9 basis points to .6% from .5% while the average
balance increased $17.1 million or 7.5% to $244.7 million, with nearly half of
the increase attributed to the Citizens Georgetown acquisition. The average rate
paid on savings deposits increased 5 basis points to .9% while the average
balance increased $17.0 million or 10.1% to $184.8 million from $167.8 million.
The Citizens Georgetown acquisition accounted for $7.3 million or 42.8% of the
increase. Interest expense on overnight borrowings, consisting of federal funds
purchased and securities sold under agreements to repurchase, increased $135
thousand as a 52 basis point increase in the average rate paid to 1.5% from 1.0%
combined with a $10.3 million or 13.9% increase in the average balance. Interest
expense on other borrowed funds increased $30 thousand in the comparison due to
an increase in the average rate paid of 38 basis points to 3.9% from 3.5%. The
increase in the average rate paid offset a $2.8 million decline in the average
balance outstanding to $59.1 million from $61.9 million.
The net interest margin (TE) increased 25 basis points to 3.78% during the third
quarter of 2004 compared to 3.53% in the third quarter of 2003. The increase in
net interest margin is primarily attributed to a 27 basis point increase in the
spread between rates earned on earning assets and the rates paid on interest
bearing liabilities to 3.52% in the current quarter from 3.25% in the third
quarter of 2003. The effect of noninterest bearing sources of funds offset the
27 basis point increase in spread by 2 basis points, resulting in the 25 basis
point 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 September 30.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL
- -----------------------------------------------------------------------------------------------------------------------------------
Quarter Ended September 30, 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Investment securities
Taxable $ 253,214 $ 2,094 3.29% $ 237,389 $ 1,318 2.20%
Nontaxable1 97,371 1,475 6.03 75,434 1,195 6.29
Time deposits with banks, federal
funds sold and securities purchased
under agreements to resell 14,328 62 1.72 60,342 141 .93
Loans1,2,3 853,402 12,851 5.99 740,215 11,991 6.43
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,218,315 $ 16,482 5.38% 1,113,380 $ 14,645 5.22%
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (13,401) (11,204)
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets, net of
allowance for loan losses 1,204,914 1,102,176
- -----------------------------------------------------------------------------------------------------------------------------------
NONEARNING ASSETS
Cash and due from banks 85,716 89,302
Premises and equipment, net 26,976 24,260
Other assets 51,354 35,626
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,368,960 $ 1,251,364
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Deposits
Interest bearing demand $ 244,713 $ 353 .57% $ 227,607 $ 275 .48%
Savings 184,811 429 .92 167,827 369 .87
Time 473,856 3,217 2.70 426,007 3,389 3.16
Federal funds purchased and
securities sold under agreements
to repurchase 84,679 317 1.49 74,362 182 .97
Other borrowed funds 59,105 572 3.85 61,893 542 3.47
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 1,047,164 $ 4,888 1.86% 957,696 $ 4,757 1.97%
- -----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST BEARING LIABILITIES
Commonwealth of Kentucky deposits 32,881 30,810
Other demand deposits 151,325 131,681
Other liabilities 10,049 6,763
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,241,419 1,126,950
- -----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 127,541 124,414
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 1,368,960 $ 1,251,364
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 11,594 9,888
TE basis adjustment (552) (456)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 11,042 $ 9,432
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest spread 3.52% 3.25%
Impact of noninterest bearing sources
of funds .26 .28
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.78% 3.53%
- -----------------------------------------------------------------------------------------------------------------------------------
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 amount to $583 thousand and $563 thousand in 2004 and 2003, respectively.
ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX EQUIVALENT BASIS)
- ----------------------------------------------------------------------------------------------------
(In thousands) Variance Variance Attributed to
Quarter Ended September 30, 2004/20031 Volume Rate
- ----------------------------------------------------------------------------------------------------
INTEREST INCOME
Taxable investment securities $ 776 $ 92 $ 684
Nontaxable investment securities2 280 588 (308)
Time deposits with banks, federal funds sold and
securities purchased under agreements to resell (79) (489) 410
Loans2 860 5,094 (4,234)
- ----------------------------------------------------------------------------------------------------
Total interest income 1,837 5,285 (3,448)
- ----------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest bearing demand deposits 78 22 56
Savings deposits 60 38 22
Time deposits (172) 1,632 (1,804)
Federal funds purchased and securities sold under
agreements to repurchase 135 28 107
Other borrowed funds 30 (129) 159
- ----------------------------------------------------------------------------------------------------
Total interest expense 131 1,591 (1,460)
- ----------------------------------------------------------------------------------------------------
Net interest income $ 1,706 $ 3,694 $ (1,988)
- ----------------------------------------------------------------------------------------------------
Percentage change 100.0% 216.5% -116.5%
- ----------------------------------------------------------------------------------------------------
1The changes that are not solely due to rate or volume are allocated on a percentage basis
using the absolute values of rate and volume variances as a basis for allocation.
2Income stated at fully tax equivalent basis using the marginal corporate Federal tax rate of 35%.
