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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 March 31, 2005
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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 227-1600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes |X| No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $.125 per share
6,782,072 shares outstanding at May 6, 2005
TABLE OF CONTENTS
Part I - Financial Information Page No.
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Item 1 - Financial Statements
Unaudited Consolidated Balance Sheets -
March 31, 2005 and December 31, 2004 3
Unaudited Consolidated Statements of Income -
For the Three Months Ended
March 31, 2005 and March 31, 2004 4
Unaudited Consolidated Statements of Comprehensive Income -
For the Three Months Ended
March 31, 2005 and March 31, 2004 5
Unaudited Consolidated Statements of Cash Flows -
For the Three Months Ended
March 31, 2005 and March 31, 2004 6
Unaudited Consolidated Statements of Changes in
Shareholders' Equity -
For the Three Months Ended
March 31, 2005 and March 31, 2004 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 20
Item 4 - Controls and Procedures 21
Part II - Other Information
Item 1 - Legal Proceedings 21
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 6 - Exhibits 21
Signatures 22
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
UNAUDITED CONSOLIDATED BALANCE SHEETS
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March 31, December 31,
(In thousands, except share data) 2005 2004
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ASSETS
Cash and cash equivalents:
Cash and due from banks $ 77,775 $ 42,418
Interest bearing deposits in other banks 2,067 2,569
Federal funds sold and securities purchased under
agreements to resell 13,639 34,273
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Total cash and cash equivalents 93,481 79,260
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Investment securities:
Available for sale, amortized cost of $342,037 (2005) and $348,240 (2004) 339,342 349,317
Held to maturity, fair value of $19,234 (2005) and $20,555 (2004) 18,715 19,803
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Total investment securities 358,057 369,120
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Loans, net of unearned income 884,030 876,705
Allowance for loan losses (12,413) (12,804)
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Loans, net 871,617 863,901
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Premises and equipment, net 27,464 27,415
Company-owned life insurance 27,209 26,978
Goodwill 8,736 8,722
Other intangible assets, net 4,013 4,259
Other assets 27,653 17,489
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Total assets $1,418,230 $1,397,144
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LIABILITIES
Deposits:
Noninterest bearing $ 183,469 $ 173,522
Interest bearing 962,525 965,505
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Total deposits 1,145,994 1,139,027
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Federal funds purchased and securities sold under agreements to repurchase 71,802 59,758
Other borrowed funds 59,105 54,949
Dividends payable 2,241 2,232
Other liabilities 8,064 9,728
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Total liabilities 1,287,206 1,265,694
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SHAREHOLDERS' EQUITY
Common stock, par value $.125 per share
9,608,000 shares authorized; 8,242,827 and 8,234,423
shares issued at March 31, 2005 and December 31, 2004, respectively 1,030 1,029
Capital surplus 20,966 20,744
Retained earnings 151,801 149,985
Treasury stock, at cost
1,450,355 and 1,450,055 shares at March 31, 2005
and December 31, 2004, respectively (41,021) (41,008)
Accumulated other comprehensive income (1,752) 700
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Total shareholders' equity 131,024 131,450
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Total liabilities and shareholders' equity $1,418,230 $1,397,144
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See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
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(In thousands, except per share data)
Three months ended March 31, 2005 2004
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INTEREST INCOME
Interest and fees on loans $ 13,703 $ 11,729
Interest on investment securities:
Taxable 1,912 1,964
Nontaxable 981 946
Interest on deposits in other banks 12 10
Interest of federal funds sold and securities purchased under agreements to resell 500 90
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Total interest income 17,108 14,739
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INTEREST EXPENSE
Interest on deposits 4,946 3,674
Interest on federal funds purchased and securities sold under agreements to repurchase 534 218
Interest on other borrowed funds 526 502
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Total interest expense 6,006 4,394
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Net interest income 11,102 10,345
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Provision for loan losses (47) 365
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Net interest income after provision for loan losses 11,149 9,980
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NONINTEREST INCOME
Service charges and fees on deposits 2,259 1,894
Allotment processing fees 653 199
Other service charges, commissions, and fees 639 685
Data processing income 340 334
Trust income 396 414
Investment securities gains, net 82
Gains on sale of mortgage loans, net 188 44
Gain on sale of credit card portfolio 700
Income from company-owned life insurance 231 405
Other 118 30
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Total noninterest income 5,524 4,087
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NONINTEREST EXPENSE
Salaries and employee benefits 5,960 5,394
Occupancy expenses, net 758 662
Equipment expenses 683 564
Data processing and communications expenses 1,034 918
Bank franchise tax 361 341
Correspondent bank fees 222 188
Other 2,491 1,615
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Total noninterest expense 11,509 9,682
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Income before income taxes 5,164 4,385
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Income tax expense 1,108 877
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Net income $ 4,056 $ 3,508
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NET INCOME PER COMMON SHARE
Basic $ .60 $ .52
Diluted .59 .52
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WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 6,791 6,723
Diluted 6,839 6,784
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See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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Three months ended March 31, (In thousands) 2005 2004
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NET INCOME $ 4,056 $ 3,508
Other comprehensive (loss) income:
Unrealized holding (loss) gain on available for sale
securities arising during the period on securities held
at end of period, net of tax of $(1,320) and $302, respectively (2,452) 560
Reclassification adjustment for prior period unrealized gain
previously reported in other comprehensive income recognized
during current period, net of tax of $19 (35)
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Other comprehensive (loss) income (2,452) 525
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COMPREHENSIVE INCOME $ 1,604 $ 4,033
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three months ended March 31, (In thousands) 2005 2004
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,056 $ 3,508
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,047 721
Net amortization of investment security premiums and (discounts):
Available for sale 116 466
Held to maturity (12) (11)
Provision for loan losses (47) 365
Noncash compensation expense 69
Mortgage loans originated for sale (7,364) (3,718)
Proceeds from sale of mortgage loans 7,217 2,341
Deferred income tax benefit (416) (519)
Gains on sale of mortgage loans, net (188) (44)
Gain on sale of credit card portfolio (700)
Gains on sale of premises and equipment, net (3)
Gains on sale of available for sale investment securities, net (82)
Decrease in accrued interest receivable 217 18
Income from company-owned life insurance (231) (405)
(Increase) decrease in other assets (9,038) 1,556
Increase (decrease) in accrued interest payable 168 (11)
(Decrease) increase in other liabilities (1,449) 928
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Net cash (used in) provided by operating activities (6,627) 5,182
