Edgar Filing: FARMERS CAPITAL BANK CORP

ffkt20140331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT

Pursuant to Section 13 OR 15(d) of

The Securities Exchange Act of 1934

For the quarterly period ended March 31, 2014

Farmers Capital Bank Corporation

(Exact name of registrant as specified in its charter)

Kentucky

000-14412

61-1017851

(State or other jurisdiction of

incorporation or organization)

(Commission

File Number)

(IRS Employer

Identification No.)

P.O. Box 309
202 West Main St.
Frankfort, KY		40601
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code – (502) 227-1668

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐		Accelerated filer ☒

Non-accelerated filer ☐ (Do not check if a smaller reporting company)		Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common stock, par value $0.125 per share

7,482,043 shares outstanding at May 8, 2014

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets	3
Unaudited Condensed Consolidated Statements of Income	4
Unaudited Condensed Consolidated Statements of Comprehensive Income	5
Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity	6
Unaudited Condensed Consolidated Statements of Cash Flows	7
Notes to Unaudited Condensed Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3. Quantitative and Qualitative Disclosures About Market Risk	45

Item 4. Controls and Procedures	46

PART II – OTHER INFORMATION

Item 1. Legal Proceedings	46

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 6. Exhibits	46

SIGNATURES	49

PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Unaudited Condensed Consolidated Balance Sheets

	March 31,			December 31,
(Dollars in thousands, except share data)	2014			2013
Assets
Cash and cash equivalents:
Cash and due from banks	$	26,028		$	22,925
Interest bearing deposits in other banks		61,300			41,749
Federal funds sold and securities purchased under agreements to resell		7,635			3,579
Total cash and cash equivalents		94,963			68,253
Investment securities:
Available for sale, amortized cost of $607,667 (2014) and $618,395 (2013)		607,764			612,820
Held to maturity, fair value of $3,929 (2014) and $827 (2013)		3,827			765
Total investment securities		611,591			613,585
Loans, net of unearned income		983,919			999,883
Allowance for loan losses		(18,690	)		(20,577	)
Loans, net		965,229			979,306
Premises and equipment, net		36,068			36,273
Company-owned life insurance		29,131			28,899
Intangible assets, net		753			854
Other real estate owned		35,444			37,826
Other assets		41,100			44,559
Total assets	$	1,814,279		$	1,809,555
Liabilities
Deposits:
Noninterest bearing	$	269,911		$	277,294
Interest bearing		1,139,321			1,132,921
Total deposits		1,409,232			1,410,215
Federal funds purchased and other short-term borrowings		27,393			29,123
Securities sold under agreements to repurchase and other long-term borrowings		127,843			127,880
Subordinated notes payable to unconsolidated trusts		48,970			48,970
Dividends payable		338			188
Other liabilities		23,838			23,124
Total liabilities		1,637,614			1,639,500
Shareholders’ Equity
Preferred stock, no par value, 1,000,000 shares authorized; 30,000 Series A shares issued and outstanding at March 31, 2014 and December 31, 2013; Liquidation preference of $30,000		30,000			29,988
Common stock, par value $.125 per share, 14,608,000 shares authorized; 7,481,171 and 7,478,706 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively		935			935
Capital surplus		51,158			51,102
Retained earnings		94,075			91,242
Accumulated other comprehensive income (loss)		497			(3,212	)
Total shareholders’ equity		176,665			170,055
Total liabilities and shareholders’ equity	$	1,814,279		$	1,809,555

See accompanying notes to unaudited condensed consolidated financial statements.

Unaudited Condensed Consolidated Statements of Income

	Three Months Ended March 31,
(In thousands, except per share data)	2014		2013
Interest Income
Interest and fees on loans	$	12,642	$	13,531
Interest on investment securities:
Taxable		3,080		2,562
Nontaxable		624		614
Interest on deposits in other banks		27		34
Interest on federal funds sold and securities purchased under agreements to resell		1		1
Total interest income		16,374		16,742
Interest Expense
Interest on deposits		1,203		1,663
Interest on federal funds purchased and other short-term borrowings		19		19
Interest on securities sold under agreements to repurchase and other long-term borrowings		1,264		1,267
Interest on subordinated notes payable to unconsolidated trusts		209		217
Total interest expense		2,695		3,166
Net interest income		13,679		13,576
Provision for loan losses		132		(632	)
Net interest income after provision for loan losses		13,547		14,208
Noninterest Income
Service charges and fees on deposits		1,916		1,960
Allotment processing fees		1,245		1,266
Other service charges, commissions, and fees		1,235		1,192
Trust income		545		484
Investment securities gains, net		9		-
Gains on sale of mortgage loans, net		97		339
Income from company-owned life insurance		246		240
Other		80		(70	)
Total noninterest income		5,373		5,411
Noninterest Expense
Salaries and employee benefits		7,351		7,324
Occupancy expenses, net		1,282		1,166
Equipment expenses		594		562
Data processing and communication expenses		1,005		1,098
Bank franchise tax		612		590
Amortization of intangibles		101		135
Deposit insurance expense		440		642
Other real estate expenses, net		1,064		892
Other		1,981		2,100
Total noninterest expense		14,430		14,509
Income before income taxes		4,490		5,110
Income tax expense		1,120		1,318
Net income		3,370		3,792
Less preferred stock dividends and discount accretion		537		485
Net income available to common shareholders	$	2,833	$	3,307
Per Common Share
Net income – basic and diluted	$	.38	$	.44
Cash dividends declared	N/A		N/A
Weighted Average Common Shares Outstanding
Basic and diluted		7,479		7,470

See accompanying notes to unaudited condensed consolidated financial statements.

Unaudited Condensed Consolidated Statements of Comprehensive Income

	Three Months Ended
	March 31,
(In thousands)	2014		2013
Net Income	$	3,370	$	3,792
Other comprehensive income (loss):
Unrealized holding gain (loss) on available for sale securities arising during the period on securities held at end of period, net of tax of $1,957 and $(503), respectively		3,635		(931	)

Reclassification adjustment for prior period unrealized loss previously reported in other comprehensive income recognized during current period, net of tax of $(27) and $-, respectively		51		-

Change in unfunded portion of postretirement benefit obligation, net of tax of $12 and $23, respectively		23		44
Other comprehensive income (loss)		3,709		(887	)
Comprehensive income	$	7,079	$	2,905

See accompanying notes to unaudited condensed consolidated financial statements.

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands, except per share data)												Accumulated
												Other			Total
Three months ended	Preferred		Common Stock				Capital		Retained			Comprehensive			Shareholders’
March 31, 2014 and 2013	Stock		Shares		Amount		Surplus		Earnings			(Loss) Income			Equity
Balance at January 1, 2014	$	29,988		7,479	$	935	$	51,102	$	91,242		$	(3,212	)	$	170,055
Net income		-		-		-		-		3,370			-			3,370
Other comprehensive income		-		-		-		-		-			3,709			3,709
Cash dividends declared – preferred, $17.50 per share		-		-		-		-		(525	)		-			(525	)
Preferred stock discount accretion		12		-		-		-		(12	)		-			-
Shares issued under director compensation plan		-		1		-		18		-			-			18
Shares issued pursuant to employee stock purchase plan		-		1		-		29		-			-			29
Expense related to employee stock purchase plan		-		-		-		9		-			-			9
Balance at March 31, 2014	$	30,000		7,481	$	935	$	51,158	$	94,075		$	497		$	176,665



Balance at January 1, 2013	$	29,537		7,470	$	934	$	50,934	$	79,747		$	6,869		$	168,021
Net income		-		-		-		-		3,792			-			3,792
Other comprehensive loss		-		-		-		-		-			(887	)		(887	)
Cash dividends declared – preferred, $12.50 per share		-		-		-		-		(375	)		-			(375	)
Preferred stock discount accretion		110		-		-		-		(110	)		-			-
Shares issued pursuant to employee stock purchase plan		-		3		-		31		-			-			31
Expense related to employee stock purchase plan		-		-		-		9		-			-			9
Balance at March 31, 2013	$	29,647		7,473	$	934	$	50,974	$	83,054		$	5,982		$	170,591

See accompanying notes to unaudited condensed consolidated financial statements.

Unaudited Condensed Consolidated Statements of Cash Flows

Three months ended March 31, (In thousands)	2014			2013
Cash Flows from Operating Activities
Net income	$	3,370		$	3,792
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,022			983
Net premium amortization of investment securities:
Available for sale		928			1,431
Held to maturity		3			-
Provision for loan losses		132			(632	)
Deferred income tax expense		1			1,242
Noncash employee stock purchase plan expense		9			9
Noncash director fee compensation		18			-
Mortgage loans originated for sale		(7,049	)		(18,032	)
Proceeds from sale of mortgage loans		10,293			16,608
Gain on sale of mortgage loans, net		(97	)		(339	)
Gain on disposal and write downs of premises and equipment, net		(5	)		-
Net loss on sale and write downs of other real estate		816			764
Net gain on sale of available for sale investment securities		(9	)		-
Increase in cash surrender value of company-owned life insurance		(232	)		(222	)
Decrease in accrued interest receivable		38			117
Decrease in other assets		1,225			542
Decrease in accrued interest payable		(96	)		(10	)
Increase (decrease) in other liabilities		846			(632	)
Net cash provided by operating activities		11,213			5,621
Cash Flows from Investing Activities
Proceeds from maturities and calls of available for sale investment securities		24,456			34,007
Proceeds from sale of available for sale investment securities		9,406			787
Purchase of investment securities:
Available for sale		(24,054	)		(31,994	)
Held to maturity		(3,065	)		-
Proceeds from sale of restricted stock investments, net		148			-
Principal collected (disbursed) on loans originated for investment, net		11,623			(11,690	)
Purchase of premises and equipment		(667	)		(1,013	)
Proceeds from sale of other real estate		741			2,914
Proceeds from disposals of premises and equipment		5			-
Net cash provided by (used in) investing activities		18,593			(6,989	)
Cash Flows from Financing Activities
Net decrease in deposits		(983	)		(16,001	)
Net (decrease) increase in federal funds purchased and other short-term borrowings		(1,730	)		1,622
Proceeds from securities sold under agreements to repurchase and other long-term borrowings		3			-
Repayments of securities sold under agreements to repurchase and other long-term borrowings		(40	)		(2,038	)
Dividends paid, preferred		(375	)		(375	)
Shares issued under employee stock purchase plan		29			31
Net cash used in financing activities		(3,096	)		(16,761	)
Net increase (decrease) in cash and cash equivalents		26,710			(18,129	)
Cash and cash equivalents at beginning of year		68,253			95,855
Cash and cash equivalents at end of period	$	94,963		$	77,726
Supplemental Disclosures
Cash paid during the period for interest	$	2,791		$	3,176
Transfers from loans to other real estate		335			1,374
Sale and financing of other real estate		1,160			1,153
Cash dividends payable, preferred		338			188