NONINTEREST INCOME
- ------------------
Noninterest income was $4.5 million for the current quarter and represented
22.2% of total revenue, compared to $5.2 million and 26.6%, respectively, for
the third quarter of the prior year. The largest component of noninterest
income, service charges and fees on deposits, totaled $2.2 million for the
quarter ended September 30, 2004. This represents an increase of $259 thousand
or 13.3% compared to the same quarter a year earlier. The increase is primarily
attributed to higher overdraft fees of $213 thousand that was driven by the
Citizens Georgetown acquisition. Other service charges, commissions, and fees
and data processing fees remained relatively flat at $900 thousand and $340
thousand, respectively. Trust income totaled $416 thousand, an increase of $31
thousand or 8.1% compared to $385 thousand a year earlier. Net gains on the sale
of available for sale investment securities totaled $102 thousand as the Company
continues to manage the composition of its balance sheet in an effort to enhance
the risk-return characteristics of its securities portfolio. Net gains on the
sale of available for sale investment securities were $822 thousand in the
comparable period a year ago, a decrease of $720 thousand or 87.6% in the
comparison. Net gains on the sale of mortgage loans were $114 thousand, a
decrease of $162 thousand or 58.7% from $276 thousand in the prior year. This
decline is attributed to a decline in mortgage loans originated for sale of
$13.5 million or 73.4% in the comparison and is reflective of lower refinancing
activity in the current period. Consumer refinancing activity in the prior year
was driven by historically low interest rates. Income from the purchase of
company-owned life insurance declined $53 thousand or 12.7% to $363 thousand for
the current three months due mainly as a result of the structure of fee vesting
schedules. Other noninterest income totaled $94 thousand, an increase of $39
thousand compared to the same period in the prior year.
NONINTEREST EXPENSE
- -------------------
Total noninterest expenses were $11.0 million for the third quarter of 2004, an
increase of $1.8 million or 19.3% from the third quarter of 2003. Approximately
$840 thousand or 47.2% of the increase in noninterest expenses is attributed to
the Citizens Georgetown acquisition. Salaries and employee benefits account for
a significant portion of the total increase in noninterest expense. Total
salaries and benefits increased $882 thousand or 17.0% to $6.1 million in the
quarterly comparison, with the Citizens Georgetown acquisition accounting for
$323 thousand or 36.6% of the increase. Employee salary and related payroll
expenses increased $609 thousand or 14.9% in the comparison, offset by noncash
compensation expense related to the Company's nonqualified stock option plan of
$26 thousand or 24.8% due to the structure of the vesting schedule. Employee
benefit expenses increased $299 thousand or 30.1% mainly as a result of higher
health care related costs. The number of full time equivalent employees
increased to 496 from 450 reported in the comparable period, with a significant
portion of the increase attributed to the Citizens Georgetown acquisition.
Occupancy expense, net of rental income, was $735 thousand, an increase of $114
thousand or 18.4%. The increase in occupancy expense is attributed to the
Citizens Georgetown acquisition along with higher maintenance expense. Equipment
expense totaled $1.0 million in the current quarter, an increase of $106
thousand or 11.3% due primarily to increased depreciation expense and expenses
attributed to the Citizens Georgetown acquisition. Other noninterest expenses,
including bank franchise taxes, increased $678 thousand or 27.5% to $3.1
million. Approximately $307 thousand of the increase relates to operations of
the newly acquired Citizens Georgetown. Other increases are attributable to
Sarbanes-Oxley compliance costs, core deposit amortization, correspondent bank
fees related to higher transaction activity, and other general operating expense
increases.
INCOME TAXES
- ------------
Income tax expense for the third quarter of 2004 was $727 thousand, a decrease
of $104 thousand or 12.5% from the same period a year earlier. The effective tax
rate increased 96 basis points to 18.52% from 17.56% in 2003. The change in the
effective tax rate was not significant and was due to small changes in the mix
between taxable and nontaxable income.
FIRST NINE MONTHS OF 2004 VS. FIRST NINE MONTHS OF 2003
-------------------------------------------------------
Net income for the nine months ended September 30, 2004 was $10.5 million, a
decrease of $72 thousand or .7% compared to the nine months ended September 30,
2003. Basic and diluted net income per share were $1.55 and $1.54, respectively,
for the current nine month period. This represents a decline of $.01 or .6% on
both a basic and diluted basis. The operating results related to the previously
disclosed acquisition of Citizens Georgetown are included in the financial
results presented herein beginning as of July 1, 2004. Therefore, the effect of
the Citizens Georgetown acquisition on the fluctuations for the nine month
period comparisons is not nearly as magnified as the quarterly amounts presented
above. Net loans and deposits acquired from Citizens Georgetown on the date of
purchase were $50.1 million and $62.4 million, respectively.
The Company reported growth in net interest income in the nine month comparison.
The increase in net interest income was attributed to lower interest expense,
primarily on deposits, combined with an increase in interest income primarily
from securities. Lower noninterest income offset the growth in net interest
income and is due primarily to a decrease in net securities gains and net gains
on the sale of mortgage loans as compared to a year earlier. An increase in
other operating expenses, particularly personnel costs and amortization expense
negatively impacted net income in the current reporting period.