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities:
Available for sale 78,017 62,914
Held to maturity 1,100 1,254
Proceeds from sale of available for sale investment securities 22,036
Purchase of available for sale investment securities (71,930) (80,107)
Loans originated for investment, net of principal collected (6,634) (19,892)
Purchase of premises and equipment (851) (778)
Proceeds from sale of equipment 4 5
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (294) (14,568)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 6,967 (39,921)
Net increase in federal funds purchased and securities
sold under agreements to repurchase 12,044 29,488
Repayments of long-term debt (477) (2,669)
Net increase (decrease) in other short-term borrowings 4,633 (103)
Dividends paid (2,232) (2,215)
Shares issued under Employee Stock Purchase Plan 46
Stock options exercised 161 280
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Net cash provided by (used in) financing activities 21,142 (15,140)
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Net increase (decrease) in cash and cash equivalents 14,221 (24,526)
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Cash and cash equivalents at beginning of year 79,260 127,216
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Cash and cash equivalents at end of period $ 93,481 $ 102,690
- --------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 5,838 $ 4,405
Income taxes
Transfers from loans to repossessed assets 1,865 31
Cash dividend declared and unpaid 2,241 2,220
- --------------------------------------------------------------------------------------------------------------------------
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
Three months ended Common Stock Capital Retained Treasury Stock Comprehensive Shareholders'
March 31, 2005 and 2004 Shares Amount Surplus Earnings Shares Amount Income Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2005 8,234 $1,029 $20,744 $149,985 1,450 $(41,008) $ 700 $131,450
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 4,056 4,056
Other comprehensive income (2,452) (2,452)
Cash dividends declared,
$.33 per share (2,240) (2,240)
Stock options exercised,
including related tax benefits 7 1 176 (13) 164
Shares issued pursuant to
Employee Stock Purchase plan 1 46 46
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Balance at March 31, 2005 8,242 $1,030 $20,966 $151,801 1,450 $(41,021) $(1,752) $131,024
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2004 8,161 $1,020 $18,670 $145,489 1,445 $(40,830) $ 2,122 $126,471
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 3,508 3,508
Other comprehensive income 525 525
Cash dividends declared,
$.33 per share (2,220) (2,220)
Stock options exercised 11 2 281 283
Noncash compensation expense
attributed to stock option grants 69 69
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Balance at March 31, 2004 8,172 $1,022 $19,020 $146,777 1,445 $(40,830) $ 2,647 $128,636
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See accompanying notes to unaudited consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The consolidated financial statements include the accounts of Farmers Capital
Bank Corporation (the "Company"), a financial holding company, and its
wholly-owned six bank and two active nonbank subsidiaries. Bank subsidiaries
include Farmers Bank & Capital Trust Co. ("Farmers Bank") in Frankfort, KY;
United Bank & Trust Co. in Versailles, KY; Lawrenceburg National Bank in
Harrodsburg, KY; First Citizens Bank in Elizabethtown, KY; Farmers Bank and
Trust Company ("Farmers Georgetown") in Georgetown, KY; and Kentucky Banking
Centers, Inc. in Glasgow, KY. The Company has two active nonbank subsidiaries,
FCB Services, Inc. and Kentucky General Holdings, LLC. FCB Services, Inc. is a
data processing subsidiary located in Frankfort, KY, which provides services to
the Company's banks as well as unaffiliated banks. Kentucky General Holdings,
LLC holds a 50% voting interest in KHL Holdings, LLC, which is the parent
company of Kentucky Home Life Insurance Company. Leasing One Corporation, a
commercial leasing company, and Farmers Capital Insurance Corporation, an
insurance agency, are wholly-owned subsidiaries of Farmers Bank. Pro Mortgage
Partners, LLC, a mortgage brokerage company, is a wholly-owned subsidiary of
Farmers Georgetown. All significant intercompany transactions and balances are
eliminated in consolidation.
The Company provides financial services through its 27 locations in 16
communities 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, 2004.
2. RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements of prior periods to conform to the current period presentation. These
reclassifications do not affect net income or total shareholders' equity as
previously reported.
3. NET INCOME PER COMMON SHARE
Basic net income per common share is determined by dividing net income by the
weighted average total number of shares of common stock outstanding. Diluted net
income per common share is determined by dividing net income by the total
weighted average number of shares of common stock outstanding, plus the total
weighted average number of shares that would be issued upon exercise of dilutive
stock options assuming proceeds are used to repurchase shares pursuant to the
treasury stock method. Net income per common share computations were as follows
at March 31, 2005 and 2004.
- -----------------------------------------------------------------------------
(In thousands, except per share data)
Three months ended March 31, 2005 2004
- -----------------------------------------------------------------------------
Net income, basic and diluted $ 4,056 $ 3,508
- -----------------------------------------------------------------------------
Average shares outstanding 6,791 6,723
Effect of dilutive stock options 48 61
- -----------------------------------------------------------------------------
Average diluted shares outstanding 6,839 6,784
- -----------------------------------------------------------------------------
Net income per share, basic $ .60 $ .52
Net income per share, diluted .59 .52
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4. STOCK-BASED COMPENSATION
In 1997, the Company's Board of Directors approved a nonqualified stock option
plan (the "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 options granted during 1997. 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 recognized noncash compensation expense over
the vesting period of the options, which term ended during 2004, based on the
intrinsic value of the stock options measured on the date of shareholder
ratification of the Plan.
The Company granted 40,049 and 54,000 additional options under the Plan during
2004 and 2000 in which there is no compensation expense being recognized
pursuant to APB No. 25. In addition, the Company issued shares pursuant to its
Employee Stock Purchase Plan ("ESPP") during each of the quarters beginning with
the quarter ended September 30, 2004 and recorded no related compensation
expense. Had compensation expense been determined under the fair value method
described in the Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, as amended by SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION-TRANSITION AND DISCLOSURE, the Company's net income and income per
common share would have been as shown in the table below.
- --------------------------------------------------------------------------------
(In thousands, except per share data)
Three months ended March 31, 2005 2004
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net Income
As reported $ 4,056 $ 3,508
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects 45
Less: Stock-based compensation expense determined
under fair value based method for all awards,
net of related tax effects (62) (59)
- --------------------------------------------------------------------------------
Proforma $ 3,994 $ 3,494
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Basic, as reported $ .60 $ .52
Basic, proforma .59 .52
Diluted, as reported .59 .52
Diluted, proforma .58 .52
- --------------------------------------------------------------------------------
On March 16, 2005 the Compensation Committee of the Company's Board of Directors
acted to approve an immediate and full acceleration of the vesting on options
granted during 2004. As a result, options to purchase 40,049 unvested and
"out-of-the-money" shares of the Company's common stock became immediately
exercisable as of March 16, 2005. The exercise price of these options remains
unchanged at $34.80 per share. The closing price of the Company's shares was
$34.50 on March 15, 2005. None of the accelerated options are granted to
directors or executive officers of the Company.