See accompanying notes to unaudited condensed consolidated financial statements.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Basis of Presentation and Nature of Operations

The condensed consolidated financial statements include the accounts of Farmers Capital Bank Corporation (the “Company” or “Parent Company”), a bank holding company, and its bank and nonbank subsidiaries. Bank subsidiaries include Farmers Bank & Capital Trust Company (“Farmers Bank”) in Frankfort, KY, United Bank & Trust Company (“United Bank”) in Versailles, KY, First Citizens Bank (“First Citizens”) in Elizabethtown, KY, and Citizens Bank of Northern Kentucky, Inc. (“Citizens Northern”) in Newport, KY.

Farmers Bank’s significant subsidiaries include EG Properties, Inc., Leasing One Corporation (“Leasing One”), and Farmers Capital Insurance Corporation (“Farmers Insurance”). EG Properties, Inc. is involved in real estate management and liquidation for certain repossessed properties of Farmers Bank. Leasing One is a commercial leasing company in Frankfort, KY, and Farmers Insurance is an insurance agency in Frankfort, KY. United Bank has one wholly-owned subsidiary, EGT Properties, Inc. EGT Properties, Inc. is involved in real estate management and liquidation for certain repossessed properties of United Bank. First Citizens has one wholly-owned subsidiary, HBJ Properties, LLC. HBJ Properties, LLC is involved in real estate management and liquidation for certain repossessed properties of First Citizens. Citizens Northern has one wholly-owned subsidiary, ENKY Properties, Inc. ENKY Properties, Inc. is involved in real estate management and liquidation for certain repossessed properties of Citizens Northern.

The Company has three active nonbank subsidiaries, FCB Services, Inc. (“FCB Services”), FFKT Insurance Services, Inc. (“FFKT Insurance”), and EKT Properties, Inc. (“EKT”). FCB Services is a data processing subsidiary located in Frankfort, KY that provides services to the Company’s banks as well as unaffiliated entities. FFKT Insurance is a captive property and casualty insurance company insuring primarily deductible exposures and uncovered liability related to properties of the Company. EKT was formed to manage and liquidate certain real estate properties repossessed by the Company. The Company has three subsidiaries organized as Delaware statutory trusts that are not consolidated into its financial statements. These trusts were formed for the purpose of issuing trust preferred securities. All significant intercompany transactions and balances are eliminated in consolidation.

The Company provides financial services at its 36 locations in 23 communities throughout Central and Northern 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 consumer 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. 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 (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at 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 condensed financial statements are based on various factors including the current interest rate environment and the general strength of the local and state 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 condensed financial statements. The allowance for loan losses, carrying value of other real estate owned, actuarial assumptions used to calculate postretirement benefits, and the fair values of financial instruments are estimates that are particularly subject to change.

The consolidated balance sheet as of December 31, 2013 has been derived from the audited financial statements of the Company as of that date. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2013 included in the Company’s annual report on Form 10-K. The accompanying condensed 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 U.S. GAAP for complete statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such condensed 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. All significant intercompany transactions and balances are eliminated in consolidation.

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, 2013.

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. Accumulated Other Comprehensive Income

The following table presents changes in accumulated other comprehensive income by component, net of tax, for the periods indicated.

	Three Months Ended March 31, 2014									Three Months Ended March 31, 2013
(In thousands)	Unrealized Gains and Losses on Available for Sale Investment Securities			Postretirement Benefit Obligation			Total			Unrealized Gains and Losses on Available for Sale Investment Securities			Postretirement Benefit Obligation			Total
Beginning balances	$	(3,623	)	$	411		$	(3,212	)	$	9,411		$	(2,542	)	$	6,869
Other comprehensive income (loss) before reclassifications		3,635			35			3,670			(931	)		-			(931	)
Amounts reclassified from accumulated other comprehensive income		51			(12	)		39			-			44			44
Net current-period other comprehensive income (loss)		3,686			23			3,709			(931	)		44			(887	)
Ending balance	$	63		$	434		$	497		$	8,480		$	(2,498	)	$	5,982

The following table presents amounts reclassified out of accumulated other comprehensive income by component for the periods indicated. Line items in the statement of income affected by the reclassification are also presented.

	Amount Reclassified from Accumulated Other Comprehensive Income
(In thousands)	Three Months Ended March 31, 2014			Three Months Ended March 31, 2013			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available for sale investment securities	$	(78	)	$	-		Investment securities gains, net
		27			-		Income tax expense
	$	(51	)	$	-		Net of tax

Amortization related to postretirement benefits
Prior service costs	$	(52	)	$	(64	)	Salaries and employee benefits
Actuarial gains (losses)		17			(3	)	Salaries and employee benefits
		(35	)	$	(67	)	Total before tax
		12			23		Income tax benefit
	$	(23	)	$	(44	)	Net of tax

Total reclassifications for the period	$	(74	)	$	(44	)	Net of tax

4. Accounting Policy

Loans and Interest Income

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their unpaid principal amount outstanding adjusted for any charge-offs and deferred fees or costs on originated loans. Interest income on loans is recognized using the interest method based on loan principal amounts outstanding during the period. Interest income also includes amortization and accretion of any premiums or discounts over the expected life of acquired loans at the time of purchase or business acquisition. Loan origination fees, net of certain direct origination costs, are deferred and amortized as yield adjustments over the contractual term of the loans.

The Company disaggregates certain disclosure information related to loans, the related allowance for loan losses, and credit quality measures by either portfolio segment or by loan class. The Company segregates its loan portfolio segments based on similar risk characteristics as follows: real estate loans, commercial loans, and consumer loans. Portfolio segments are further disaggregated into classes for certain required disclosures as follows:

Portfolio Segment	Class

Real estate loans	Real estate mortgage - construction and land development Real estate mortgage - residential Real estate mortgage - farmland and other commercial enterprises
Commercial loans	Commercial and industrial Depository institutions Agriculture production and other loans to farmers States and political subdivisions Leases Other
Consumer loans	Secured Unsecured

The Company has a loan policy in place that is amended and approved from time to time as needed to reflect current economic conditions and product offerings in its markets. The policy establishes written procedures concerning areas such as the lending authorities of loan officers, committee review and approval of certain credit requests, underwriting criteria, policy exceptions, appraisal requirements, and loan review. Credit is extended to borrowers based primarily on their ability to repay as demonstrated by income and cash flow analysis.

Loans secured by real estate make up the largest segment of the Company’s loan portfolio. If a borrower fails to repay a loan secured by real estate, the Company may liquidate the collateral in order to satisfy the amount owed. Determining the value of real estate is a key component to the lending process for real estate backed loans. If the fair value of real estate (less estimated cost to sell) securing a collateral dependent loan declines below the outstanding loan amount, the Company will write down the carrying value of the loan and thereby incur a loss. The Company uses independent third party state certified or licensed appraisers in accordance with its loan policy to mitigate risk when underwriting real estate loans. Cash flow analysis of the borrower, loan to value limits as adopted by loan policy, and other customary underwriting standards are also in place which are designed to maximize credit quality and mitigate risks associated with real estate lending.

Commercial loans are made to businesses and are secured mainly by assets such as inventory, accounts receivable, machinery, fixtures and equipment, or other business assets. Commercial lending involves significant risk, as loan repayments are more dependent on the successful operation or management of the business and its cash flows. Consumer lending includes loans to individuals mainly for personal autos, boats, or a variety of other personal uses and may be secured or unsecured. Loan repayment associated with consumer loans is highly dependent upon the borrower’s continuing financial stability, which is heavily influenced by local unemployment rates. The Company mitigates its risk exposure to each of its loan segments by analyzing the borrower’s repayment capacity, imposing restrictions on the amount it will loan compared to estimated collateral values, limiting the payback periods, and following other customary underwriting practices as adopted in its loan policy.

The accrual of interest on loans is discontinued when it is determined that the collection of interest or principal is doubtful, or when a default of interest or principal has existed for 90 days or more, unless such loan is well secured and in the process of collection. Past due status is based on the contractual terms of the loan. Interest accrued but not received for a loan placed on nonaccrual status is reversed against interest income. Cash payments received on nonaccrual loans generally are applied to principal until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Company’s policy for placing a loan on nonaccrual status or subsequently returning a loan to accrual status does not differ based on its portfolio class or segment.

Commercial and real estate loans delinquent in excess of 120 days and consumer loans delinquent in excess of 180 days are charged off, unless the collateral securing the debt is of such value that any loss appears to be unlikely. In all cases, loans are charged off at an earlier date if classified as loss under its loan grading process or as a result of regulatory examination. The Company’s charge-off policy for impaired loans does not differ from the charge-off policy for loans outside the definition of impaired.

Provision and Allowance for Loan Losses

The provision for loan losses represents charges or credits made to earnings to maintain an allowance for loan losses at a level considered adequate to provide for probable incurred credit losses at the balance sheet date. The allowance for loan losses is a valuation allowance increased by the provision for loan losses and decreased by net charge-offs. Loan losses are charged against the allowance when management believes the uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Company estimates the adequacy of the allowance using a risk-rated methodology which is based on the Company’s past loan loss experience, known and inherent risks in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral securing loans, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires significant judgment and the use of estimates that may be susceptible to change.