For the nine month period ended September 30, 2004, net interest income
increased $3.2 million or 11.2% to $31.9 million. The amount attributed to the
Citizens Georgetown acquisition, which occurred during the current quarter, was
approximately $364 thousand or 11.3% of the increase. Noninterest income
declined $933 thousand or 6.8% to $12.9 million in the nine month comparison.
The decline is due to lower net securities gains of $799 thousand or 82.7% in
the current nine months in addition to a $559 thousand or 70.9% decline in net
gains on the sale of mortgage loans. Origination activity for mortgage loans
originated for sale has declined sharply from 2003 mainly due to the
historically high refinancing activity that occurred during 2002 and 2003 driven
by the low interest rate environment. Salaries and employee benefits increased
$1.4 million or 8.9% to $16.8 million. Approximately $323 thousand or 23.4% of
the increase in salaries and employee benefits is attributed to the results of
the Citizens Georgetown acquisition. The remaining increase is due primarily to
rising benefits costs and normal salary increases. Core deposit intangible
amortization related to the Citizens Georgetown acquisition totaled $128
thousand in the current nine month period. There is no related core deposit
intangible amortization for the prior period.
ROA was 1.06% for the nine months ended September 30, 2004, a decrease of 7
basis points from 1.13% in the same period in 2003. The decrease in ROA is
primarily attributed to the impact of lower noninterest income relative to
average assets of 18 basis points, lower earning assets contributing 8 basis
points, and the increase in noninterest expense relative to average assets of 7
basis points. Partially offsetting these negative effects was a 23 basis point
increase in net interest margin to 3.81% from 3.58%. Return on average equity
("ROE") was 11.0% for the nine months ended September 30, 2004 compared to
11.27% in the same period of 2003. The decrease is due to lower net income
reported in the current period coupled with a $2.2 million or 1.7% increase in
average equity capital.
NET INTEREST INCOME
- -------------------
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
continue 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 75 basis
points by the Fed during the current nine months did not significantly impact
the Company's net interest income during the reporting periods as they were
weighted closer to the end of the current nine-month period.
The Company's tax equivalent yield on earning assets for the current nine months
was virtually unchanged at 5.4% compared to the same period a year ago. The cost
of funds for the current nine months was 1.8%, a decline of 35 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 and 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 and are beginning to edge upward. Average earning
assets, primarily loans, increased $50.0 million or 4.4% to $1.2 billion in the
comparison. The acquisition of Citizens Georgetown contributed $21.4 million to
the increase in average earning assets for the period. As a percentage of total
average assets, earning assets decreased to 89.03% from 90.57%. This decrease
had the effect of lowering ROA by 7 basis points in the comparison.
Interest income totaled $45.6 million for the first nine months of 2004, an
increase of $1.5 million or 3.4% compared to the same period in the prior year.
The increase was due primarily to interest income on securities, which included
unusually high premium amortization in the prior year. Interest expense totaled
$13.6 million, a decrease of $1.7 million or 11.1%. The decrease in interest
expense is due mainly to lower rates paid on time deposits, which more than
offset the effect of an increase in the average balance. Net interest grew $3.2
million or 11.2% in the comparison and totaled $31.9 million at September 30,
2004.
Interest and fees on loans were relatively unchanged at $36.3 million. Average
loans increased $60.8 million or 8.2% to $800.3 million in the comparison due to
higher loan demand in a low rate environment and, to a lesser extent, the loans
acquired in the Citizens Georgetown acquisition. The growth in loans was offset
by a decrease in the average rate earned, which was negatively impacted by both
competitive market conditions on new and renewed loans as well as the loans
acquired in the Citizens Georgetown acquisition. The tax equivalent yield on
loans decreased 51 basis points to 6.1% from 6.6% in the nine month comparison.
Interest on taxable securities was $6.1 million, an increase of $1.3 million or
26.2% due an increase in the average rate earned and the effect of higher
premium amortization on mortgage-backed securities in the prior year.
Prepayments on mortgage-backed securities increased greatly during 2003 due to
corresponding refinancing of home mortgages that serve as collateral for these
investment securities. The increase in activity was directly related to the
lower interest rate environment. The average rate earned on taxable securities
increased 66 basis points to 3.2% from 2.6% while the average balance increased
$810 thousand or .3% to $251.2 million. Interest on nontaxable securities
increased $538 thousand or 22.5% due to a $22.8 million or 31.5% increase in the
average balance to $95.2 million from $72.4 million. Interest on short-term
investments, including time deposits in other banks, federal funds sold, and
securities purchased under agreements to resell, decreased $308 thousand due to
a decrease in the average balance maintained on these investments of $34.4
million or 53.5% and a 5 basis point decline in the average rate earned to 1.1%
Interest expense on deposits decreased $1.7 million or 13.2% to $11.3 million in
the nine month comparison. This decrease resulted from a general decline in the
average rate paid on the time and interest bearing demand deposit portfolios,
which correlates with the general decline in market interest rates in the
reporting periods. The decline in the average rates paid on time and interest
bearing demand deposits offset a general increase in their average balances. The
decline in interest expense on deposits is attributed to a decrease in interest
on time deposits of $1.7 million or 15.6% and interest bearing demand deposits
of $56 thousand or 5.7%. These decreases were offset by a slight increase in
interest on savings deposits of $13 thousand or 1.1%. The average rate paid on
time deposits, the largest component of interest bearing deposits, was 2.7% for
the nine months ended September 30, 2004 compared to 3.4% for the same period of
2003. The average balance of time deposits increased $19.9 million or 4.7% to
$443.2 million. The average rate paid on interest bearing demand deposits
declined 7 basis points to .5% from .6% while the average balance increased
$15.7 million or 7.0% to $238.9 million. The average rate paid on savings
deposits decreased 10 basis points to .9% from 1.0% while the average balance
increased $21.8 million or 13.0% to $188.8 million from $167.0 million. Interest
expense on overnight borrowings, consisting of federal funds purchased and
securities sold under agreements to repurchase, totaled $784 thousand, an
increase of $100 thousand or 14.6% due to a 5 basis point increase in the
average rate paid along with a $8.0 million or 10.7% increase in the average
balance. Interest expense on other borrowed funds decreased $82 thousand or 5.0%
due to a lower average balance outstanding, which offset an increase in the
average rate paid. The average balance of other borrowed funds totaled $56.2
million, a decrease of $8.6 million or 13.3% in the comparison. The average rate
paid on other borrowed funds increased 33 basis points to 3.7% from 3.4%.
