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FFKT > SEC Filings for FFKT > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for FARMERS CAPITAL BANK CORP



Quarterly Report

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


This report contains forward-looking statements with the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Statements in this report that are not statements of historical fact are forward-looking statements. 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 management of Farmers Capital Bank Corporation (the "Company" or "Parent 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.

Various risks and uncertainties may cause actual results to differ materially from those indicated by the Company's forward-looking statements. In addition to the risks described under Part 1, Item 1A "Risk Factors" in the Company's most recent annual report on Form 10-K, 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; changes in prepayment speeds of loans or investment securities; inflation; material unforeseen changes in the liquidity, results of operations, or financial condition of the Company's customers; changes in the level of non-performing assets and charge-offs; changes in the number of common shares outstanding; the capability of the Company to successfully enter into a definitive agreement for and close anticipated transactions; unexpected claims or litigation against the Company; technological or operational difficulties; the impact of new accounting pronouncements and changes in policies and practices that may be adopted by regulatory agencies; acts of war or terrorism; the ability of the parent company to receive dividends from its subsidiaries; the impact of larger or similar financial institutions encountering difficulties, which may adversely affect the banking industry or the Company; the Company or its subsidiary banks' ability to maintain required capital levels and adequate funding sources and liquidity; 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's forward-looking statements are based on information available at the time such statements are made. The Company expressly disclaims any intent or obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events, or other changes.


Second Quarter 2013 Compared to Second Quarter 2012

The Company reported net income of $3.5 million for the quarter ended June 30, 2013, an increase of $400 thousand compared with net income of $3.1 million for the second quarter a year ago. On a per common share basis, net income for the current quarter was $.41, an increase of $.05 or 13.9% compared to $.36 reported for the second quarter of 2012. Selected income statement amounts and related data are presented in the table below.

(In thousands except per share data)
Three Months Ended June 30,                           2013            2012      (Decrease)
Interest income                                $    16,631     $    18,087     $     (1,456 )
Interest expense                                     3,038           4,720           (1,682 )
Net interest income                                 13,593          13,367              226
Provision for loan losses                             (362 )         1,341           (1,703 )
Net interest income after provision for loan
losses                                              13,955          12,026            1,929
Noninterest income                                   5,441           6,412             (971 )
Noninterest expenses                                14,722          14,401              321
Income before income taxes                           4,674           4,037              637
Income tax expense                                   1,127             890              237
Net income                                     $     3,547     $     3,147     $        400
Less preferred stock dividends and discount
accretion                                              487             480                7
Net income available to common shareholders    $     3,060     $     2,667     $        393

Basic and diluted net income per common
share                                          $       .41     $       .36     $        .05

Weighted average common shares outstanding -
basic and diluted                                    7,473           7,454               19
Return on average assets                               .79 %           .68 %          11 bp
Return on average equity                              8.30 %          7.75 %          55 bp

bp = basis points.

Net Interest Income

The overall interest rate environment at June 30, 2013, as measured by the Treasury yield curve, remains at low levels in historical terms despite a spike in yields during the current quarter for the five and ten year maturity periods. Shorter-term yields for three and six-month maturities were relatively unchanged during the current quarter. For longer-term maturities, three year maturities increased 30 basis points while the five, ten, and thirty year maturity periods are up 63, 64, and 40 basis points, respectively. At June 30, 2013, the short-term federal funds target interest rate was between zero and 0.25%, unchanged since December 2008. The Federal Reserve Board has indicated an objective of holding short-term interest rates at exceptionally low levels until unemployment rates decline to a target of 6.5% and inflation remains within its long term goals. The national unemployment rate was 7.6% at the end of the second quarter 2013. The near historical low rate environment makes managing the Company's net interest margin very challenging.