The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current risk factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Actual loan losses could differ significantly from the amounts estimated by management.

The Company’s risk-rated methodology includes segregating non-impaired watch list and past due loans from the general portfolio and allocating a loss percentage to these loans depending on their status. For example, watch list loans, which may be identified by the internal loan review risk-rating process or by regulatory examiner classification, are assigned a certain loss percentage while loans past due 30 days or more are assigned a different loss percentage. Each of these percentages considers past experience as well as current factors. The remainder of the general loan portfolio is segregated into portfolio segments having similar risk characteristics identified as follows: real estate loans, commercial loans, and consumer loans. Each of these portfolio segments is assigned a loss percentage based on their respective sixteen quarter rolling historical loss rates, adjusted for qualitative risk factors.

The qualitative risk factors used in the methodology are consistent with the guidance in the most recent Interagency Policy Statement on the Allowance for Loan Losses issued. Each factor is supported by a detailed analysis performed at each subsidiary bank and is both measureable and supportable. Some factors include a minimum allocation in some instances where loss levels are extremely low and it is determined to be prudent from a safety and soundness perspective. Qualitative risk factors that are used in the methodology include the following for each loan portfolio segment:

●

Delinquency trends

●

Trends in net charge-offs

●

Trends in loan volume

●

Lending philosophy risk

●

Management experience risk

●

Concentration of credit risk

●

Economic conditions risk

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

The Company accounts for impaired loans in accordance with Accounting Standards Codification (“ASC”) Topic 310, “Receivables.” ASC Topic 310 requires that impaired loans be measured at the present value of expected future cash flows, discounted at the loan’s effective interest rate, at the loan’s observable market price, or at the fair value of the collateral if the loan is collateral dependent. Impaired loans may also be classified as nonaccrual. In many circumstances, however, the Company continues to accrue interest on an impaired loan. Cash receipts on accruing impaired loans are applied to the recorded investment in the loan, including any accrued interest receivable. Cash payments received on nonaccrual impaired loans generally are applied to principal until qualifying for return to accrual status. Loans that are part of a large group of smaller-balance homogeneous loans, such as residential mortgage, consumer, and smaller-balance commercial loans, are collectively evaluated for impairment. Troubled debt restructurings are measured at the present value of estimated future cash flows using the loan’s effective interest rate at inception, or at the fair value of collateral. The Company determines the amount of reserve for troubled debt restructurings that subsequently default in accordance with its accounting policy for the allowance for loan losses.

5. Net Income Per Common Share

Basic net income per common share is determined by dividing net income available to common shareholders by the weighted average total number of common shares issued and outstanding. Net income available to common shareholders represents net income adjusted for preferred stock dividends including dividends declared, accretion of discounts on preferred stock issuances, and cumulative dividends related to the current dividend period that have not been declared as of the end of the period.

Diluted net income per common share is determined by dividing net income available to common shareholders by the total weighted average number of common shares issued and outstanding plus amounts representing the dilutive effect of stock options outstanding. The effects of stock options outstanding are excluded from the computation of diluted earnings per common share in periods in which the effect would be antidilutive. Dilutive potential common shares are calculated using the treasury stock method.

Net income per common share computations were as follows for the periods indicated.

	Three Months Ended March 31,
(In thousands, except per share data)	2014		2013

Net income, basic and diluted	$	3,370	$	3,792
Less preferred stock dividends and discount accretion		537		485
Net income available to common shareholders, basic and diluted	$	2,833	$	3,307


Average common shares issued and outstanding, basic and diluted		7,479		7,470

Net income per common share, basic and diluted	$	.38	$	.44

Stock options for 20,049 and 22,049 shares of common stock were not included in the determination of diluted net income per common share for the three months ended March 31, 2014 and 2013, respectively, because they were antidilutive.

6. Investment Securities

The following tables summarize the amortized costs and estimated fair value of the securities portfolio at March 31, 2014 and December 31, 2013. The summary is divided into available for sale and held to maturity investment securities.

March 31, 2014 (In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available For Sale
Obligations of U.S. government-sponsored entities	$	93,723	$	162	$	2,301	$	91,584
Obligations of states and political subdivisions		127,048		2,485		1,291		128,242
Mortgage-backed securities – residential		376,779		5,709		4,006		378,482
Mortgage-backed securities – commercial		745		-		48		697
Corporate debt securities		7,120		45		673		6,492
Mutual funds and equity securities		2,252		27		12		2,267
Total securities – available for sale	$	607,667	$	8,428	$	8,331	$	607,764
Held To Maturity
Obligations of states and political subdivisions	$	3,827	$	102	$	-	$	3,929

December 31, 2013 (In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available For Sale
Obligations of U.S. government-sponsored entities	$	96,750	$	155	$	3,155	$	93,750
Obligations of states and political subdivisions		132,311		2,056		2,397		131,970
Mortgage-backed securities – residential		379,238		5,071		6,232		378,077
Mortgage-backed securities – commercial		748		-		59		689
Corporate debt securities		7,266		40		1,049		6,257
Mutual funds and equity securities		2,082		15		20		2,077
Total securities – available for sale	$	618,395	$	7,337	$	12,912	$	612,820
Held To Maturity
Obligations of states and political subdivisions	$	765	$	62	$	-	$	827

The amortized cost and estimated fair value of the debt securities portfolio at March 31, 2014, by contractual maturity, are detailed below. The summary is divided into available for sale and held to maturity securities. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mutual funds and equity securities in the available for sale portfolio consist of investments attributed to the Company’s captive insurance subsidiary. These securities have no stated maturity and are not included in the maturity schedule that follows.

Mortgage-backed securities are stated separately due to the nature of payment and prepayment characteristics of these securities, as principal is not due at a single date.

	Available For Sale				Held To Maturity
	Amortized		Estimated		Amortized		Estimated
March 31, 2014 (In thousands)	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	3,656	$	3,666	$	-	$	-
Due after one year through five years		116,771		116,898		-		-
Due after five years through ten years		89,372		88,384		765		850
Due after ten years		18,092		17,370		3,062		3,079
Mortgage-backed securities		377,524		379,179		-		-
Total	$	605,415	$	605,497	$	3,827	$	3,929

Gross realized gains and losses on the sale of available for sale investment securities were as follows:

	Three Months Ended
	March 31,
(In thousands)	2014		2013

Gross realized gains	$	159	$	-
Gross realized losses		150		-
Net realized gains	$	9	$	-

Investment securities with unrealized losses at March 31, 2014 and December 31, 2013 not recognized in income are presented in the tables below. The tables segregate investment securities that have been in a continuous unrealized loss position for less than twelve months from those that have been in a continuous unrealized loss position for twelve months or more. The tables also include the fair value of the related securities.

	Less than 12 Months				12 Months or More				Total
March 31, 2014 (In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored entities	$	61,969	$	1,645	$	13,896	$	656	$	75,865	$	2,301
Obligations of states and political subdivisions		38,839		825		14,121		466		52,960		1,291
Mortgage-backed securities – residential		147,828		3,027		15,985		979		163,813		4,006
Mortgage-backed securities – commercial		697		48		-		-		697		48
Corporate debt securities		335		3		5,200		670		5,535		673
Mutual funds and equity securities		621		9		22		3		643		12
Total	$	250,289	$	5,557	$	49,224	$	2,774	$	299,513	$	8,331

	Less than 12 Months				12 Months or More				Total
December 31, 2013 (In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored entities	$	65,094	$	2,434	$	11,830	$	721	$	76,924	$	3,155
Obligations of states and political subdivisions		48,715		1,594		15,095		803		63,810		2,397
Mortgage-backed securities – residential		219,032		5,199		16,306		1,033		235,338		6,232
Mortgage-backed securities – commercial		689		59		-		-		689		59
Corporate debt securities		80		-		4,816		1,049		4,896		1,049
Mutual funds and equity securities		716		17		22		3		738		20
Total	$	334,326	$	9,303	$	48,069	$	3,609	$	382,395	$	12,912

Unrealized losses included in the tables above have not been recognized in income since they have been identified as temporary. The Company evaluates investment securities for other-than-temporary impairment (“OTTI”) at least quarterly, and more frequently when economic or market conditions warrant. Many factors are considered, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was effected by macroeconomic conditions, and (4) whether the Company has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. The assessment of whether an OTTI charge exists involves a high degree of subjectivity and judgment and is based on the information available to the Company at a point in time.

At March 31, 2014, the Company’s investment securities portfolio had gross unrealized losses of $8.3 million, a decrease of $4.6 million or 35.5% compared with $12.9 million at year-end 2013. Gross unrealized losses include $2.8 million which have been in a continuous loss position of 12 months or more.

Corporate debt securities in the Company’s investment securities portfolio at March 31, 2014 include single-issuer trust preferred capital securities with an unrealized loss of $670 thousand and a carrying value of $5.2 million. These securities were issued by a national and global financial services firm and purchased by the Company during 2007. The securities are currently performing and continue to be rated as investment grade by major rating agencies. The issuer of the securities announced in the first quarter of 2014 an increase in per share common dividend payments and authorization of a common equity repurchase plan. The Company does not intend to sell these securities nor does the Company believe it is likely that it will be required to sell these securities prior to their anticipated recovery. The Company believes these securities are not impaired due to reasons of credit quality or other factors, but rather the unrealized loss is primarily attributed to continuing uncertainties in both international and domestic economies and market volatility. The Company believes that it will collect all amounts due according to the contractual terms of these securities and that the fair values of these securities will continue to recover as they approach their maturity dates.

The Company attributes the unrealized losses in other sectors of its investment securities portfolio to changes in market interest rates and volatility. Investment securities with unrealized losses at March 31, 2014 are performing according to their contractual terms, and the Company does not expect to incur a loss on these securities unless they are sold prior to maturity. The Company does not have the intent to sell these securities nor does it believe it is likely that it will be required to sell these securities prior to their anticipated recovery. The Company does not consider any of the securities to be impaired due to reasons of credit quality or other factors.