The net interest margin (TE) increased 23 basis points to 3.81% during the nine
months ended September 30, 2004 compared to 3.58% in the same period of 2003.
The increase in net interest margin is primarily attributed to a 31 basis point
improvement in the spread between rates earned on earning assets and the rates
paid on interest bearing liabilities to 3.56% in the current nine months from
3.25% in the same period in 2003. The effect of noninterest bearing sources of
funds offset the 31 basis point increase in spread by 8 basis points, resulting
in the 23 basis point increase in margin. The effect of noninterest bearing
sources of funds on net interest margin typically declines in a falling rate
environment.
The following tables present an analysis of net interest income for the nine
months ended September 30.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Investment securities
Taxable $ 251,213 $ 6,079 3.23% $ 250,403 $ 4,818 2.57%
Nontaxable1 95,204 4,329 6.07 72,405 3,523 6.51
Time deposits with banks, federal
funds sold and securities purchased
under agreements to resell 29,934 247 1.10 64,310 555 1.15
Loans1,2,3 800,269 36,554 6.10 739,505 36,575 6.61
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,176,620 $ 47,209 5.36% 1,126,623 $ 45,471 5.40%
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (12,063) (11,244)
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets, net of
allowance for loan losses 1,164,557 1,115,379
- ------------------------------------------------------------------------------------------------------------------------------------
NONEARNING ASSETS
Cash and due from banks 90,450 74,655
Premises and equipment, net 25,136 24,206
Other assets 41,462 29,634
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,321,605 $ 1,243,874
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Deposits
Interest bearing demand $ 238,853 $ 926 .52% $ 223,166 $ 982 .59%
Savings 188,795 1,253 .89 167,014 1,240 .99
Time 443,194 9,096 2.74 423,319 10,774 3.40
Federal funds purchased and
securities sold under agreements
to repurchase 82,682 784 1.27 74,668 684 1.22
Other borrowed funds 56,155 1,567 3.73 64,750 1,649 3.40
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 1,009,679 $ 13,626 1.80% 952,917 $ 15,329 2.15%
- ------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST BEARING LIABILITIES
Commonwealth of Kentucky deposits 36,780 34,130
Other demand deposits 139,701 125,224
Other liabilities 8,526 6,843
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,194,686 1,119,114
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 126,919 124,760
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 1,321,605 $ 1,243,874
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 33,583 30,142
TE basis adjustment (1,647) (1,417)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 31,936 $ 28,725
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest spread 3.56% 3.25%
Impact of noninterest bearing sources
of funds .25 .33
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.81% 3.58%
- ------------------------------------------------------------------------------------------------------------------------------------
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 amount to $1.8 million and $1.7 million in 2004 and 2003, respectively.
ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX EQUIVALENT BASIS)
- ----------------------------------------------------------------------------------------------------------------
(In thousands) Variance Variance Attributed to
Nine Months Ended September 30, 2004/20031 Volume Rate
- ----------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Taxable investment securities $ 1,261 $ 16 $ 1,245
Nontaxable investment securities2 806 1,189 (383)
Time deposits with banks, federal funds sold and
securities purchased under agreements to resell (308) (285) (23)
Loans2 (21) 3,879 (3,900)
- ----------------------------------------------------------------------------------------------------------------
Total interest income 1,738 4,799 (3,061)
- ----------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest bearing demand deposits (56) 96 (152)
Savings deposits 13 196 (183)
Time deposits (1,678) 762 (2,440)
Federal funds purchased and securities sold under
agreements to repurchase 100 73 27
Other borrowed funds (82) (294) 212
- ----------------------------------------------------------------------------------------------------------------
Total interest expense (1,703) 833 (2,536)
- ----------------------------------------------------------------------------------------------------------------
Net interest income $ 3,441 $ 3,966 $ (525)
- ----------------------------------------------------------------------------------------------------------------
Percentage change 100.0% 115.3% -15.3%
- ----------------------------------------------------------------------------------------------------------------
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 $12.9 million or 22.0% of total revenue for the first
nine months of 2004, compared to $13.8 million and 23.8%, respectively for the
same period a year earlier. This represents a decrease of $933 or 6.8% and 184
basis points, respectively. The largest component of noninterest income, service
charges and fees on deposits, increased $389 thousand or 6.7% to $6.2 million.