The purpose of the accelerated vesting is to allow the Company to reduce
anticipated future compensation expense attributed to its stock option grants
pursuant to recently issued SFAS No. 123 (revised), "SHARE-BASED PAYMENT". Under
SFAS No. 123 (revised), the Company will be required to recognize compensation
expense in its income statement beginning January 1, 2006 (in compliance with
SEC Release No. 33-8568) for awards granted or modified on or after that date,
as well as recognizing compensation expense for the portion of existing options
that vest January 1, 2006 or later. Since the options granted during 2004 now
have an exercise price in excess of the market price on the date of modification
and there is no future vesting requirement, there will be no compensation
expense recorded for these options in the current or future periods. This
represents a reduction in estimated future compensation expense of approximately
$31,000 and $26,000 for the twelve months ended December 31, 2006 and 2007,
respectively. The Company anticipates that it will record compensation expense
pursuant to SFAS No. 123 (revised) for unvested options from its 2000 grant and
shares issued under its ESPP.
5. EMPLOYEE STOCK PURCHASE PLAN
The Company's 2004 ESPP was approved by its shareholders at the Company's 2004
annual meeting. The purpose of the ESPP 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. The ESPP was
effective July 1, 2004. There were 1,600 shares issued under the plan during the
first quarter of 2005. Compensation cost related to the ESPP included in the
proforma net income disclosure in the table in Note 4 above was $7,000 for the
three months ended March 31, 2005.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties. Although the
Company believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
included herein will prove to be accurate. Factors that could cause actual
results to differ from the results discussed in the forward-looking statements
include, but are not limited to: economic conditions (both generally and more
specifically in the markets in which the Company and its subsidiaries operate);
competition for the Company's customers from other providers of financial
services; government legislation and regulation (which changes from time to time
and over which the Company has no control); changes in interest rates; material
unforeseen changes in the liquidity, results of operations, or financial
condition of the Company's customers; and other risks detailed in the Company's
filings with the Securities and Exchange Commission, all of which are difficult
to predict and many of which are beyond the control of the Company. The Company
expressly disclaims any intent or obligation to update any forward-looking
statements after the date hereof to conform such statements to actual results or
to changes in our opinions or expectations.
RESULTS OF OPERATIONS
FIRST QUARTER 2005 VS. FIRST QUARTER 2004
-----------------------------------------
The Company reported net income of $4.1 million for the first three months of
2005, an increase of $548 thousand or 15.6% compared to $3.5 million for the
same period in 2004. Basic and diluted net income per share were $.60 and $.59,
respectively, for the current quarter. This represents an increase of $.08 or
15.4% and $.07 or 13.5% on a basic and diluted per share basis, respectively.
The operating results related to the previously disclosed acquisitions of
Citizens Bank (Kentucky), Inc. ("Citizens Georgetown") acquired on July 1, 2004
and Financial National Electronic Transfer, Inc. ("FiNET") acquired on October
8, 2004 are included in the financial results presented for the current quarter.
Net loans and deposits acquired from Citizens Georgetown on the date of purchase
were $50.1 million and $62.4 million, respectively. Net assets acquired from
FiNET on the date of purchase, primarily intangibles, were approximately $6.6
million.
The increase in net income for the current three months was driven by higher net
interest income. Net interest income for the current period was $11.1 million,
an increase of $757 thousand or 7.3% compared to $10.3 million for the same
period a year earlier. The increase in net interest income is due mainly to
higher interest income from loans of $2.0 million or 16.8%. This offset an
increase in interest expense of $1.6 million or 36.7% that was driven primarily
by an increase in interest expense on deposits of $1.3 million or 34.6%.
The provision for loan losses decreased $412 thousand in the quarterly
comparison. The negative $47 thousand provision recorded in the current period
is attributed to several factors, including a sharp decline of $3.9 million or
39.2% in nonperforming loans from year-end 2004 and the sale of the Company's
credit card loan portfolio during the current quarter. Nonperforming loans
include nonaccrual loans and loans past due 90 days or more in which interest is
still accruing. Nonperforming loans and credit card loans typically have larger
allowances due to their identified risk of loss characteristics.
Noninterest income increased $1.4 million or 35.2% in the quarterly comparison.
The increase in noninterest income was led by a one-time gain of $700 thousand
on the sale of the Company's $3.2 million credit card portfolio during the
current quarter. Under the sale agreement, the Company will continue to offer
its customers credit cards via an agency arrangement with the purchaser. All
existing credit card accounts on the purchase date remained active. Other
significant increases in noninterest income include allotment processing fees of
$454 thousand or 228.1% attributed to the FiNET acquisition during late 2004,
service charges and fees on deposits of $365 thousand or 19.3%, and gains on the
sale of mortgage loans of $144 thousand. Significant declines in noninterest
income include income from company-owned life insurance of $174 thousand or
43.0% due to lower crediting rates on the underlying investments and lower
investment securities gains of $82 thousand.
Noninterest expenses increased $1.8 million or 18.9% for the current three
months compared to the same period a year earlier. The increase in noninterest
expenses occurred across a broad range of line items and is generally attributed
to the Company's business expansion during the last half of 2004. The most
significant increase was salaries and employee benefits, which grew $566
thousand or 10.5% as the number of full time equivalent employees rose to 516
from 455. Other notable increases include amortization of intangibles of $246
thousand and auditing expenses of $117 thousand. The effective income tax rate
increased to 21.5% from 20.0% in the comparison while income tax expense rose
$231 thousand or 26.3%.
The return on average assets ("ROA") was 1.14% for the first quarter of 2005, an
increase of 4 basis points compared to 1.10% reported for the same period of
2004. The return on average equity ("ROE") was 12.51% for the first quarter of
2005, an increase of 142 basis points compared to 11.09% for the same period of
2004. The increase in ROE is primarily attributed to a 97 basis point increase
in financial leverage to 10.96% from 10.12% combined with the increase in net
income of $548 thousand. Financial leverage represents the degree in which
borrowed funds, as opposed to equity, are used in the funding of assets.
NET INTEREST INCOME
- -------------------
The trend of the general interest rate environment in the current three months
compared to a year earlier has been upward primarily as a result of short-term
interest rate increases by the Fed. The Fed has increased short-term interest
rates by 175 basis points in seven equal increments of 25 basis points since
June 30, 2004. The effects of these rate increases by the Fed has generally led
to higher average rates earned and paid on interest earning assets and interest
bearing liabilities with a faster increase in the average rates paid on interest
bearing liabilities due to their repricing characteristics.
Net interest income is the most significant component of the Company's earnings.