7. Loans and Allowance for Loan Losses

Major classifications of loans outstanding are summarized as follows:

(In thousands)	March 31, 2014		December 31, 2013

Real Estate:
Real estate mortgage - construction and land development	$	98,220	$	101,352
Real estate mortgage - residential		366,622		371,582
Real estate mortgage - farmland and other commercial enterprises		414,430		418,147
Commercial:
Commercial and industrial		47,899		47,426
States and political subdivisions		20,857		21,561
Lease financing		578		902
Other		21,266		23,840
Consumer:
Secured		8,019		8,579
Unsecured		6,036		6,513
Total loans		983,927		999,902
Less unearned income		8		19
Total loans, net of unearned income	$	983,919	$	999,883

Activity in the allowance for loan losses by portfolio segment was as follows for the periods indicated.

Three months ended March 31, 2014 (In thousands)	Real Estate			Commercial			Consumer			Total

Balance, beginning of period	$	18,716		$	1,409		$	452		$	20,577
Provision for loan losses		(756	)		925			(37	)		132
Recoveries		168			27			35			230
Loans charged off		(1,014	)		(1,160	)		(75	)		(2,249	)
Balance, end of period	$	17,114		$	1,201		$	375		$	18,690

Three months ended March 31, 2013 (In thousands)	Real Estate			Commercial			Consumer			Total

Balance, beginning of period	$	22,254		$	1,513		$	678		$	24,445
Provision for loan losses		(652	)		(7	)		27			(632	)
Recoveries		136			83			36			255
Loans charged off		(336	)		(31	)		(138	)		(505	)
Balance, end of period	$	21,402		$	1,558		$	603		$	23,563

The following tables present individually impaired loans by class of loans for the dates indicated.

March 31, 2014 (In thousands)	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Allowance for Loan Losses Allocated
Real Estate
Real estate mortgage - construction and land development	$	16,753	$	9,354	$	4,612	$	13,966	$	929
Real estate mortgage - residential		11,590		3,729		7,747		11,476		1,456
Real estate mortgage - farmland and other commercial enterprises		33,534		13,587		19,096		32,683		1,362
Commercial
Commercial and industrial		246		24		224		248		200
Consumer
Secured		18		-		18		18		15
Unsecured		69		-		69		69		69
Total	$	62,210	$	26,694	$	31,766	$	58,460	$	4,031

December 31, 2013 (In thousands)	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Allowance for Loan Losses Allocated
Real Estate
Real estate mortgage- construction and land development	$	17,234	$	9,742	$	4,699	$	14,441	$	930
Real estate mortgage - residential		11,595		2,871		8,612		11,483		1,443
Real estate mortgage - farmland and other commercial enterprises		32,102		12,262		19,746		32,008		1,443
Commercial
Commercial and industrial		311		24		293		317		200
Consumer
Secured		18		-		18		18		15
Unsecured		71		-		72		72		71
Total	$	61,331	$	24,899	$	33,440	$	58,339	$	4,102

Three Months Ended March 31, 2014 (In thousands)	Average		Interest Income Recognized		Cash Basis Interest Recognized
Real Estate
Real estate mortgage - construction and land development	$	15,623	$	113	$	111
Real estate mortgage - residential		11,713		115		109
Real estate mortgage - farmland and other commercial enterprises		34,193		386		376
Commercial
Commercial and industrial		249		1		-
Consumer
Secured		18		-		-
Unsecured		70		4		3
Total	$	61,866	$	619	$	599

Three Months Ended March 31, 2013 (In thousands)	Average		Interest Income Recognized		Cash Basis Interest Recognized
Real Estate
Real estate mortgage - construction and land development	$	25,945	$	353	$	342
Real estate mortgage - residential		8,288		85		80
Real estate mortgage - farmland and other commercial enterprises		31,191		248		242
Commercial
Commercial and industrial		704		4		4
Consumer
Secured		21		-		-
Unsecured		213		3		2
Total	$	66,362	$	693	$	670

The following tables present the balance of the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of March 31, 2014 and December 31, 2013.

March 31, 2014 (In thousands)	Real Estate		Commercial		Consumer		Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	3,747	$	200	$	84	$	4,031
Collectively evaluated for impairment		13,367		1,001		291		14,659
Total ending allowance balance	$	17,114	$	1,201	$	375	$	18,690

Loans
Loans individually evaluated for impairment	$	58,125	$	248	$	87	$	58,460
Loans collectively evaluated for impairment		821,147		90,344		13,968		925,459
Total ending loan balance, net of unearned income	$	879,272	$	90,592	$	14,055	$	983,919

December 31, 2013 (In thousands)	Real Estate		Commercial		Consumer		Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	3,816	$	200	$	86	$	4,102
Collectively evaluated for impairment		14,900		1,209		366		16,475
Total ending allowance balance	$	18,716	$	1,409	$	452	$	20,577

Loans
Loans individually evaluated for impairment	$	57,932	$	317	$	90	$	58,339
Loans collectively evaluated for impairment		833,149		93,393		15,002		941,544
Total ending loan balance, net of unearned income	$	891,081	$	93,710	$	15,092	$	999,883

The following tables present the recorded investment in nonperforming loans by class of loans as of March 31, 2014 and December 31, 2013.

March 31, 2014 (In thousands)	Nonaccrual		Restructured Loans		Loans Past Due 90 Days or More and Still Accruing
Real Estate:
Real estate mortgage - construction and land development	$	5,498	$	4,219	$	-
Real estate mortgage - residential		5,156		4,790		-
Real estate mortgage - farmland and other commercial enterprises		13,762		16,885		434
Commercial:
Commercial and industrial		220		-		-
Lease financing		70		-		-
Other		12		-		-
Consumer:
Secured		2		-		-
Unsecured		-		50		-
Total	$	24,720	$	25,944	$	434

December 31, 2013 (In thousands)	Nonaccrual		Restructured Loans		Loans Past Due 90 Days or More and Still Accruing
Real Estate:
Real estate mortgage - construction and land development	$	5,821	$	4,391	$	-
Real estate mortgage - residential		5,154		4,826		10
Real estate mortgage - farmland and other commercial enterprises		12,677		16,987		434
Commercial:
Commercial and industrial		160		-		-
Lease financing		22		-		-
Consumer:
Secured		3		-		-
Unsecured		1		51		-
Total	$	23,838	$	26,255	$	444

The Company has allocated $2.6 million and $2.7 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings and that are in compliance with those terms as of March 31, 2014 and December 31, 2013, respectively. The Company had no commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings at March 31, 2014 and December 31, 2013.

During the three months ended March 31, 2014, the Company had no credits that were modified as troubled debt restructurings. During the three months ended March 31, 2013, the Company had two credits that were modified as troubled debt restructurings. Each of these two credits is secured by residential real estate whereby the borrowers’ debt was discharged under Chapter 7 bankruptcy. The borrower in each case did not reaffirm their debt, and the release of personal liability by the court was deemed a concession. However, each borrower continues to make payments under the original terms of the loan agreement.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended March 31, 2013. There were no loans modified as troubled debt restructurings during the three months ended March 31, 2014.

(Dollars in thousands) Troubled Debt Restructurings:	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Three Months Ended March 31, 2013
Real Estate:
Real estate mortgage - residential		2	$	291	$	291
Total		2	$	291	$	291

The troubled debt restructurings identified in the table above increased the allowance for loan losses by $8 thousand for the three months ended March 31, 2013. There were no charge-offs related to loans restructured in the first three months of 2014 and 2013. There were no payment defaults during the first three months of 2014 or 2013 for credits that were restructured during the previous twelve months.

The tables below present an age analysis of past due loans 30 days or more by class of loans as of the dates indicated. Past due loans that are also classified as nonaccrual are included in their respective past due category.

March 31, 2014 (In thousands)	30-89 Days Past Due		90 Days or More Past Due		Total		Current		Total Loans
Real Estate:
Real estate mortgage - construction and land development	$	-	$	588	$	588	$	97,632	$	98,220
Real estate mortgage - residential		1,972		2,390		4,362		362,260		366,622
Real estate mortgage - farmland and other commercial enterprises		690		11,225		11,915		402,515		414,430
Commercial:
Commercial and industrial		54		196		250		47,649		47,899
States and political subdivisions		-		-		-		20,857		20,857
Lease financing, net		8		70		78		492		570
Other		17		-		17		21,249		21,266
Consumer:
Secured		12		2		14		8,005		8,019
Unsecured		52		-		52		5,984		6,036
Total	$	2,805	$	14,471	$	17,276	$	966,643	$	983,919

December 31, 2013 (In thousands)	30-89 Days Past Due		90 Days or More Past Due		Total		Current		Total Loans
Real Estate:
Real estate mortgage - construction and land development	$	58	$	613	$	671	$	100,681	$	101,352
Real estate mortgage - residential		1,225		2,502		3,727		367,855		371,582
Real estate mortgage - farmland and other commercial enterprises		3,548		7,978		11,526		406,621		418,147
Commercial:
Commercial and industrial		71		53		124		47,302		47,426
States and political subdivisions		-		-		-		21,561		21,561
Lease financing, net		-		22		22		861		883
Other		56		-		56		23,784		23,840
Consumer:
Secured		41		3		44		8,535		8,579
Unsecured		58		1		59		6,454		6,513
Total	$	5,057	$	11,172	$	16,229	$	983,654	$	999,883

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends and conditions. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes large-balance loans and non-homogeneous loans, such as commercial real estate and certain residential real estate loans. Loan rating grades, as described further below, are assigned based on a continuous process. The amount and adequacy of the allowance for loan loss is determined on a quarterly basis. The Company uses the following definitions for its risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the borrower’s repayment ability, weaken the collateral or inadequately protect the Company’s credit position at some future date. These credits pose elevated risk, but their weaknesses do not yet justify a substandard classification.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent of those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above which are analyzed individually as part of the above described process are considered to be pass rated loans, which are considered to have a low risk of loss. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows for the dates indicated. Each of the following tables excludes immaterial amounts attributed to accrued interest receivable.