The increase is mainly due to higher overdraft fees of $331 thousand or 8.9%.
Moderate growth in overdraft fees occurred in most of our market areas, but was
fueled by the Citizens Georgetown acquisition, which accounted for nearly 51% of
the increase. Other service charges, commissions, and fees were relatively
unchanged at $2.7 million. Data processing fees were down 1.5% to $1.1 million
as higher fees for paper check processing is down in favor or lower fee
electronic transactions. Trust fees increased $47 thousand or 3.9% to $1.2
million. Net gains on the sale of available for sale securities totaled $167
thousand, a decrease of $799 thousand or 82.7% compared to the same period a
year ago as the Company continues to manage the composition of its balance sheet
in an effort to enhance the risk-return characteristics of its securities
portfolio. Net gains on the sale of mortgage loans were $229 thousand, a
decrease of $559 thousand or 70.9% from $788 thousand in the prior year. This
decline is attributed to a decline in mortgage loans originated for sale of
$38.9 million or 72.8% in the comparison and is reflective of lower refinancing
activity in the current period. Consumer refinancing activity in the prior year
was driven by historically low interest rates. Income from the purchase of
company-owned life insurance increased $41 thousand or 3.8% due to a combination
of the fee schedule structure and the timing of the purchase. The insurance was
purchased near the end of the first quarter of 2003, which results in a full
nine months of income recorded in the current year compared to seven months in
the prior year. Other noninterest income totaled $170 thousand, a decline of $28
thousand in the prior year.
NONINTEREST EXPENSE
- -------------------
Noninterest expenses totaled $30.3 million for the first nine months of 2004, an
increase of $2.5 million or 8.9% compared to the same period in 2003.
Approximately $840 thousand or 33.8% of the increase is attributed to the
operations of the newly acquired Citizens Georgetown during the third quarter of
2004. Salaries and employee benefits, the largest component of noninterest
expense, accounts for $1.4 million or 55.5% of the increase and totaled $16.8
million at September 30, 2004. Included in the $1.4 million increase is $323
thousand related to the operations of the Citizens Georgetown. Employee benefit
expenses increased $560 thousand or 19.3% primarily due to increased health care
costs and the timing effect of additional costs associated with the new
postretirement health insurance coverage initiated late in the first quarter of
2003. Salary and related payroll expenses increased $917 thousand or 7.5% in the
comparison due to increased personnel and normal salary increases while noncash
compensation expense related to the Company's nonqualified stock option plan
declined $99 thousand or 31.5% due to the structure of the vesting schedule. The
number of full time equivalent employees increased to 496 from 450 reported in
the prior period, with a significant portion of the increase attributed to the
Citizens Georgetown acquisition. Occupancy expense, net of rental income,
increased $110 thousand or 5.7% and totaled $2.0 million. Approximately 48.2% of
the increase in net occupancy expense is attributed to the operations of
Citizens Georgetown along with higher utilities costs. Equipment expense was
$2.9 million, an increase of $119 thousand or 4.3% due to the operations of the
newly acquired Citizens Georgetown. Other noninterest expenses, including bank
franchise taxes, increased $877 thousand or 11.5% to $8.5 million. Approximately
$307 thousand or 35.0% of the increase is attributed to operations of Citizens
Georgetown. Other significant factors include increases related to
Sarbanes-Oxley compliance and core deposit amortization. There was no related
core deposit amortization in the prior nine month period.
INCOME TAXES
- ------------
Income tax expense for the first nine months of 2004 was $2.6 million, a
decrease of $235 thousand or 8.4% from $2.8 million in the same period a year
earlier. The effective tax rate decreased 131 basis points to 19.75% from 21.06%
in 2003. The change in the effective tax rate was not significant and was due to
small changes in the mix between taxable and nontaxable income.
FINANCIAL CONDITION
Total assets were $1.4 billion on September 30, 2004, an increase of $57.7
million or 4.4% from December 31, 2003. The increase in assets was driven by a
$115.0 million or 15.4% increase in net loans, which were helped by a $47.3
million increase in loans attributed to the newly acquired Citizens Georgetown.
Offsetting the increase in loans were decreases in both cash and equivalents of
$23.6 million or 18.5% and investment securities of $48.7 million or 12.7%.
Other assets, including $4.8 million in goodwill and $2.1 million in core
deposit intangibles related to the Citizens Georgetown acquisition, increased
$15.3 million or 24.1% since year end 2003. The increase in total assets
correlates to additional funding sources, primarily $43.0 million or 4.0% in
additional deposits and $4.7 million or 3.7% in additional equity. The increase
in deposits is mainly due to the Citizens Georgetown acquisition, which were
$59.3 million at September 30, 2004. Total shareholders' equity increased $4.7
million or 3.7% due mainly to an increase in retained earnings of $3.8 million
or 2.6%.