Net interest income was $13.6 million for the current quarter, an increase of $226 thousand or 1.7% compared to $13.4 million for the prior-year second quarter. The improvement was made up of lower interest expense of $1.7 million or 35.6%, partially offset by a decrease in interest income of $1.5 million or 8.0%. The Company's overall cost of funds was 0.90% for the current quarter compared to 1.31% from a year ago. The decrease to interest income and interest expense is attributed to both rate and volume declines of interest earning assets and interest paying liabilities. Rate and volume declines are the result of an overall slow growing economy and related competitive pressures combined with the Company's strategy of being more selective in pricing its loans and deposits in an effort to improve credit quality, net interest margin, overall profitability, and capital position. The Company is generally earning and paying less interest from its earning assets and funding sources as the average rates earned and paid have decreased. This includes repricing of variable and floating rate assets and liabilities that have reset to overall lower amounts since their previous repricing date as well as activity related to new earning assets and funding sources in a low interest rate environment. In periods when loan demand is low, available funds are invested in lower yielding investment securities or cash equivalents.

Interest income and interest expense related to nearly all categories of the Company's earning assets and interest paying liabilities have declined in the quarterly comparison. The $1.5 million decrease from interest income in the comparison is primarily made up of lower interest from investment securities and loans of $854 thousand or 21.6% and $613 thousand or 4.3%, respectively. Interest income on taxable investment securities decreased $935 thousand or 27.5% due to both a 37 basis point decrease in yield and lower average balances outstanding of $82.1 million or 14.9%. Average taxable investment securities decreased from a year ago mainly due to a decline in long-term borrowings and deposits. Proceeds received from maturing or sold investment securities not needed to fund higher-earning loans have either been reinvested into nontaxable investment securities or used to manage liquidity, such as for deposit outflows or repayment of long-term debt obligations. A higher proportion of the reinvestment in securities is now directed to nontaxable issues. Interest income from nontaxable investment securities increased $81 thousand or 14.4% due mainly to an increase in volume. While the average yield on nontaxable investments decreased in the comparison, average balances have increased as the related tax equivalent yields are more attractive as well as fitting within overall asset/liability management strategies. The decrease in interest income from loans was driven primarily by lower average loan balances outstanding of $29.7 million or 2.8%, which is attributed primarily to a lack of high quality loan demand.

The $1.7 million decrease in interest expense resulted from a reduction of interest on deposits and long-term borrowings of $844 thousand or 35.6% and $833 thousand or 35.8%, which helped to lower the overall cost of funds to 0.90%. The decrease in interest expense on deposits is due to an $847 thousand or 39.3% reduction to interest on time deposits, which was driven downward as both volume and rates paid have declined. The Company has repriced higher-rate maturing time deposits downward to lower current market rates or allowed them to mature without renewal, as liquidity has been adequate. Average outstanding balances of time deposits were $513 million for the current quarter, a decrease of $84.3 million or 14.1% compared to a year earlier. The average rate paid on time deposits was 1.0% and 1.5% for the current and year-ago periods, respectively.

Interest expense on borrowings decreased $838 thousand or 35.6%, driven by an $833 thousand or 35.8% decrease from long-term borrowings. The decrease is due to a $53.3 million or 23.2% lower average balance outstanding related to long-term borrowings and a 68 basis point decrease in the average rate paid. The decrease in the average balance reflects a $50.0 million principal repayment during the fourth quarter of 2012 related to the Company's 2007 balance sheet leverage transaction. The average rate paid on long-term borrowings decreased in the comparison mainly due to the repricing of $23.2 million of 6.60% fixed rate borrowings to a floating interest rate of three-month LIBOR plus 132 basis points, which occurred during the fourth quarter of 2012.

The net interest margin on a taxable equivalent basis increased 19 basis points to 3.40% for the current quarter compared to 3.21% for the same quarter of 2012. The increase in net interest margin was driven by a 23 basis point increase in the spread between the average rate earned on earning assets and the average rate paid on interest bearing liabilities to 3.23% from 3.00%. The increase in spread was driven by a 41 basis point decrease in the overall cost of funds, which more than offset an 18 basis point decline in the overall yield on earning assets. The Company expects its net interest margin to remain relatively flat or trend downward in the near term according to internal modeling using expectations about future market interest rates, the maturity structure of the Company's earning assets and liabilities, and other factors. Future results could be significantly different than expectations.

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

Distribution of Assets, Liabilities and Shareholders' Equity: Interest Rates and

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