Net interest income is the excess of the interest income earned on earning
assets over the interest paid for funds to support those assets. The two most
common metrics used to analyze net interest income are net interest spread and
net interest margin. Net interest spread represents the difference between the
yields on earning assets and the rates paid on interest bearing liabilities. Net
interest margin represents the percentage of net interest income to average
earning assets. Net interest margin will exceed net interest spread because of
the existence of noninterest bearing sources of funds, principally demand
deposits and shareholders' equity, which are also available to fund earning
assets. Changes in net interest income and margin result from the interaction
between the volume and the composition of earning assets, their related yields,
and the associated cost and composition of the interest bearing liabilities.
Accordingly, portfolio size, composition, and the related yields earned and the
average rates paid can have a significant impact on net interest spread and
margin. The table on the following page represents the major components of
interest earning assets and interest bearing liabilities on a tax equivalent
basis. To compare the tax-exempt asset yields to taxable yields, amounts are
adjusted to pretax equivalents based on the marginal corporate Federal tax rate
of 35%.
The Company's tax equivalent ("TE") yield on earning assets for the current
three months was 5.6%, an increase of 18 basis points from 5.4% in the same
period a year ago. The cost of funds for the current three months was 2.2%, an
increase of 39 basis points compared to 1.8% in the same period a year earlier.
A goal of the Company in the current interest rate environment is to increase
earning assets and maintain the current relatively low interest rates paid on
interest bearing liabilities. The Company strives to accomplish this goal while
providing excellent service to its customers and maintaining its core deposit
base. Maintaining the relatively low cost of funds is becoming increasingly
difficult due to the recent rise in general interest rates and competitive
market forces. Average earning assets were $1.3 billion for the current quarter,
an increase of $143.7 million or 12.6% compared to $1.1 billion a year ago. As a
percentage of total average assets, earning assets increased 57 basis points to
89.5% from 88.9%. This increase had a positive 4 basis point effect on ROA in
the comparison.
Interest income results from interest earned on earning assets, which primarily
include loans and investment securities. Interest income is affected by volume
(average balance), composition of earning assets, and the related rates earned
on those assets. Total interest income for the first quarter of 2005 was $17.1
million, an increase of $2.4 million or 16.1% from the same period in the
previous year. The growth in interest income was mainly attributed to higher
interest income on loans. Interest income on loans increased mainly as a result
of higher average loan balances outstanding resulting from both the Citizens
Georgetown acquisition and internally generated loan growth. The Company's tax
equivalent yield on earning assets for the current period was 5.6%, an increase
of 18 basis points compared to the same period a year ago.
Interest and fees on loans was $13.7 million, an increase of $2.0 million or
16.8% compared to a year earlier. Average loans increased $115.3 million or
15.1% to $879.5 million in the comparison due to higher loan demand in what
remains a relatively low rate environment and, to a lesser extent, the loans
acquired in the Citizens Georgetown acquisition. On July 1, 2004, the Company
purchased approximately $50.1 million in loans related to the Citizens
Georgetown acquisition. In addition, the related tax equivalent yield on loans
increased 14 basis points to 6.4% from 6.2% in the quarterly comparison.
Interest on taxable securities was $1.9 million, a decrease of $52 thousand or
2.6% due to a $20.1 million or 8.1% lower average balance outstanding. The
decrease in the average balance outstanding offset a 21 basis point higher
average rate earned on taxable securities of 3.4% from 3.2% a year earlier.
Interest on nontaxable securities increased $35 thousand or 3.7% due to a $3.5
million or 3.8% increase in the average balance to $95.6 million from $92.1
million. Interest on short-term investments, including time deposits in other
banks, federal funds sold, and securities purchased under agreements to resell,
increased $412 thousand due to an increase in the average rate earned and
average balances outstanding of 144 basis points and $45.0 million,
respectively.
Interest expense results from incurring interest on interest bearing
liabilities, which primarily include interest bearing deposits, federal funds
purchased and securities sold under agreements to repurchase, and other borrowed
funds. Interest expense is affected by volume, composition of interest bearing
liabilities, and the related rates paid on those liabilities. Total interest
expense was $6.0 million for first quarter of 2005, an increase of $1.6 million
or 36.7% from the same period in prior year. Interest expense increased as a
result of both higher average rates paid on interest bearing deposits along with
higher average balances outstanding throughout the entire deposit portfolio. The
Company's cost of funds was 2.2% for the first quarter of 2005, an increase of
39 basis points from 1.8% for the prior year. The increase in cost of funds was
led by a 139 basis point increase in federal funds purchased and securities sold
under agreements to repurchase, which generally reprice more quickly than other
interest bearing sources of funds and correlates with the increase in general
short-term market interest rates.
Interest expense on time deposits, the largest component of total interest
expense, increased $882 thousand or 29.6% to $3.9 million. The increase was
driven mainly by a $98.7 million or 23.2% higher average balance outstanding in
the current period that was boosted by the promotion of the FlexSpender
certificate of deposit product during the last half of 2004 and the effect of
the $62.4 million additional deposits from the Citizens Georgetown acquisition.
The average rate paid on time deposits edged up 17 basis points to 3.0% from
2.8% a year earlier. Interest expense on savings deposits and interest bearing
demand deposits increased $136 thousand or 33.3% and $254 thousand or 90.1%,
respectively. These increases were due almost entirely to an increase in the
average rates paid on savings and interest bearing demand deposits of 27 basis
points or 31.0% and 39 basis points or 81.3%, respectively. The increase in
average rates paid follows the trend of increasing general short-term market
interest rates between the comparable periods. The average outstanding balances
of savings and interest bearing demand deposits grew $4.4 million or 2.3% and
$14.3 million or 6.1%, respectively.
Interest expense on federal funds purchased and securities sold under agreements
to repurchase increased $316 thousand or 145.0% due mainly to a 139 basis point
increase in the average rate paid to 2.5% from 1.1% a year ago and is attributed
to the increase in general short-term market interest rates experienced since
the comparable period of last year. Interest expense on other borrowed funds
consists primarily of Federal Home Loan Bank ("FHLB") borrowings. Interest
expense on other borrowed funds was relatively unchanged at $526 thousand in the
current quarter due to the long-term fixed rate characteristics of these
borrowings.
The net interest margin (TE) decreased 17 basis points to 3.66% during the first
quarter of 2005 compared to 3.83% in the first quarter of 2004. The decrease in
net interest margin is primarily attributed to a 21 basis point decline in the
spread between rates earned on earning assets and the rates paid on interest
bearing liabilities to 3.36% in the current quarter from 3.57% in the first
quarter of 2004. A four basis point improvement from the benefit of noninterest
bearing sources of funds offset the 21 basis point decline in spread, resulting
in the decreased net interest margin. The effect of noninterest bearing sources
of funds on net interest margin typically increases in a rising rate
environment.
