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FFKT > SEC Filings for FFKT > Form 10-Q on 6-Nov-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.


Third Quarter 2013 Compared to Third Quarter 2012

The Company reported net income of $3.0 million for the quarter ended September 30, 2013, a decrease of $56 thousand or 1.8% compared to $3.1 million for the third quarter of 2012. On a per common share basis, net income was $.34 and $.35 for the current and year-ago quarters, respectively. This represents a decrease of $.01 or 2.9%. Selected income statement amounts and related data are presented in the table below.

(In thousands except per share data)
Three Months Ended September 30,                    2013             2012      (Decrease)
Interest income                             $     16,563     $     17,578     $      (1,015 )
Interest expense                                   2,953            4,511            (1,558 )
Net interest income                               13,610           13,067               543
Provision for loan losses                           (586 )           (256 )            (330 )
Net interest income after provision for
loan losses                                       14,196           13,323               873
Noninterest income                                 5,678            6,166              (488 )
Noninterest expenses                              15,984           15,347               637
Income before income taxes                         3,890            4,142              (252 )
Income tax expense                                   855            1,051              (196 )
Net income                                  $      3,035     $      3,091     $         (56 )
Less preferred stock dividends and
discount accretion                                   489              481                 8
Net income available to common
shareholders                                $      2,546     $      2,610     $         (64 )

Basic and diluted net income per common
share                                       $        .34     $        .35     $        (.01 )

Weighted average common shares
outstanding - basic and diluted                    7,475            7,461                14
Return on average assets                             .67 %            .66 %            1 bp
Return on average equity                            7.33 %           7.38 %          (5) bp
bp = basis points.

Net Interest Income

The overall interest rate environment at September 30, 2013, as measured by the Treasury yield curve, remains at low levels in historical terms despite a spike in yields during the second quarter particularly for the five and ten year maturity periods. Yields were relatively unchanged during the current quarter with the exception of the 10 and 30 year maturity periods, which increased 12 and 19 basis points, respectively. At September 30, 2013, the short-term federal funds target interest rate remained between zero and 0.25%, which is unchanged since December 2008. The Federal Reserve Board has indicated an objective of holding short-term interest rates at exceptionally low levels at least as long as the unemployment rate remains above 6.5% and inflation remains within its long term goals. The national unemployment rate was 7.2% at the end of the third quarter 2013. The near historical low rate environment makes managing the Company's net interest margin challenging.

Net interest income was $13.6 million for the current quarter, an increase of $543 thousand or 4.2% compared to $13.1 million for the prior-year third quarter. The improvement was made up of lower interest expense of $1.6 million or 34.5%, partially offset by a decrease in interest income of $1.0 million or 5.8%. The Company's overall cost of funds was 0.87% for the current quarter compared to 1.26% 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 in nearly all categories of the Company's earning assets and interest paying liabilities have declined in the quarterly comparison. The $1.0 million decrease from interest income in the comparison is primarily made up of lower interest from loans and investment securities of $570 thousand or 4.1% and $450 thousand or 12.3%, respectively. The decrease in interest income from loans was driven by both a lower average outstanding balance of $29.0 million or 2.8% and an 11 basis point decrease in the average rate earned to 5.3% from 5.4%. Average loans have decreased primarily from a lack of high quality loan demand.

Interest income on taxable investment securities decreased $506 thousand or 16.4% due to both a lower average balance outstanding of $63.0 million or 11.8% and a 12 basis point decrease in yield. Average taxable investment securities have decreased as a result of 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 more into nontaxable investment securities or used to manage liquidity, such as for deposit outflows or repayment of long-term debt obligations. Interest income from nontaxable investment securities increased $56 thousand or 9.8% due mainly to an increase in volume of $19.9 million or 21.4%. 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 $1.6 million decrease in interest expense resulted from a reduction of interest on long-term borrowings and deposits of $837 thousand or 35.7% and $718 thousand or 33.5%, which lowered overall cost of funds to 0.87%. The decrease in interest on long-term borrowings is due to a $53.2 million or 23.2% lower average balance outstanding and a 67 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 decreased 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 interest rate for this borrowing as of the last determination date during the quarter was 1.59%.

The $718 thousand decrease in interest expense on deposits is due to lower interest on time deposits of $726 thousand or 37.7%, which was driven downward as both the rates paid and volume have declined. The Company has repriced higher-rate maturing time deposits downward to lower market rates or allowed them to mature without renewal, as liquidity has been adequate. The average rate paid on time deposits was 0.95% and 1.3% for the current and year-ago periods, respectively. Average outstanding balances of time deposits were $499 million for the current quarter, a decrease of $74.8 million or 13.0% compared to a year earlier.

The net interest margin on a taxable equivalent basis increased 23 basis points to 3.36% for the current quarter compared to 3.13% for the same quarter of 2012. The increase in net interest margin was driven by a 28 basis point increase in the spread between the average rate earned on earning assets and the average rate paid on interest bearing liabilities to 3.19% from 2.91%. The increase in spread is attributed to a 39 basis point decrease in the overall cost of funds, which more than offset an 11 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 September 30.

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

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