Real Estate							Commercial
March 31, 2014 (In thousands)	Real Estate Mortgage -Construction and Land Development		Real Estate Mortgage-Residential		Real Estate Mortgage-Farmland and Other Commercial Enterprises		Commercial and Industrial		States and Political Subdivisions		Lease Financing		Other
Credit risk profile by internally assigned rating grades:
Pass	$	76,055	$	328,058	$	349,845	$	46,296	$	20,857	$	500	$	21,188
Special Mention		6,874		15,926		26,549		805		-		-		59
Substandard		15,291		22,638		37,550		798		-		70		19
Doubtful		-		-		486		-		-		-		-
Total	$	98,220	$	366,622	$	414,430	$	47,899	$	20,857	$	570	$	21,266

Real Estate							Commercial
December 31, 2013 (In thousands)	Real Estate Mortgage -Construction and Land Development		Real Estate Mortgage-Residential		Real Estate Mortgage-Farmland and Other Commercial Enterprises		Commercial and Industrial		States and Political Subdivisions		Lease Financing		Other
Credit risk profile by internally assigned rating grades:
Pass	$	77,873	$	334,104	$	352,238	$	45,652	$	21,561	$	861	$	23,820
Special Mention		7,755		15,120		29,156		963		-		-		-
Substandard		15,724		22,358		36,753		735		-		22		20
Doubtful		-		-		-		76		-		-		-
Total	$	101,352	$	371,582	$	418,147	$	47,426	$	21,561	$	883	$	23,840

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the consumer loans outstanding based on payment activity as of March 31, 2014 and December 31, 2013.

	March 31, 2014				December 31, 2013
	Consumer				Consumer
(In thousands)	Secured		Unsecured		Secured		Unsecured
Credit risk profile based on payment activity:
Performing	$	8,017	$	5,986	$	8,576	$	6,461
Nonperforming		2		50		3		52
Total	$	8,019	$	6,036	$	8,579	$	6,513

8. Other Real Estate Owned

Other real estate owned (“OREO”) was as follows as of the date indicated:

(In thousands)	March 31, 2014		December 31, 2013
Construction and land development	$	21,548	$	23,504
Residential real estate		2,730		2,695
Farmland and other commercial enterprises		11,166		11,627
Total	$	35,444	$	37,826

OREO activity for the three months ended March 31, 2014 and 2013 was as follows:

Three months ended March 31, (In thousands)	2014			2013
Beginning balance	$	37,826		$	52,562
Transfers from loans		335			1,374
Proceeds from sales		(1,901	)		(4,067	)
Gain on sales, net		90			269
Write downs and other decreases, net		(906	)		(1,008	)
Ending balance	$	35,444		$	49,130

9. Postretirement Medical Benefits

Prior to 2003, the Company provided lifetime medical and dental benefits upon retirement for certain employees meeting the eligibility requirements as of December 31, 1989 (Plan 1). During 2003, the Company implemented an additional postretirement health insurance program (Plan 2). Under Plan 2, any employee meeting the service requirement of 20 years of full time service to the Company and is at least age 55 years of age upon retirement is eligible to continue their health insurance coverage. Under both plans, retirees not yet eligible for Medicare have coverage identical to the coverage offered to active employees. Under both plans, Medicare-eligible retirees are provided with a Medicare Advantage plan. The Company pays 100% of the cost of Plan 1. The Company and the retirees each pay 50% of the cost under Plan 2. Both plans are unfunded.

The following disclosures of the net periodic benefit cost components of Plan 1 and Plan 2 were measured at January 1, 2014 and 2013.

Three months ended March 31, (In thousands)	2014			2013
Service cost	$	121		$	157
Interest cost		142			138
Recognized prior service cost		52			64
Recognized net actuarial gain		(16	)		-
Net periodic benefit cost	$	299		$	359

The Company expects benefit payments of $340 thousand for 2014, of which $66 thousand have been made during the first three months of 2014.

10. Regulatory Matters

The Company and its subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements will initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the banks must meet specific capital guidelines that involve quantitative measures of the banks’ assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and its subsidiary banks’ capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The regulatory ratios of the consolidated Company and its subsidiary banks were as follows for the dates indicated.

	March 31, 2014									December 31, 2013
	Tier 1 Risk-based Capital¹			Total Risk-based Capital¹			Tier 1 Leverage²			Tier 1 Risk-based Capital¹			Total Risk-based Capital¹			Tier 1 Leverage²
Consolidated		19.43	%		20.68	%		12.10	%		18.95	%		20.21	%		11.90	%
Farmers Bank		18.08			19.33			9.81			17.56			18.82			9.60
United Bank		15.33			16.60			9.84			15.06			16.33			9.67
First Citizens		13.84			14.53			9.60			12.92			13.67			9.03
Citizens Northern		13.66			14.91			9.56			13.57			14.82			9.67

¹Tier 1 Risk-based and Total Risk-based Capital ratios are computed by dividing a bank’s Tier 1 or Total Capital, as defined by regulation, by a risk-weighted sum of the bank’s assets, with the risk weighting determined by general standards established by regulation. The safest assets (e.g., government obligations) are assigned a weighting of 0% with riskier assets receiving higher ratings (e.g., ordinary commercial loans are assigned a weighting of 100%).

²Tier 1 Leverage ratio is computed by dividing a bank’s Tier 1 Capital by its total quarterly average assets, as defined by regulation.

Summary of Regulatory Agreements

Below is a summary of the regulatory agreements that two of the Company’s subsidiary banks have entered into with their primary banking regulators. The agreement entered into during 2009 between the Parent Company and its primary regulators was terminated in March 2014 as a result of continued satisfactory compliance, most notably from the progress made in lowering nonperforming assets and increasing capital levels. Therefore, the Company is no longer required to receive permission from its banking regulators to make interest payments on its trust preferred securities or to pay dividends on its common and preferred stock. However, the Company has no intention of declaring or paying any dividend on its common stock prior to redeeming all of its outstanding preferred stock. The Company announced during the first quarter of 2014 that it would redeem 10,000 shares, or one-third, of its outstanding preferred stock on May 15, 2014. Further redemptions, which require regulatory approval, will be based on satisfactory financial performance and take into account the Company’s capital position, earnings, asset quality, and other factors. The timing and amount of any further redemption by the Company of its remaining outstanding preferred stock will be disclosed when assured.

United Bank

In November of 2009, the Federal Deposit Insurance Corporation (“FDIC”) and the Kentucky Department of Financial Institutions (“KDFI”) entered into a Cease and Desist Order (“C&D”) with United Bank primarily as a result of its level of nonperforming assets. The C&D was terminated in December 2011 coincident with the issuance of a Consent Order (“Consent Order”) entered into between the parties. The Consent Order is substantially the same as the C&D, with the primary exception being that United Bank must achieve and maintain a Tier 1 Leverage ratio of 9.0% and a Total Risk-based Capital ratio of 13.0%.

During January 2014, the Company received written notification from the FDIC and KDFI that the formal Consent Order entered into during 2011 with United Bank had been terminated and replaced with a stepped-down enforcement action in the form of an informal Memorandum of Understanding (“Memorandum”). The informal Memorandum includes many of the same provisions covered by the Consent Order.

Other components in the regulatory order include oversight and reporting obligations to its regulators in terms of complying with the Memorandum. It also includes requirements in the level of reporting by management to its board of directors of its financial results, budgeting, and liquidity analysis, as well as restricting the bank from extending additional credit to borrowers with credits classified as substandard, doubtful or special mention in the report of examination. There is also a requirement to obtain written consent prior to declaring or paying a dividend and to develop a written contingency plan if the bank is unable to meet the capital levels established in the Memorandum.

Citizens Northern

The KDFI and the FDIC entered into a Memorandum with Citizens Northern on September 8, 2010. The Memorandum was terminated July 7, 2013 upon the issuance of an updated Memorandum. The updated Memorandum contains many of the same provisions included in the terminated Memorandum, with a new requirement that Citizens Northern maintain a Tier 1 leverage ratio at or above 9.0%. In addition, the updated Memorandum requires having and retaining qualified management in the areas of loan administration and collection. It also requires Citizens Northern to address credit underwriting and administration weaknesses identified in the most recent examination of the bank by the KDFI and FDIC.

Other parts of the regulatory order include the development and documentation of plans for reducing problem loans, providing progress reports on compliance with the Memorandum, and for the development and implementation of a written profit plan and strategic plans. It also restricts the bank from extending additional credit to borrowers with credits classified as substandard, doubtful or special mention in the report of examination.

Regulators continue to monitor the Company’s progress and compliance with the regulatory agreements through periodic on-site examinations, regular communications, and quarterly data analysis. The Company believes it is adequately addressing all issues of the regulatory agreements to which it is subject. However, only the respective regulatory agencies can determine if compliance with the applicable regulatory agreements has been met. The Company believes that each of its subsidiary banks is in compliance with the requirements identified in their regulatory agreements as of March 31, 2014.

The Parent Company maintains cash available to fund a certain amount of additional injections of capital to its bank subsidiaries as determined by management or if required by its regulators. If needed, further amounts in excess of available cash may be funded by future public or private sales of securities, although the Parent Company is currently under no directive by its regulators to raise any additional capital.

11. Fair Value Measurements

ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value, and sets forth disclosures about fair value measurements. ASC Topic 825, “Financial Instruments,” allows entities to choose to measure certain financial assets and liabilities at fair value. The Company has not elected the fair value option for any of its financial assets or liabilities.

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This Topic describes three levels of inputs that may be used to measure fair value:

Level 1:

Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date.

Level 2:

Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3:

Significant unobservable inputs that reflect a reporting entity’s own assumptions supported by little or no market activity, about the assumptions that market participants would use in pricing the asset or liability.