The following tables present an analysis of net interest income for the
quarterly periods ended March 31.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL
- -----------------------------------------------------------------------------------------------------------------------------------
Three months ended March 31, 2005 2004
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Investment securities
Taxable $ 227,878 $ 1,912 3.40% $ 247,953 $ 1,964 3.19%
Nontaxable1 95,594 1,439 6.10 92,073 1,398 6.11
Time deposits with banks, federal
funds sold and securities purchased
under agreements to resell 85,831 512 2.42 40,879 100 .98
Loans1,2,3 879,498 13,789 6.36 764,161 11,818 6.22
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,288,801 $ 17,652 5.55% 1,145,066 $ 15,280 5.37%
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (12,827) (11,404)
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets, net of
allowance for loan losses 1,275,974 1,133,662
- -----------------------------------------------------------------------------------------------------------------------------------
NONEARNING ASSETS
Cash and due from banks 76,915 93,893
Premises and equipment, net 27,499 24,191
Other assets 60,041 36,363
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $1,440,429 $1,288,109
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Deposits
Interest bearing demand $249,345 $ 536 .87% $ 235,050 $ 282 .48%
Savings 193,866 545 1.14 189,426 409 .87
Time 524,440 3,865 2.99 425,781 2,983 2.82
Federal funds purchased and
securities sold under agreements
to repurchase 86,235 534 2.51 78,427 218 1.12
Other borrowed funds 56,845 526 3.75 55,050 502 3.67
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 1,110,731 $ 6,006 2.19% 983,734 $ 4,394 1.80%
- -----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST BEARING LIABILITIES
Commonwealth of Kentucky deposits 34,651 36,384
Other demand deposits 152,516 132,825
Other liabilities 11,064 7,914
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,308,962 1,160,857
- -----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 131,467 127,252
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,440,429 $1,288,109
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 11,646 10,886
TE basis adjustment (544) (541)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 11,102 $ 10,345
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest spread 3.36% 3.57%
Impact of noninterest bearing sources
of funds .30 .26
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.66% 3.83%
- -----------------------------------------------------------------------------------------------------------------------------------
1Income and yield stated at a fully tax equivalent basis using the marginal corporate Federal tax rate of 35%.
2Loan balances include principal balances on nonaccrual loans.
3Loan fees included in interest income amounted to $553 thousand and $619 thousand in 2005 and 2004, respectively.
ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX EQUIVALENT BASIS)
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Variance Variance Attributed to
Three months ended March 31, 2005/20041 Volume Rate
- -------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Taxable investment securities $ (52) $ (603) $ 551
Nontaxable investment securities2 41 57 (16)
Time deposits with banks, federal funds sold and
securities purchased under agreements to resell 412 176 236
Loans2 1,971 1,715 256
- -------------------------------------------------------------------------------------------------------------------
Total interest income 2,372 1,345 1,027
- -------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest bearing demand deposits 254 18 236
Savings deposits 136 10 126
Time deposits 882 700 182
Federal funds purchased and securities sold under
agreements to repurchase 316 23 293
Other borrowed funds 24 14 10
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 1,612 765 847
- -------------------------------------------------------------------------------------------------------------------
Net interest income $ 760 $ 580 $ 180
- -------------------------------------------------------------------------------------------------------------------
Percentage change 100.0% 76.3% 23.7%
- -------------------------------------------------------------------------------------------------------------------
1The changes that are not solely due to rate or volume are allocated on a percentage basis using the
absolute values of rate and volume variances as a basis for allocation.
2Income stated at fully tax equivalent basis using the marginal corporate Federal tax rate of 35%.
NONINTEREST INCOME
- ------------------
Noninterest income totaled $5.5 million for the first quarter of 2005, an
increase of $1.4 million or 35.2% compared to $4.1 million for the same period
in the prior year. Noninterest income represents 24.4% of total revenue for the
current quarter, an increase of 270 basis points from 21.7% for the same period
last year. The increase in noninterest income is due primarily to the previously
discussed $700 thousand gain on the sale of the Company's $3.2 million credit
card portfolio, increased allotment processing fees of $454 thousand or 228.1%
attributed to the FiNET acquisition, higher service charges and fees on deposit
accounts of $365 thousand or 19.3%, and an increase in net gains on the sale of
mortgage loans of $144 thousand. The increased net gains on the sale of mortgage
loans is attributed to higher mortgage loans originated for sale of $3.6 million
or 98.1% in the comparison and is mainly attributed to the operations of Pro
Mortgage Partners, a mortgage company the Company opened during 2004. The
increase in service charges and fees on deposit accounts is due mainly to fees
related to new deposit accounts resulting from the FiNET acquisition during the
fourth quarter of 2004. Since this is a recent acquisition, the increase in
service charges and fees related to these deposit accounts is expected to level
off once there are comparable periods in the future.
Income from company-owned life insurance was $231 thousand in the current three
months, a decrease of $174 thousand or 43.0%. The decline is attributed to lower
crediting rates on the underlying investments. Until recently, the underlying
investments related to the company-owned life insurance have been repricing
downward in a lower interest rate environment. Investment securities gains were
zero in the current period, which resulted in a decline of $82 thousand compared
to the same period a year ago. The Company periodically sells investment
securities primarily for asset and liability management purposes, which can
result in variability when comparing to previous periods.
NONINTEREST EXPENSE
- -------------------
Total noninterest expenses were $11.5 million for the three months ended March
31, 2005, an increase of $1.8 million or 18.9% compared to the same period in
2004. The increase in noninterest expenses are mainly a result of the Citizens
Georgetown and FiNET acquisitions and the expansion of banking operations into
the Lexington, Kentucky market, all of which occurred during the last six months
of 2004. The largest increase in noninterest expenses was salaries and employee
benefits, which increased $566 thousand or 10.5% as the number of full time
equivalent employees rose 13.4% to 516 from 455 in the three-month comparison. A
significant portion of the increase in full time equivalent employees is
attributed to the Citizens Georgetown acquisition and additional employees at
Pro Mortgage Partners. Salaries and related payroll taxes increased $758
thousand or 18.2% to $4.9 million due to increased personnel and normal salary
increases. Noncash compensation expense related to the Company's nonqualified
stock option plan declined $69 thousand or 100.0% due to the structure of the
vesting schedule. All options for which the Company had previously recorded
noncash compensation expense became fully vested during the fourth quarter of
2004. Therefore, there is no further noncash compensation expense recorded for
these stock options. Employee benefit expenses decreased $123 thousand or 10.6%
due to lower health care and pension costs.
