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FFKT > SEC Filings for FFKT > Form 10-Q on 8-Nov-2012All 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; the possibility that acquired entities may not perform as well as expected; 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 2012 Compared to Third Quarter 2011

The Company reported net income of $3.1 million for the quarter ended September
30, 2012, an increase of $2.8 million compared with net income of $272 thousand
for the third quarter a year ago. On a per common share basis, net income for
the current quarter was $.35, an increase of $.38 compared to a net loss of $.03
reported for the third quarter of 2011. Selected income statement amounts and
related data are presented in the table below.

(In thousands except per share data)
Three Months Ended September 30,                       2012           2011         Change
Interest income                                  $   17,578     $   19,493     $   (1,915 )
Interest expense                                      4,511          6,096         (1,585 )
Net interest income                                  13,067         13,397           (330 )
Provision for loan losses                              (256 )        3,232         (3,488 )
Net interest income after provision for loan
losses                                               13,323         10,165          3,158
Noninterest income                                    6,166          6,260            (94 )
Noninterest expenses                                 15,347         16,959         (1,612 )
Income (loss) before income tax expense               4,142           (534 )        4,676
Income tax expense (benefit)                          1,051           (806 )        1,857
Net income                                       $    3,091     $      272     $    2,819
Less preferred stock dividends and discount
accretion                                               481            474              7
Net income (loss) available to common
shareholders                                     $    2,610     $     (202 )   $    2,812

Basic and diluted net income (loss) per common
share                                            $      .35     $     (.03 )   $      .38

Weighted average common shares outstanding -
basic and diluted                                     7,461          7,427             34
Return on average assets                                .65 %          .06 %           59 bp
Return on average equity                               7.38 %          .69 %          669 bp

bp = basis points.

The $2.8 million or $.38 per common share increase in net income for the third quarter of 2012 compared to the same quarter a year ago was mainly driven by a decrease of $3.5 million or 108% and $2.0 million or 57.1% in the provision for loan losses and expenses associated with repossessed real estate, respectively, partially offset by an increase in income tax expense of $1.9 million. Further information related to the more significant components making up the increase in net income follows.

Net Interest Income

The overall interest rate environment at September 30, 2012, as measured by the Treasury yield curve, remains at very low levels in historical terms. Shorter-term yields for three and six-month maturities have increased 8 basis points and 7 basis points, respectively since year-end 2011. For longer-term maturities, three year maturities decreased 5 basis points while the five, ten, and thirty year maturity periods declined 21, 24, and 7 basis points, respectively. At September 30, 2012, the short-term federal funds target interest rate was between zero and .25%, which has remained unchanged since December 2008. The Federal Reserve Board has indicated an objective of holding short-term interest rates at exceptionally low levels through mid-2015. The near historical low rate environment makes managing the Company's net interest margin very challenging.

Net interest income was $13.1 million for the current quarter, a decrease of $330 thousand or 2.5% compared to $13.4 million for the prior-year third quarter. The decrease in net interest income is attributed mainly to a $1.9 million or 9.8% decrease in interest income, primarily on loans, which was partially offset by a $1.6 million or 26.0% decrease in interest expense, primarily on deposits. The decrease in total interest income and interest expense is attributed to both rate and volume declines related mainly to loans and deposits and are the result of the overall weak economic environment combined with the Company's balance sheet management strategy. The overall weak economy has generally resulted in lower interest rates while the Company has become more selective in pricing deposits and extending loans, chiefly to reduce its costs of funds and improve net interest margin, overall profitability, and its 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. Additionally, an increase in available funds has been invested in lower yielding investment securities or cash equivalents in response to a decrease in high quality loan demand.

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 $1.9 million decrease from interest income in the comparison is primarily made up of lower interest on loans and investment securities of $1.4 million or 8.9% and $550 thousand or 13.1%, respectively. The decrease in interest on loans was driven primarily by an $86.7 million or 7.7% decrease in average volume and, to a lesser extent, a decrease in the average rate earned of six basis points to 5.4% from 5.5%. For investment securities, the decrease in interest income is rate driven, as a 50 basis point decrease in the average rate earned of 2.5% more than offset a higher average balance outstanding of $40.0 million or 6.8%.

The $1.6 million decrease in interest expense is primarily a result of lower interest expense on deposits of $1.4 million or 39.7% followed by lower interest on borrowings of $173 thousand or 6.8%. The decrease in interest expense on deposits was driven by lower interest on time deposits of $1.2 million or 39.1% due to both a decrease in the average rate paid and volume declines. The average rate paid on time deposits was 1.3% and 1.8% for the current and prior years' third quarter, respectively. Average outstanding balances of time deposits were $574 million for the current quarter, a decrease of $107 million or 15.7% compared to a year earlier. Interest expense on borrowings decreased mainly as a result of maturities related to outstanding long-term Federal Home Loan Bank ("FHLB") advances.

The net interest margin on a taxable equivalent basis increased six basis points to 3.13% for the third quarter of 2012 compared to 3.07% in the same quarter of 2011. The increase in net interest margin was driven by an eight basis point increase in the spread between the average rate earned on earning assets and the average rate paid on interest bearing liabilities to 2.91% in the current quarter from 2.83% for the same quarter of 2011. The Company expects its net interest margin to trend upward 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. In particular, the Company's cost of funds is expected to decrease in the near term primarily from the maturity of $50.0 million of 3.98% fixed rate FHLB borrowings combined with $23.2 million of 6.60% fixed rate borrowings that reprice downward to a floating interest rate of three-month LIBOR plus 132 basis points. Each of these events occur during the fourth quarter of 2012. 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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