Following is a description of the valuation method used for financial instruments measured at fair value on a recurring basis. For this disclosure, the Company only has available for sale investment securities that meet the requirement.

Available for sale investment securities

Valued primarily by independent third party pricing services under the market valuation approach that include, but are not limited to, the following inputs:

●

Mutual funds and equity securities are priced utilizing real-time data feeds from active market exchanges for identical securities and are considered Level 1 inputs.

●

Government-sponsored agency debt securities, obligations of states and political subdivisions, mortgage-backed securities, corporate bonds, and other similar investment securities are priced with available market information through processes using benchmark yields, matrix pricing, prepayment speeds, cash flows, live trading data, and market spreads sourced from new issues, dealer quotes, and trade prices, among others sources and are considered Level 2 inputs.

Available for sale investment securities are the Company’s only balance sheet item that meets the disclosure requirements for instruments measured at fair value on a recurring basis. Disclosures as of March 31, 2014 and December 31, 2013 are as follows:

			Fair Value Measurements Using
(In thousands) Available For Sale Investment Securities	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

March 31, 2014
Obligations of U.S. government-sponsored entities	$	91,584	$	-	$	91,584	$	-
Obligations of states and political subdivisions		128,242		-		128,242		-
Mortgage-backed securities – residential		378,482		-		378,482		-
Mortgage-backed securities – commercial		697		-		697		-
Corporate debt securities		6,492		-		6,492		-
Mutual funds and equity securities		2,267		2,267		-		-
Total	$	607,764	$	2,267	$	605,497	$	-

			Fair Value Measurements Using
(In thousands) Available For Sale Investment Securities	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

December 31, 2013
Obligations of U.S. government-sponsored entities	$	93,750	$	-	$	93,750	$	-
Obligations of states and political subdivisions		131,970		-		131,970		-
Mortgage-backed securities – residential		378,077		-		378,077		-
Mortgage-backed securities – commercial		689		-		689		-
Corporate debt securities		6,257		-		6,257		-
Mutual funds and equity securities		2,077		2,077		-		-
Total	$	612,820	$	2,077	$	610,743	$	-

The Company is required to measure and disclose certain other assets and liabilities at fair value on a nonrecurring basis in periods following their initial recognition. The Company’s disclosure about assets and liabilities measured at fair value on a nonrecurring basis consists of impaired loans and OREO. The carrying value of these assets are adjusted to fair value on a nonrecurring basis through impairment charges as described more fully below.

Impairment charges on collateral-dependent loans are recorded by either an increase to the provision for loan losses and related allowance or by direct loan charge-offs. The fair value of collateral-dependent impaired loans with specific allocations of the allowance for loan losses is measured based on recent appraisals of the underlying collateral. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraisers take absorption rates into consideration and adjustments are routinely made in the appraisal process to identify differences between the comparable sales and income data available. Such adjustments consist mainly of estimated costs to sell that are not included in certain appraisals or to update appraised collateral values as a result of market declines of similar properties for which a newer appraisal is available. These adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value.

OREO includes properties acquired by the Company through, or in lieu of, actual loan foreclosures and is carried at fair value less estimated costs to sell. Fair value of OREO at acquisition is generally based on third party appraisals of the property that includes comparable sales data and is considered as Level 3 inputs. The carrying value of each OREO property is updated at least annually and more frequently when market conditions significantly impact the value of the property. If the carrying amount of the OREO exceeds fair value less estimated costs to sell, an impairment loss is recorded through noninterest expense.

The following table represents the carrying amount of assets measured at fair value on a nonrecurring basis and still held by the Company as of the dates indicated. The amounts in the table only represent assets whose carrying amount has been adjusted by impairment charges during the period in a manner as described above; therefore, these amounts will differ from the total amounts outstanding. Collateral-dependent impaired loan amounts in the tables below exclude restructured loans since they are measured based on present value techniques, which are outside the scope of the fair value reporting framework.

			Fair Value Measurements Using
(In thousands) Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

March 31, 2014
Collateral-dependent Impaired Loans
Real estate mortgage – residential	$	733	$	-	$	-	$	733
Real estate mortgage – farmland and other commercial enterprises		1,150		-		-		1,150
Commercial and industrial		2		-		-		2
Total	$	1,885	$	-	$	-	$	1,885

OREO
Construction and land development	$	1,713	$	-	$	-	$	1,713
Residential real estate		366		-		-		366
Farmland and other commercial enterprises		1,346		-		-		1,346
Total	$	3,425	$	-	$	-	$	3,425

			Fair Value Measurements Using
(In thousands) Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2013
Collateral-dependent Impaired Loans
Real estate mortgage – construction and land development	$	334	$	-	$	-	$	334
Real estate mortgage – residential		2,085		-		-		2,085
Real estate mortgage – farmland and other commercial enterprises		3,152		-		-		3,152
Commercial and industrial		88		-		-		88
Total	$	5,659	$	-	$	-	$	5,659

OREO
Construction and land development	$	14,465	$	-	$	-	$	14,465
Residential real estate		1,116		-		-		1,116
Farmland and other commercial enterprises		9,152		-		-		9,152
Total	$	24,733	$	-	$	-	$	24,733

The following table presents impairment charges recorded in earnings on assets measured at fair value on a nonrecurring basis.

(In thousands)
Three months ended March 31,	2014		2013
Impairment charges:
Collateral-dependent impaired loans	$	940	$	371
OREO		906		1,017
Total	$	1,846	$	1,388

The following table presents quantitative information about unobservable inputs for assets measured on a nonrecurring basis using Level 3 measurements. As previously discussed, the fair value of real estate securing impaired loans and OREO are based on current third party appraisals. It is often necessary, however, for the Company to discount the appraisal amounts supporting its impaired loans and OREO. These discounts relate primarily to marketing and other holding costs that are not included in certain appraisals or to update values as a result of market declines of similar properties for which newer appraisals are available. Discounts also result from contracts to sell properties entered into during the period. The range of discounts is presented in the table below for 2014.

(In thousands)	Fair Value at March 31, 2014		Valuation Technique	Unobservable Inputs	Range			Weighted Average
Collateral-dependent impaired loans	$	1,885	Discounted appraisals	Marketability discount		0% - 7.0	%		5.0	%
OREO	$	3,425	Discounted appraisals	Marketability discount		1.1% - 31.8	%		14.6	%

Fair Value of Financial Instruments

The table that follows represents the estimated fair values of the Company’s financial instruments made in accordance with the requirements of ASC 825, “Financial Instruments.” ASC 825 requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet for which it is practicable to estimate that value. The estimated fair value amounts have been determined by the Company using available market information and present value or other valuation techniques. These derived fair values are subjective in nature, involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. ASC 825 excludes certain financial instruments and all nonfinancial instruments from the disclosure requirements. Accordingly, the aggregate fair value amounts presented are not intended to represent the underlying value of the Company.

The following methods and assumptions were used to estimate the fair value of each of the financial instruments in the table that follows.

Cash and Cash Equivalents, Accrued Interest Receivable, and Accrued Interest Payable

The carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization or settlement.

Investment Securities Held to Maturity

Fair value is based on quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities or with available market information through processes using benchmark yields, matrix pricing, prepayment speeds, cash flows, live trading data, and market spreads sourced from new issues, dealer quotes, and trade prices, among others sources.

Loans

The fair value of loans is estimated by discounting expected future cash flows using current discount rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Expected future cash flows are projected based on contractual cash flows adjusted for estimated prepayments.

Federal Home Loan Bank and Federal Reserve Bank Stock

It is not practical to determine the fair value of Federal Home Loan Bank and Federal Reserve Bank stock due to restrictions placed on its transferability.

Deposit Liabilities

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date and fair value approximates carrying value. The fair value of fixed maturity certificates of deposit is estimated by discounting the expected future cash flows using the rates currently offered for certificates of deposit with similar remaining maturities.

Federal Funds Purchased and Other Short-term Borrowings

The carrying amount is the estimated fair value for these borrowings which reprice frequently in the near term.

Securities Sold Under Agreements to Repurchase, Subordinated Notes Payable, and Other Long-term Borrowings

The fair value of these borrowings is estimated by discounting the expected future cash flows using rates currently available for debt with similar terms and remaining maturities. For subordinated notes payable, the Company uses its best estimate to determine an appropriate discount rate since active markets for similar debt transactions are very limited.

Commitments to Extend Credit and Standby Letters of Credit

Pricing of these financial instruments is based on the credit quality and relationship, fees, interest rates, probability of funding, compensating balance, and other covenants or requirements. Loan commitments generally have fixed expiration dates, variable interest rates and contain termination and other clauses that provide for relief from funding in the event there is a significant deterioration in the credit quality of the customer. Many loan commitments are expected to, and typically do, expire without being drawn upon. The rates and terms of the Company’s commitments to lend and standby letters of credit are competitive with others in the various markets in which the Company operates. There are no unamortized fees relating to these financial instruments, as such the carrying value and fair value are both zero.

The following table presents the estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2014 and December 31, 2013. Information for available for sale investment securities is presented within this footnote in greater detail above.

					Fair Value Measurements Using
(In thousands)	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2014
Assets
Cash and cash equivalents	$	94,963	$	94,963	$	94,963	$	-	$	-
Held to maturity investment securities		3,827		3,929		-		3,929		-
Loans, net		965,229		967,622		-		-		967,622
Accrued interest receivable		5,863		5,863		-		5,863		-
Federal Home Loan Bank and Federal Reserve Bank Stock		9,368	N/A			-		-		-

Liabilities
Deposits		1,409,232		1,411,262		956,646		-		454,616
Federal funds purchased and other short-term borrowings		27,393		27,393		-		27,393		-
Securities sold under agreements to repurchase and other long-term borrowings		127,843		139,332		-		139,332		-
Subordinated notes payable to unconsolidated trusts		48,970		24,663		-		-		24,663
Accrued interest payable		1,041		1,041		-		1,041		-

December 31, 2013
Assets
Cash and cash equivalents	$	68,253	$	68,253	$	68,253	$	-	$	-
Held to maturity investment securities		765		827		-		827		-
Loans, net		979,306		977,846		-		-		977,846
Accrued interest receivable		5,901		5,901		-		5,901		-
Federal Home Loan Bank and Federal Reserve Bank Stock		9,516	N/A			-		-		-

Liabilities
Deposits		1,410,215		1,412,572		938,700		-		473,872
Federal funds purchased and other short-term borrowings		29,123		29,123		-		29,123		-
Securities sold under agreements to repurchase and other long-term borrowings		127,880		139,375		-		139,375		-
Subordinated notes payable to unconsolidated trusts		48,970		26,070		-		-		26,070
Accrued interest payable		1,137		1,137		-		1,137		-

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

FORWARD-LOOKING STATEMENTS

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.