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,
checks are drawn on Farmers Bank by these agencies, which include 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 nine months of
2004, an increase of $70.9 million or 5.7% from year-end 2003. Average earning
assets, primarily loans and securities, were $1.2 billion at September 30, 2004,
an increase of $49.2 million or 4.4% from year-end 2003. Average earning assets
represent 89.03% of total average assets on September 30, 2004, a decrease 111
basis points compared to 90.14% at year-end 2003.
LOANS
- -----
Loans, net of unearned income, totaled $872.6 million at September 30, 2004, an
increase of $116.7 million or 15.4% from year-end 2003. The composition of the
loan portfolio is summarized in the table below.
- --------------------------------------------------------------------------------
September 30, 2004 December 31, 2003
(Dollars in thousands) Amount % Amount %
- --------------------------------------------------------------------------------
Commercial, financial,
and agriculture $ 132,755 15.2% $ 110,657 14.6%
Real estate - construction 61,763 7.1 45,390 6.0
Real estate mortgage - residential 312,651 35.8 270,638 35.8
Real estate mortgage - farmland and
Other commercial enterprises 251,210 28.8 222,100 29.4
Installment 75,825 8.7 71,565 9.5
Lease financing 38,434 4.4 35,595 4.7
- --------------------------------------------------------------------------------
Total $ 872,638 100.0% $ 755,945 100.0%
- --------------------------------------------------------------------------------
On average, loans represented 68.0% of earning assets during the current nine
month period compared to 65.8% for year-end 2003. As loan demand fluctuates, the
available funds are reallocated between loans and lower earning temporary
investments or investment securities, which typically have lower credit risk and
lower yields.
ALLOWANCE FOR LOAN LOSSES
- -------------------------
The allowance for loan losses was $13.3 million at September 30, 2004, an
increase of $2.0 million or 17.7% from the prior year-end. Citizen Georgetown
accounts for $1.6 million or 81.3% of the increase. The allowance for loan
losses was 1.52% of loans net of unearned income at September 30, 2004, an
increase of 3 basis points from 1.49% from December 31, 2003. The provision for
loan losses increased $24 thousand or 3.7% and $101 thousand or 7.3% in the
current three-month and nine-month periods, respectively, compared to the same
periods in 2003. The Company had net charge-offs of $797 thousand and $1.5
million in the current three and nine months of 2004, respectively, compared to
net charge-offs of $671 thousand and $1.3 million in the same periods of 2003.
Annualized net charge-offs represent .37% and .25% of average net loans for
three and nine months ended September 30, 2004, respectively compared to .32% at
year-end 2003. The allowance for loan losses as a percentage of nonperforming
loans totaled 133.1% and 123.9% at September 30, 2004 and December 31, 2003,
respectively. The increase is primarily reflective of the increase in the
allowance for loans losses, which grew more rapidly than the increase in
nonperforming loans of $875 thousand to $10.0 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 $14.7 million at
September 30, 2004, an increase of $3.5 million or 31.2% from the prior
year-end. The increase in nonperforming assets was mainly attributed to the
Citizens Georgetown acquisition, which added $2.7 million to period-end
balances. Nonperforming loans totaled $10.0 million at September 30, 2004, an
increase of $875 thousand or 9.6% compared to year-end 2003. The net increase in
nonperforming loans include a $1.9 million or 35.5% increase in nonaccrual loans
to $7.1 million offset by a $990 thousand or 25.7% decline in loans past due
ninety days or more on which interest is still accruing that totaled $2.9 at
September 30, 2004. The Citizens Georgetown acquisition contributed $2.1 million
to nonperforming loans totals, including $1.7 million in nonaccrual loans at the
end of the current reporting period. Nonperforming loans also 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 September 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 1.1% at September 30, 2004, a decrease of 7
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 $2.7 million to $4.5 million on September 30, 2004. The increase in
other real estate owned includes $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 $16.0 million at September 30, 2004, a decrease of $11.6 million or
41.9% from year-end 2003. Temporary investments averaged $29.9 million for the
first nine months of 2004, a decrease of $29.5 million or 49.6% 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 $334.2 million on September 30, 2004, a decrease of
$48.7 million or 12.7% from year-end 2003. This decrease offset the effect of an
additional $12.2 million in investment securities at the end of the period
attributed to the Citizens Georgetown acquisition. Available for sale and held
to maturity securities were $312.6 million and $21.6 million, respectively.
Investment securities averaged $346.4 million for the first nine months of 2004,
an increase of $20.7 million or 6.4% from year-end 2003. The increase in average
investment securities was driven by a $19.5 million or 25.8% increase in
nontaxable securities and is attributable to the Company's continued efforts to
manage the composition of its balance sheet in an effort to enhance the
risk-return characteristics of its securities portfolio in a continuing
difficult economic environment. The Company had an unrealized gain on available
for sale investment securities of $3.4 million at September 30, 2004 compared to
an unrealized gain of $3.3 million at year-end 2003 and an unrealized loss of
$3.5 million at June 30, 2004. The $6.8 million increase in the current quarter
is due primarily to the impact of changing economic conditions, including an
increase in short-term market interest rates near the end of the previous
quarter that lowered the value of the portfolio in that reporting period. As
overall market rates have drifted downward for the current quarter, the
portfolio has increased in value. Market values of fixed rate investments are
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 $26.6
million at September 30, 2004, an increase of $1.1 million or 4.4% from year-end
2003.