Occupancy expense, net of rental income, increased $96 thousand or 14.5% and
totaled $758 thousand at March 31, 2005. The increase was driven by the
Company's business acquisitions and expansion during the final half of 2004.
Equipment expenses were $683 thousand, an increase of $119 thousand or 21.1%
that was also driven by business expansion. Data processing and communications
expense rose $116 thousand or 12.6% to $1.0 million from $918 thousand. The
increase is attributed to increased data transfer capacity and larger processing
volumes in the comparison periods. Other noninterest expenses increased $876
thousand or 54.2% to $2.5 million from $1.6 million. Included in this increase
is $123 thousand of amortization expense of core deposit intangibles and $123
thousand of customer relationship intangibles related to acquisition activity in
which there is no corresponding amount for the first quarter of 2004.
Additionally, there was an increase in auditing expenses of approximately $117
thousand in the current quarter compared to the same period in 2004 attributed
to Sarbanes-Oxley compliance along with increases in other general expenses
relating to the Company's acquisitions and business expansion activity during
2004.
INCOME TAXES
- ------------
Income tax expense for the first quarter of 2005 was $1.1 million, an increase
of $231 thousand or 26.3% compared to $877 thousand for the same period a year
earlier. The effective tax rate increased 146 basis points to 21.5% from 20.0%
in the comparison. The change in the effective tax rate is due to increased
revenues from taxable sources and a decrease in revenue from nontaxable
investment securities.
FINANCIAL CONDITION
Total assets were $1.4 billion on March 31, 2005, an increase of $21.1 million
or 1.5% from the prior year-end. The growth in assets was the result of a $14.2
million or 17.9% increase in cash and cash equivalents, a $7.7 million or .9%
increase in net loans, and a $10.2 million or 58.1% increase in other assets,
partially offset by a decline in investment securities of $11.1 million or 3.0%.
The $10.2 million higher other assets total is due to an increase in other real
estate owned of $6.4 million and $3.8 million accrued receivable for the sale of
the Company's credit card portfolio. The increase in total assets correlates to
additional funding sources, primarily $7.0 million or .6% in additional
deposits, $12.0 million or 20.2% increase in federal funds purchased and
securities sold under agreements to repurchase, and $4.2 million or 7.6%
increase in other borrowed funds. The increase in deposits is mainly due to
higher noninterest bearing deposits of $9.9 million or 5.7% and is related to
deposit activity of the Commonwealth of Kentucky. Total shareholders' equity
decreased $426 thousand or .3% due mainly to a $2.5 million decline in
comprehensive income related to unrealized losses (net of tax) of the Company's
available for sale investment securities portfolio.
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
important to understanding the financial condition of the Company.
On an average basis, total assets were $1.4 billion for the first three months
of 2005, an increase of $92.8 million or 6.9% from year-end 2004. Average
earning assets, primarily loans and securities, were $1.3 billion at March 31,
2005, an increase of $88.1 million or 7.3% from year-end 2004. Average earning
assets represent 89.5% of total average assets on March 31, 2005, an increase of
37 basis points compared to 89.1% at year-end 2004.
LOANS
- -----
Loans, net of unearned income, totaled $884.0 million at March 31, 2005, an
increase of $7.3 million or .8% from year-end 2004. The composition of the loan
portfolio is summarized in the table below.
- --------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
(Dollars in thousands) Amount % Amount %
- --------------------------------------------------------------------------------
Commercial, financial,
and agriculture $136,829 15.5% $134,016 15.3%
Real estate - construction 61,268 6.9 63,156 7.2
Real estate mortgage - residential 315,784 35.7 313,711 35.8
Real estate mortgage - farmland and
other commercial enterprises 264,645 30.0 251,094 28.6
Installment 65,620 7.4 75,271 8.6
Lease financing 39,884 4.5 39,457 4.5
- --------------------------------------------------------------------------------
Total $884,030 100.0% $876,705 100.0%
- --------------------------------------------------------------------------------
On average, loans represented 68.2% of earning assets during the current period,
unchanged from year-end 2004. As loan demand fluctuates, the available funds are
reallocated between loans and lower earning temporary investments or investment
securities, which typically involve a decrease in credit risk and lower yields.
ALLOWANCE FOR LOAN LOSSES
- -------------------------
The allowance for loan losses was $12.4 million at March 31, 2005, a decrease of
$391 thousand or 3.1% from the prior year-end. The allowance for loan losses was
1.40% of loans net of unearned income at March 31, 2005, a decrease of 6 basis
points compared to 1.46% at December 31, 2004. A $47 thousand negative provision
for loan losses in the current quarter resulted in a $412 thousand decreased in
provision for loan losses compared to the same period in 2004. The negative
provision for loan losses is attributed to a sharp decline of $3.9 million or
39.2% in nonperforming loans from year-end 2004 and the sale of the Company's
$3.2 million credit card portfolio during the current quarter. These factors
contributed to a lower allowance for loan loss at March 31, 2005. The Company
had net charge-offs of $344 thousand in the first three months of 2005 compared
to net charge-offs of $363 thousand in the same period of 2004, a decrease of
$19 thousand or 5.2%. Annualized net charge-offs represent .16% and .19% of
average net loans for three months ended March 31, 2005 and 2004 respectively,
as compared to .32% at year-end 2004. The allowance for loan losses as a
percentage of nonperforming loans totaled 203.9% and 127.8% at March 31, 2005
and December 31, 2004, respectively. The increase is primarily attributed to the
$3.9 million decline in nonperforming loans. 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 $16.3 million at
March 31, 2005, an increase of $2.4 million or 17.7% from the prior year-end.
Nonperforming loans were $6.1 million at March 31, 2005, a $3.9 million or 39.2%
decline compared to year-end 2004. The decline in nonperforming loans relates
primarily to two extensions of credit secured by real estate. One involves a
balance of approximately $1.3 million to a financially trouble builder secured
by multifamily residential real estate, the other relates to approximately $1.4
million secured by commercial real estate. The underlying collateral securing
the credit to the financially troubled builder was transferred to the Company
through foreclosure during the current quarter. The $1.4 million commercial real
estate credit was collected during the quarter. Nonperforming loans represent
..7% of loans net of unearned income at March 31, 2005, a decrease of 45 basis
points from 1.1% compared to year-end 2004.
Other real estate owned was $10.1 million at March 31, 2005. This represents an
increase of $6.4 million or 170.2% compared to $3.7 million at year-end 2004.
The increase is attributed mainly to the transfer of $6.3 million of residential
real estate to the Company through foreclosure related to the previously
disclosed financially troubled builder.