RESULTS OF OPERATIONS

First Quarter 2014 Compared to First Quarter 2013

The Company reported net income of $3.4 million for the quarter ended March 31, 2014, a decrease of $422 thousand or 11.1% compared to net income of $3.8 million for the first quarter of 2013. On a per common share basis, net income was $.38 and $.44 for the current and year-ago quarters, respectively. This represents a decrease of $.06 or 13.6%. Selected income statement amounts and related data are summarized in the table below.

(In thousands except per share data)							Increase
Three Months Ended March 31,	2014			2013			(Decrease)
Interest income	$	16,374		$	16,742		$	(368	)
Interest expense		2,695			3,166			(471	)
Net interest income		13,679			13,576			103
Provision for loan losses		132			(632	)		764
Net interest income after provision for loan losses		13,547			14,208			(661	)
Noninterest income		5,373			5,411			(38	)
Noninterest expenses		14,430			14,509			(79	)
Income before income tax expense		4,490			5,110			(620	)
Income tax expense		1,120			1,318			(198	)
Net income	$	3,370		$	3,792		$	(422	)
Less preferred stock dividends and discount accretion		537			485			52
Net income available to common shareholders	$	2,833		$	3,307		$	(474	)

Basic and diluted net income per common share	$	.38		$	.44		$	(.06	)

Weighted average common shares outstanding – basic and diluted		7,479			7,470			9
Return on average assets		.75	%		.86	%	(11) bp
Return on average equity		7.77	%		9.10	%	(133) bp
bp = basis points.

The $422 thousand decrease in net income for the current quarter compared to the first quarter a year earlier was driven mainly by a higher provision for loan losses of $764 thousand or 121%, partially offset by an increase in net interest income of $103 thousand or 0.8% and lower income tax expense of $198 thousand or 15.0%. 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 March 31, 2014, as measured by the Treasury yield curve, remains at very low levels when compared with historical trends. Since year-end 2013, yields on three and six-month maturities were relatively unchanged, decreasing four and three basis points, respectively. The yield on the three-year notes increased 10 basis points, while longer-term maturities declined 31 and 41 basis points for the ten and thirty-year maturity periods, respectively. At March 31, 2014, the short-term federal funds target interest rate remained between zero and 0.25%, unchanged since December 2008. The Federal Reserve Board has indicated that the low federal funds rate will likely be appropriate for a considerable period of time, particularly in light of current inflation projections and its longer-run goal of supporting maximum employment. At March 31, 2014, the national and Kentucky unemployment rate was 6.7% and 7.9%, respectively.

Net interest income was $13.7 million for the first three months of 2014, an increase of $103 thousand or 0.8% compared to $13.6 million for the first three months of 2013. The improvement in net interest income was driven by lower interest expense of $471 thousand or 14.9%, which offset a decrease in interest income of $368 thousand or 2.2%. Interest expense on deposits and interest income on loans decreased $460 thousand or 27.7% and $889 thousand or 6.6%, respectively; interest on investment securities increased $528 thousand or 16.6%.

The decrease to interest income and interest expense was driven mainly by overall rate declines on loans and time deposits. Rate declines are the result of an overall slow growing economy, related competitive pressures, and the Company’s strategy of being more selective in pricing its loans and deposits in an effort to improve credit quality, net interest income, 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. The Company continues to reprice its higher-rate maturing time deposits downward to lower market rates or allow them to mature without renewal, as liquidity has been adequate.

Average investment securities increased $43.3 million or 7.5% from a year ago mainly due to a decline in loans outstanding. In periods when quality loan demand is low, available funds are invested in lower yielding investment securities or cash equivalents or otherwise used to manage liquidity, such as for deposit outflows or for the repayment of long-term debt.

The net interest margin on a taxable equivalent basis decreased three basis points to 3.41% for the first quarter of 2014 compared to 3.44% for the same quarter of 2013. The decrease in net interest margin reflects a two basis point decrease in the spread between the average rate earned on earning assets and the average rate paid on interest bearing liabilities to 3.25% from 3.27%. The Company expects its net interest margin to remain relatively flat 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 March 31.

Distribution of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest Differential

Three Months Ended March 31,	2014									2013
(In thousands)	Average Balance			Interest			Average Rate			Average Balance			Interest			Average Rate
Earning Assets
Investment securities
Taxable	$	507,013		$	3,080			2.46	%	$	477,617		$	2,562			2.18	%
Nontaxable¹		115,787			926			3.24			101,867			910			3.62
Interest bearing deposits in banks, federal funds sold and securities purchased under agreements to resell		56,091			28			.20			61,879			35			.23
Loans^1,2,3		994,050			12,727			5.19			1,005,775			13,641			5.50
Total earning assets		1,672,941		$	16,761			4.06	%		1,647,138		$	17,148			4.22	%
Allowance for loan losses		(19,598	)								(24,370	)
Total earning assets, net of allowance for loan losses		1,653,343									1,622,768
Nonearning Assets
Cash and due from banks		23,297									24,301
Premises and equipment, net		36,172									36,138
Other assets		99,824									110,152
Total assets	$	1,812,636								$	1,793,359
Interest Bearing Liabilities
Deposits
Interest bearing demand	$	322,969		$	50			.06	%	$	299,668		$	56			.08	%
Savings		349,485			158			.18			323,329			157			.20
Time		462,656			995			.87			529,080			1,450			1.11
Federal funds purchased and other short-term borrowings		33,753			19			.23			25,732			19			.30
Securities sold under agreements to repurchase and other long-term borrowings		176,070			1,473			3.39			176,844			1,484			3.40
Total interest bearing liabilities		1,344,933		$	2,695			.81	%		1,354,653		$	3,166			.95	%
Noninterest Bearing Liabilities
Demand deposits		266,939									243,251
Other liabilities		24,878									26,456
Total liabilities		1,636,750									1,624,360
Shareholders’ equity		175,886									168,999
Total liabilities and shareholders’ equity	$	1,812,636								$	1,793,359
Net interest income					14,066									13,982
TE basis adjustment					(387	)								(406	)
Net interest income				$	13,679								$	13,576
Net interest spread								3.25	%								3.27	%
Impact of noninterest bearing sources of funds								.16									.17
Net interest margin								3.41	%								3.44	%

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 $239 thousand and $474 thousand in 2014 and 2013, respectively.

Analysis of Changes in Net Interest Income (tax equivalent basis)

(In thousands)	Variance			Variance Attributed to
Three Months Ended March 31,	2014/2013¹			Volume			Rate

Interest Income
Taxable investment securities	$	518		$	168		$	350
Nontaxable investment securities²		16			447			(431	)
Interest bearing deposits in banks, federal funds sold and securities purchased under agreements to resell		(7	)		(3	)		(4	)
Loans²		(914	)		(157	)		(757	)
Total interest income		(387	)		455			(842	)
Interest Expense
Interest bearing demand deposits		(6	)		27			(33	)
Savings deposits		1			58			(57	)
Time deposits		(455	)		(167	)		(288	)
Federal funds purchased and other short-term borrowings		-			21			(21	)
Securities sold under agreements to repurchase and other long-term borrowings		(11	)		(6	)		(5	)
Total interest expense		(471	)		(67	)		(404	)
Net interest income	$	84		$	522		$	(438	)
Percentage change		100.0	%		621.4	%		(521.4	)%

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%.

Provision for Loan Losses

The provision for loan losses represents charges (or credits) to earnings that are necessary to maintain an allowance for loan losses at an adequate level to cover credit losses specifically identified in the loan portfolio, as well as management’s best estimate of incurred probable loan losses in the remainder of the portfolio at the balance sheet date. The credit quality of the Company’s loan portfolio continues to improve, but remains hampered by the lingering effects of the downturn of the overall economy and financial markets that began in late 2007 which has not fully rebounded. Economic expansion remains slow and labor force participation rates are near 30-year lows.

The provision for loan losses was $132 thousand for the first quarter of 2014, an increase of $764 thousand or 121% compared to a credit of $632 thousand for the first quarter of 2013. The allowance for loan losses as a percentage of outstanding loans (net of unearned income) was 1.90% at March 31, 2014 compared to 2.06% and 2.31% at year-end 2013 and March 31, 2013, respectively. While total nonperforming loans have decreased $3.5 million or 6.4% from a year ago, net charge-offs for the current quarter were $2.0 million, an increase of $1.8 million. On an annualized basis, quarterly net charge-offs were 0.82% of average loans outstanding for the three months ended March 31, 2014 compared to 0.10% for the first quarter of 2013. Nonperforming loans, impaired loans, early stage delinquencies, and watch list loans, however, have all decreased from a year ago. For further information about improvements in the Company’s overall credit quality, please refer to the discussion under the captions “Allowance for Loan Losses” and “Nonperforming Loans” that follows.