DEPOSITS
- --------
Total deposits were $1.1 billion at September 30, 2004, an increase of $43.0
million or 4.0% from year-end 2003. Noninterest bearing deposits decreased $15.9
million or 7.0% in the comparison. This decrease is primarily due to a $25.0
million or 30.4% decline in balances with the Commonwealth of Kentucky. Large
fluctuations in deposits from the Commonwealth of Kentucky are typical.
Additional information regarding the relationship between the Company's
principal subsidiary and the Commonwealth of Kentucky is described in preceding
sections of this report. On average, noninterest bearing deposits were $176.5
million during the current period, an increase of $14.5 million or 9.0% from
year-end 2003.
End of period interest bearing deposit balances were $900.6 million, an increase
of $58.9 million or 7.0% compared to year-end 2003. The increase is mainly due
to the Citizens Georgetown acquisition that accounted for $51.6 million or 87.6%
of the increase. The increase in interest bearing deposit accounts include
higher interest bearing checking accounts of $1.5 million or .6%, savings
accounts of $2.6 million or 3.6%, and time deposits of $67.9 million or 16.1%.
The Citizens Georgetown acquisition accounts for $36.6 million of the increase
in time deposits. Offsetting these increases was a decline in money market
deposit accounts of $13.1 million or 11.4%. On average, interest bearing
deposits were $870.8 million in the current period, an increase of $48.9 million
or 6.0% 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 $11.6 million or 5.1%, money market
deposit accounts of $6.4 million or 6.0%, time deposits of $20.4 million or
4.8%, and savings accounts of $10.4 million or 16.2%. Total deposits averaged
$1.0 billion, an increase of $63.4 million or 6.4% from year-end 2003. Borrowed
Funds
Borrowed funds totaled $122.0 million at September 30, 2004, an increase of $8.4
million or 7.4% from $113.5 million at year-end 2003. A $1.1 million net
increase in long-term borrowings and a $7.3 million increase in short-term
borrowings accounted for the increase in borrowed funds. Federal funds purchased
and securities sold under agreements to repurchase increased $6.3 million or
11.1% 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 $1.0 million to $1.4 million due to additional net
borrowings from the Federal Home Loan Bank ("FHLB"). The $1.1 million increase
in long-term borrowings is mainly attributed to $5.2 million in additional
borrowing from the FHLB due to the Citizens Georgetown acquisition offset by
$4.1 million in net repayments to the FHLB during the period. Total borrowed
funds averaged $138.8 million, an increase of $5.6 million or 4.2% 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 September 30, 2004 combined retained earnings of the
subsidiary banks were $50.0 million, of which $3.0 million was available for the
payment of dividends to the Parent Company without obtaining prior approval from
bank regulatory agencies. As a practical matter, payment of future dividends is
also subject to the maintenance of other capital ratio requirements. During the
current nine months ended September 30, 2004 the Parent Company received
dividends of $4.3 million from its bank subsidiaries. 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 $12.2 million at September 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 September 30, 2004 the Company had approximately
$184.9 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 September 30, 2004, such assets totaled $416.2 million, a decrease of
$69.2 million or 14.2% 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 $13.0 million in the first nine months of 2004, a decrease of
$4.2 million from $17.3 million in the same nine-month period last year. Net
cash used in investing activities was $14.1 million compared to net cash
provided by investing activities of $67.8 million in the prior year. The $81.9
decrease in the nine-month comparison is due primarily to a $36.5 million
decrease from investment securities transactions, $63.1 million related to loan
growth, and $5.8 million attributed to net cash used in the purchase of Citizens
Georgetown. 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 nine months. Net cash used in financing activities was $22.5
million for the nine months ended September 30, 2004 compared to $16.2 million
in the prior year. The $6.3 million increase in net cash used is related to
higher net cash outflows of deposits offset by higher borrowing activity during
the current nine-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 $131.2 million on September 30, 2004, an increase of
$4.7 million or 3.7% from year-end 2003 primarily due to a $3.8 million or 2.6%
increase in retained earnings. Retained earnings increased as a result of $10.4
million in net income offset by $6.7 million, or $.99 per share, in dividends
declared during the first nine months of 2004. The Company issued 28 thousand
and one thousand shares of common stock during the first nine months of 2004
pursuant to its nonqualified stock option plan and employee stock purchase plan,
respectively. The issuance of these shares increased shareholders' equity by
$731 thousand. Offsetting this increase was the purchase of approximately 2
thousand shares of outstanding common stock during the first nine months of 2004
for a total cost of $86 thousand.
In comparison to the prior quarter, shareholders equity increased $5.8 million
due mainly to a $4.5 million increase in accumulated other comprehensive income.
Accumulated other comprehensive income, consisting of unrealized holding gains
on available for sale investment securities (net of tax), increased sharply in
the current quarter due to an increase in the market value of the investment
securities portfolio. The $4.5 million increase during the current quarter is
due primarily to the impact of changing economic conditions, including an
increase in short-term market interest rates near the end of the previous
quarter that lowered the value of the portfolio in that reporting period. As
overall market rates have drifted downward in the current quarter, the portfolio
has increased in value. Market values of fixed rate investments are inversely
related to changes in market interest rates.