TEMPORARY INVESTMENTS
- ---------------------
Temporary investments consist of interest bearing deposits in other banks and
federal funds sold and securities purchased under agreements to resell. The
Company uses these funds in the management of liquidity and interest rate
sensitivity. At March 31, 2005, temporary investments were $15.7 million, a
decrease of $21.1 million or 57.4% compared to $36.8 million at year-end 2004.
Temporary investments averaged $85.8 million during the first three months of
2005, an increase of $45.3 million or 111.8%. The increase is primarily a result
of the Company's net funding position, which includes an increase in average
interest bearing deposits of $75.1 million or 8.4%. Temporary investments are
reallocated as loan demand and other investment alternatives present the
opportunity.
INVESTMENT SECURITIES
- ---------------------
The investment securities portfolio is comprised primarily of U.S. Government
agency securities, mortgage-backed securities, and tax-exempt securities of
states and political subdivisions. Total investment securities were $358.1
million on March 31, 2005, a decrease of $11.1 million or 3.0% from year-end
2004.
Investment securities averaged $323.5 million in total for the current three
months, a decrease of $17.8 million or 5.2%. The decrease in average investment
securities was driven by a $31.9 million net decline in mortgage-backed
securities, which was partially offset by net additional purchases of U.S.
Government agency securities averaging $14.9 million during the quarter. The
Company had a net unrealized loss on available for sale investment securities of
$2.7 million at March 31, 2005 compared to a net unrealized gain of $1.1 million
at year-end 2004. The $3.8 million decrease in the current period is due
primarily to the impact of changing economic conditions, including an increase
in short-term market interest rates that have generally lowered the value of the
investment portfolio at the end of the current period. As overall market
interest rates have drifted higher in the current period, the portfolio has
declined in value. Market values of fixed rate investments are inversely related
to changes in market interest rates.
COMPANY-OWNED LIFE INSURANCE
- ----------------------------
Company-owned life insurance totaled $27.2 million at March 31, 2005, an
increase of $231 thousand or 0.9% from $27.0 million at year-end 2004. Income
from company-owned life was $231 thousand during the first three months of 2005,
a decrease of $174 thousand or 43.0% compared to $405 thousand for the same
period in 2004. The decline is due to lower crediting rates on the underlying
investments. Until recently, the underlying investments related to the
company-owned life insurance have been repricing downward in a lower interest
rate environment.
DEPOSITS
- --------
The Company's primary source of funding for its lending and investment
activities results from its customer deposits, which consist of noninterest and
interest bearing demand, savings, and time deposits. On March 31, 2005, deposits
totaled $1.1 billion, an increase of $7.0 million or .6% from year-end 2004. The
modest increase in deposits was due to a $9.9 million or 5.7% increase in
noninterest bearing deposits partially offset by a $3.0 million or .3% decline
in interest bearing deposits. The increase in noninterest bearing deposits is
attributed to $11.7 million higher balance related to the Commonwealth of
Kentucky. Excluding the Commonwealth of Kentucky deposits, noninterest bearing
deposits decreased $1.8 million or 1.2% in the comparison. The net decrease in
interest bearing deposits include higher time deposits of $12.2 million or 2.4%,
offset by lower savings deposit balances of $13.1 million or 6.5% and lower
interest bearing demand deposits of $2.0 million or .8%. Time deposits grew
primarily as a result of a net additional $17.9 million of FlexSpender
certificate of deposit accounts opened during the current quarter. The Company
anticipates that the growth of FlexSpender accounts will diminish since
marketing efforts to sell this product have now been scaled back. Average total
deposits were $1.2 billion for the first three months of 2005, an increase of
$82.3 million or 7.7% compared to year-end 2004. Net increases in average
deposits were consistent throughout most of the deposit portfolio as follows:
noninterest bearing demand of $7.2 million or 4.0%; interest bearing demand of
$7.3 million or 3.0%; savings accounts of $2.8 million or 1.4%; and time
deposits of $65.1 million or 14.2%.
BORROWED FUNDS
- --------------
Borrowed funds totaled $130.9 million at March 31, 2005, an increase of $16.2
million or 14.1% from $114.7 million at year-end 2004. The increase was made up
of a $16.7 million or 27.1% increase in short-term borrowings coupled with a
decline of $477 thousand or .1% in long-term borrowings. Federal funds purchased
and securities sold under agreements to repurchase and debt assumed in the
acquisition of other real estate owned increased short-term borrowings by $12.0
million or 20.2% and $5.0 million, respectively. The increase in federal funds
purchased and securities sold under agreements to repurchase is due primarily to
increased correspondent banking activity. The $477 thousand decrease in
long-term borrowings is attributed to repayments of borrowed funds from the
FHLB. Total borrowed funds averaged $143.1 million, an increase of $5.2 million
or 3.8% from $137.9 million at year-end 2004.
LIQUIDITY
The Parent Company's primary use of cash consists of dividend payments to its
common shareholders, purchases of its common stock, corporate acquisitions, and
other general operating purposes. Liquidity of the Parent Company depends
primarily on the receipt of dividends from its subsidiary banks and cash
balances maintained. As of March 31, 2005 combined retained earnings of the
subsidiary banks were $51.9 million, of which $3.6 million was available for the
payment of dividends to the Parent Company without obtaining prior approval from
bank regulatory agencies. As a practical matter, payment of future dividends is
also subject to the maintenance of other capital ratio requirements. Management
expects that in the aggregate, its subsidiary banks will continue to have the
ability to pay dividends in order to provide funds to the Parent Company during
the remainder of 2005 sufficient to meet its liquidity needs. In addition, 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 has not been drawn upon and will mature on May 31, 2005. The Parent
Company had cash balances of $7.8 million at March 31, 2005, a decrease of $3.0
million or 27.5% from $10.8 million at year-end 2004. The $3.0 million decrease
in cash at the Parent Company is due primarily to $2.2 million in dividends paid
to the Company's shareholders and for the payment of general operating expenses.
The Company's objective as it relates to liquidity is to ensure that the
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 subsidiary banks have several sources of funds available
on a daily basis that can be used for liquidity purposes. Those sources of funds
include the subsidiary banks' core deposits, consisting of both business and
nonbusiness deposits; cash flow generated by repayment of principal and interest
on loans and investment securities; FHLB borrowings; and federal funds purchased
and securities sold under agreements to repurchase. While maturities and
scheduled amortization of loans and investment securities are generally a
predictable source of funds, deposit outflows and mortgage prepayments are
influenced significantly by general interest rates, economic conditions, and
competition in our local markets. As of March 31, 2005 the Company had
approximately $189.9 million in additional borrowing capacity under various
FHLB, federal funds, and other borrowing agreements. However, 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, both at the bank subsidiary level and on a consolidated basis, meets
regularly and monitors the composition of the balance sheet to ensure
comprehensive management of interest rate risk and liquidity.