Consistent with the objective of operating a sound financial organization, the
Company's goal is to maintain capital ratios well above the regulatory minimum
requirements. The Company's capital ratios as of September 30, 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 13.19% 4.00% 6.00%
Total risk based 14.45% 8.00% 10.00%
Leverage 8.96% 4.00% 5.00%
The capital ratios of all the subsidiary banks, on an individual basis, were in
excess of the applicable minimum regulatory capital ratio requirements at
September 30, 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
The Company uses a simulation model as a tool to monitor and evaluate interest
rate risk exposure. The model is designed to measure the sensitivity of net
interest income and net income to changing interest rates over future time
periods. Forecasting net interest income and its sensitivity to changes in
interest rates requires the Company to make assumptions about the volume and
characteristics of many attributes, including assumptions relating to the
replacement of maturing earning assets and liabilities. Other assumptions
include, but are not limited to, projected prepayments, projected new volume,
and the predicted relationship between changes in market interest rates and
changes in customer account balances. These effects are combined with the
Company's estimate of the most likely rate environment to produce a forecast of
net interest income and net income. The forecasted results are then adjusted for
the effect of a gradual increase and decrease in market interest rates on the
Company's net interest income and net income. Because assumptions are inherently
uncertain, the model cannot precisely estimate net interest income or net income
or the effect of interest rate changes on net interest income and net income.
Actual results could differ significantly from simulated results.
At September 30, 2004, the model indicated that if rates were to gradually
increase by 75 basis points during the calendar year, then net interest income
and net income would increase .14% and .35%, respectively for the year ending
December 31, 2004. The model indicated that if rates were to gradually decrease
by 75 basis points over the same period, then net interest income and net income
would decrease .36% and .91%, respectively.
In the current low interest rate environment, it is not practical or possible to
reduce certain deposit rates by the same magnitude as rates on earning assets.
The average rates paid on some of the Company's deposits are below 1.0%. This
situation magnifies the model's predicted results when modeling a decrease in
interest rates, as earning assets with higher yields have more of an opportunity
to reprice at lower rates than lower-rate deposits.
ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------
The Company's Chief Executive Officer and Chief Financial Officer have reviewed
and evaluated the 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 Company'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 Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the Chief Executive Officer and Chief Financial Officers evaluation, nor were
there any material weaknesses in the controls which required corrective action.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
As of September 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 September 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
- -----------------------------------------------------------------------------------------------------------------------------------
July 1, 2004 to
July 31, 2004 199,126
- -----------------------------------------------------------------------------------------------------------------------------------
August 1, 2004 to
August 31, 2004 403 $ 32.60 403 198,723
- -----------------------------------------------------------------------------------------------------------------------------------
September 1, 2004 to
September 30, 2004 198,723
- -----------------------------------------------------------------------------------------------------------------------------------
Total 403 $ 32.60 403
- -----------------------------------------------------------------------------------------------------------------------------------
On January 27, 2003, the Company's Board of Directors authorized the purchase of up to 300,000 shares of the Company's outstanding
common stock. No stated expiration date was established under this plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a) List of Exhibits
----------------
3i. Amended and Restated Articles of Incorporation of Farmers Capital
Bank Corporation (incorporated by reference to Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1998).
3ii. Amended and Restated By-Laws of Farmers Capital Bank Corporation
(incorporated by reference to Annual Report of Form 10-K for the
fiscal year ended December 31, 1997.
3iia Amendments to By-Laws of Farmers Capital Bank Corporation
(incorporated by reference to Quarterly Report of Form 10-Q for
the quarterly period ended March 31, 2003).
31.1 CEO Certification (page 30)
31.2 CFO Certification (page 31)
32 CEO & CFO Certifications Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (page 32)
b) Reports on 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 Items
12 and seven reporting its earning for the second quarter of 2004.
There were no financial statements filed with this Form 8-K.
On October 5, 2004 the Registrant filed a report on Form 8-K under
Items 8.01 and 9.01 announcing that Farmers Bank and Trust Co., a
wholly owned bank subsidiary headquartered in Georgetown, Kentucky,
opened a branch bank office in downtown Lexington, Kentucky and is
expected to open a second branch in Lexington during 2005.
On October 12, 2004 the Registrant filed a report on Form 8-K under
Items 8.01 and 9.01 announcing that First Citizens Bank, a wholly
owned bank subsidiary headquartered in Elizabethtown, Kentucky,
completed its previously announced acquisition of Financial National
Electronic Transfer, Inc., located in Radcliff, Kentucky.
On October 18, 2004 the Registrant filed a report on Form 8-K under
Items 2.02 and 9.01 announcing its earnings for the nine months ended
September 30, 2004.
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: November 8, 2004 /s/ G. Anthony Busseni
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G. Anthony Busseni,
President and CEO
(Principal Executive Officer)
Date: 11-8-04 /s/ C Douglas Carpenter
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C. Douglas Carpenter,
Vice President, Secretary, and CFO
(Principal Financial and Accounting Officer)