Liquid assets consist of cash, cash equivalents, and securities available for
sale. At March 31, 2005, such assets totaled $432.8 million, an increase of $4.2
million or 1.0% from year-end 2004. The increase in liquid assets is attributed
to the overall funding position of the Company. Net cash used in operating
activities was $6.6 million in the first three months of 2005 compared to net
cash provided by operating activities of $5.2 million for the same period a year
earlier. The net use of cash in the current three months is attributed to an
increase in other assets attributed to $6.4 million higher balance of other real
estate owned and $3.8 million accrued receivable for sale of the credit card
portfolio. Net cash used in investing activities was $294 thousand in the
current period compared to $14.6 million in the same period last year. The most
significant item included in the $14.3 million lower cash flows used in
investing activities is a $13.3 million decrease from loans originated for
investment, net of principal collected. Net cash provided by financing
activities was $21.1 million for the three months ended March 31, 2005 compared
to $15.1 million net cash used in the same period a year earlier. This
represents an increase in cash flows of $36.3 million in the comparison and is
related mainly to $46.9 million attributed to increased deposit activity
partially offset by $17.4 million related to lower federal funds purchased and
securities sold under agreements to repurchase activity in the comparable
periods.
Commitments to extend credit are considered in addressing the Company's
liquidity management. The Company does not expect these commitments to
significantly effect the liquidity position in future periods.
CAPITAL RESOURCES
Shareholders' equity was $131.0 million on March 31, 2005. This represents a
decrease of $426 thousand or .3% from year-end 2004 due mainly to a decrease in
other comprehensive income of $2.5 million. This was partially offset by a $1.8
million or 1.2% increase in retained earnings. Retained earnings increased as a
result of $4.1 million in net income offset by $2.2 million, or $.33 per share,
in dividends declared during the current quarter. The Company issued seven
thousand and one thousand shares of common stock during the current quarter
pursuant to its nonqualified stock option plan and employee stock purchase plan,
respectively. The issuance of these shares increased shareholders' equity by
$223 thousand. The Company purchased three hundred shares of its outstanding
common stock at a total cost of $13 thousand during current quarter of 2005.
Accumulated other comprehensive income, consisting of net unrealized holding
losses on available for sale securities (net of tax), was $1.8 million at March
31, 2005, a decrease of $2.5 million from year-end 2004. The decrease is due
primarily to the impact of changing economic conditions, including an increase
in short-term market interest rates that have generally lowered the value of the
investment portfolio at the end of the current period. As overall market rates
have drifted higher in the current period, the portfolio has declined 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 March 31, 2005, the regulatory
minimums, and the regulatory standard for a well-capitalized institution are as
follows.
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Farmers Capital Regulatory Well
Bank Corporation Minimum Capitalized
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Tier 1 risk based 12.62% 4.00% 6.00%
Total risk based 13.87% 8.00% 10.00%
Leverage 8.41% 4.00% 5.00%
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As of March 31, 2005, all of the Company's subsidiary banks were in excess of
the well-capitalized regulatory ratio requirements as calculated under
guidelines established by federal banking agencies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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The Company uses a simulation model as a tool to monitor and evaluate interest
rate risk exposure. The model is designed to measure the sensitivity of net
interest income and net income to changing interest rates over future time
periods. Forecasting net interest income and its sensitivity to changes in
interest rates requires the Company to make assumptions about the volume and
characteristics of many attributes, including assumptions relating to the
replacement of maturing earning assets and liabilities. Other assumptions
include, but are not limited to, projected prepayments, projected new volume,
and the predicted relationship between changes in market interest rates and
changes in customer account balances. These effects are combined with the
Company's estimate of the most likely rate environment to produce a forecast of
net interest income and net income. The forecasted results are then adjusted for
the effect of a gradual increase and decrease in market interest rates on the
Company's net interest income and net income. Because assumptions are inherently
uncertain, the model cannot precisely estimate net interest income or net income
or the effect of interest rate changes on net interest income and net income.
Actual results could differ significantly from simulated results.
At March 31, 2005, the model indicated that if rates were to gradually increase
by 150 basis points during the calendar year, then net interest income and net
income would increase .83% and 1.75%, respectively for the year ending December
31, 2005. The model indicated that if rates were to gradually decrease by 150
basis points over the same period, then net interest income and net income would
decrease 3.0% and 6.6%, respectively.
In the current low interest rate environment, it is not practical or possible to
reduce certain deposit rates by the same magnitude as rates on earning assets.
The average rate paid on some of the Company's deposits is well below 1.5%. This
situation magnifies the model's predicted results when modeling a decrease in
interest rates, as earning assets with higher yields have more of an opportunity
to reprice at lower rates than lower-rate deposits.
ITEM 4. CONTROLS AND PROCEDURES
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The Registrant's Chief Executive Officer and Chief Financial Officer have
reviewed and evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of the end of the period covered by this report, and have
concluded that the Registrant's disclosure controls and procedures were adequate
and effective to ensure that all material information required to be disclosed
in this annual report has been made known to them in a timely fashion.
There were no significant changes in the Registrant's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the Chief Executive Officer and Chief Financial Officers evaluation, nor
were there any significant deficiencies or material weaknesses in the controls
which required corrective action.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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As of March 31, 2005, there were various pending legal actions and proceedings
against the Company arising from the normal course of business and in which
claims for damages are asserted. Management, after discussion with legal
counsel, believes that these actions are without merit and that the ultimate
liability resulting from these legal actions and proceedings, if any, will not
have a material effect upon the consolidated financial statements of the
Company.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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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. There were no shares purchased
during the current quarter.
ITEM 6. EXHIBITS
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List of Exhibits
----------------
3i. Amended and Restated Articles of Incorporation of Farmers Capital Bank
Corporation (incorporated by reference to Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998).
3ii. Amended and Restated By-Laws of Farmers Capital Bank Corporation
(incorporated by reference to Annual Report of Form 10-K for the
fiscal year ended December 31, 1997.
3iia Amendments to By-Laws of Farmers Capital Bank Corporation
(incorporated by reference to Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2003).
31.1 CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (page 23)
31.2 CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (page 24)
32 CEO and CFO Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Page 25)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 9, 2005 /s/ G. Anthony Busseni
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G. Anthony Busseni,
President and CEO (Principal Executive Officer)
Date: 5-9-05 /s/ Doug Carpenter
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C. Douglas Carpenter,
Vice President, Secretary, and CFO
(Principal Financial and Accounting Officer)