Noninterest Income

The components of noninterest income are as follows for the periods indicated:

(Dollars in thousands) Three Months Ended March 31,	2014		2013			Increase (Decrease)			%
Service charges and fees on deposits	$	1,916	$	1,960		$	(44	)		(2.2)%
Allotment processing fees		1,245		1,266			(21	)		(1.7)
Other service charges, commissions, and fees		1,235		1,192			43			3.6
Trust income		545		484			61			12.6
Investment securities gains, net		9		-			9		N/A
Gain on sale of mortgage loans, net		97		339			(242	)		(71.4)
Income from company-owned life insurance		246		240			6			2.5
Other		80		(70	)		150			214.3
Total noninterest income	$	5,373	$	5,411		$	(38	)		(0.7)%

Total noninterest income was relatively unchanged in the comparison at $5.4 million. The decrease in service charges and fees on deposits and allotment processing fees are driven by a decrease in transaction volumes. Other service charges, commissions, and fees increased mainly from higher mortgage loan servicing fees due to an increase in servicing volumes. The increase in trust income is due mainly to higher market values of managed assets, which is a component of the fee structure arrangement. The decrease in net gains on the sale of mortgage loans is attributed primarily to a decline in mortgage loan origination activity in the current quarter. The current quarter also includes a loss of $46 thousand related to a group of seven loans which were written down to reflect the lower of cost or fair value adjustment upon reclassification from held for sale to held for investment. The $150 thousand increase in other noninterest income was driven by a $78 thousand or 57.8% decrease in the loss from the Company’s equity interest in two low income tax credit partnerships.

Noninterest Expense

The components of noninterest expense are as follows for the periods indicated:

(Dollars in thousands) Three Months Ended March 31,	2014		2013		Increase (Decrease)			%
Salaries and employee benefits	$	7,351	$	7,324	$	27			0.4	%
Occupancy expenses, net		1,282		1,166		116			9.9
Equipment expenses		594		562		32			5.7
Data processing and communication expense		1,005		1,098		(93	)		(8.5	)
Bank franchise tax		612		590		22			3.7
Amortization of intangibles		101		135		(34	)		(25.2	)
Deposit insurance expense		440		642		(202	)		(31.5	)
Other real estate expenses, net		1,064		892		172			19.3
Other		1,981		2,100		(119	)		(5.7	)
Total noninterest expense	$	14,430	$	14,509	$	(79	)		(0.5	)%

Total noninterest expenses were relatively unchanged in the comparison at $14.4 million. The more significant components include higher occupancy expenses and other real estate expenses of $116 thousand and $172 thousand, respectively. These amounts were offset by a decrease in data processing and communication expenses of $93 thousand and deposit insurance expense of $202 thousand.

The increase in occupancy expenses were driven by overall higher maintenance and utilities costs. Other real estate expenses are higher due to a $179 thousand or 66.5% reduction in the net gain recorded from the sale of repossessed real estate in the comparison. Data processing and communication expenses decreased across a broad range of components and are primarily driven by lower volume and other cost-reduction strategies. The reduction in deposit insurance expense is due to improved risk ratings used in the determination of the amount payable.

Income Taxes

Income tax expense was $1.1 million for the first quarter of 2014, a decrease of $198 thousand or 15.0% compared to $1.3 million for the first quarter of 2013. The effective tax rates were 24.9% and 25.8% for the current quarter and first quarter of 2013, respectively.

FINANCIAL CONDITION

Total assets were $1.8 billion at March 31, 2014, relatively unchanged from year-end 2013. Cash and cash equivalents increased $26.7 million or 39.1%, partially offset by a decrease in loans (net of unearned income) of $16.0 million or 1.6%, other real estate owned of $2.4 million or 6.3%, and investment securities of $2.0 million or 0.3%.

Cash and cash equivalents remain elevated as a result of the Company’s overall net funding position and a lack of high quality loan demand. Cash levels have also increased since year-end in part for the upcoming redemption of a portion of the Company’s preferred stock in the amount of $10.0 million, plus accrued dividends. Other real estate owned decreased primarily from sales and write-down activity, which offset a relatively small amount of new properties that were repossessed during the quarter. While investment securities had an overall decrease during the quarter, the fair market value adjustment related to the available for sale portfolio increased $5.7 million or 102%. Bond prices rebounded during the quarter as a result of favorable changes in market interest rates, primarily on longer dated maturities.

Total liabilities were $1.6 billion at March 31, 2014, relatively unchanged from year-end 2013. Total noninterest bearing deposits decreased $7.4 million or 2.7%, partially offset by an increase in interest bearing deposits of $6.4 million or 0.6%. Shareholders’ equity increased $6.6 million or 3.9%, driven by net income of $3.4 million and other comprehensive income of $3.7 million. The increase in other comprehensive income is due mainly to an increase in the after-tax value of the available for sale investment securities portfolio.

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 or as a short-term holding prior to subsequent movement into other investments with higher yields or for other purposes. At March 31, 2014, temporary investments were $68.9 million, an increase of $23.6 million or 52.1% compared to $45.3 million at year-end 2013.

Investment Securities

The investment securities portfolio is comprised primarily of residential mortgage-backed securities, tax-exempt securities of states and political subdivisions, and debt securities issued by U.S. government-sponsored agencies. Substantially all of the Company’s investment securities are designated as available for sale. Total investment securities had a carrying amount of $612 million at March 31, 2014, a decrease of $2.0 million or 0.3% compared to $614 million at year-end 2013.

The decrease in investment securities was driven by net sales, maturities, and calls totaling $6.7 million, partially offset by an increase in the unrealized gain on available for sale securities in the amount of $5.7 million or 102%. Net premium amortization was $931 thousand for the first three months of 2014 compared to $1.4 million for 2013. The increase in the value of the available for sale securities portfolio is attributed to higher bond prices related to longer-dated maturities. Yields for the five, ten, and 30-year Treasury securities each declined for the first three months of 2014. As market interest rates decrease, the value of fixed rate investments increases.

At March 31, 2014, investment securities include $5.9 million amortized cost amounts of single-issuer trust preferred capital securities of a U.S. based global financial services firm with an estimated fair value of $5.2 million. This represents an increase in estimated fair value of $384 thousand or 8.0% compared to $4.8 million at year-end 2013.

The Company’s investment in the single-issuer trust preferred capital securities continues to perform according to contractual terms and the issuer of these securities is rated as investment grade by major rating agencies. The issuer of the securities announced in the first quarter of 2014 an increase in per share common dividend payments and authorization of a common equity repurchase plan. The Company does not intend to sell these securities nor does the Company believe it is likely that it will be required to sell these securities prior to their anticipated recovery. The Company believes these securities are not impaired due to reasons of credit quality or other factors, but rather the unrealized loss is primarily attributed to continuing uncertainties in both international and domestic economies and market volatility. The Company believes that it will collect all amounts due according to the contractual terms of these securities and that the fair values of these securities will continue to recover as they approach their maturity dates.

Loans

Loans, net of unearned income, were $984 million at March 31, 2014, a decrease of $16.0 million or 1.6% compared to year-end 2013. High quality loan demand remains weak, and the Company continues a measured and cautious approach to loan originations while working to further reduce its level of nonperforming assets in a slow growth economy.

The composition of the loan portfolio is summarized in the table below.

	March 31, 2014					December 31, 2013
(Dollars in thousands)	Amount		%			Amount		%

Real estate mortgage - construction and land development	$	98,220		10.0	%	$	101,352		10.1	%
Real estate mortgage - residential		366,622		37.3			371,582		37.2
Real estate mortgage - farmland and other commercial enterprises		414,430		42.1			418,147		41.8
Commercial, financial, and agriculture		90,022		9.1			92,827		9.3
Installment		14,055		1.4			15,092		1.5
Lease financing		570		.1			883		.1
Total	$	983,919		100.0	%	$	999,883		100.0	%

On an average basis, loans represented 59.4% of earning assets for the current three month period, a decrease of 119 basis points compared to 60.6% for the year 2013. The decrease in the level of loans as a percentage of earning assets reflects the overall lack of high quality loan demand for which the Company desires. As loan demand changes, available funds are reallocated between temporary investments or investment securities, which typically involve a decrease in credit risk and result in lower yields.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed to be adequate by management to cover probable losses in the loan portfolio. The calculation of the appropriate level of allowance for loan losses requires significant judgment in order to reflect credit losses specifically identified in the Company’s loan portfolio as well as management's best estimate of probable incurred credit losses in the loan portfolio at the balance sheet date. The allowance for loan losses is a valuation allowance increased by the provision for loan losses and decreased by net charge-offs. Loan losses are charged against the allowance when management believes the uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses and the related provision for loan losses generally fluctuate as the relative level of nonperforming and impaired loans vary. However, other factors impact the amount of the allowance for loan losses such as the Company’s historical loss experience, the borrowers’ financial condition, general economic conditions, and other risk factors as described greater detail in the Company’s most recent annual report on Form 10-K.

The allowance for loan losses was $18.7 million or 1.90% of outstanding loans (net of unearned income) at March 31, 2014. This compares to $20.6 million or 2.06% of net loans outstanding at year-end 2013. The decrease in the allowance as a percentage of net loans outstanding from the prior year-end is mainly attributed to net charge-offs of $2.0 million, which exceeded the provision for loan losses by $1.9 million. As a percentage of nonperforming loans, the allowance for loan losses was 36.6% at March 31, 2014 compared to 40.7% at year-end 2013. Nonperforming loans include $25.9 million and $26.3 million of accruing restructured loans at March 31, 2014 and year-end 2013, respectively. As a percentage of nonaccrual loans and loans past due 90 days or more, the allowance for loan losses was 74.3% and 84.7% for the current and linked quarters, respectively.

The $2.0 million of net charge-offs in the current year is primarily made up of two events: charge-offs totaling $1.0 million related to a group of fraudulent loans made by a former loan officer and a charge-off of $755 thousand related to one credit secured by commercial real estate. The Company has filed an insurance claim seeking possible recovery of approximately $750 thousand related to the fraudulent loans. The amount of recovery, if any, will be recognized when received.

The overall improvement in the credit quality of the loan portfolio experienced during 2013 remained relatively stable during the first quarter of 2014. Certain credit quality measures are summarized in the table that follows for the periods indicated. While these measures have weakened slightly since year-end, each remains near recent historical lows.

(In thousands)	March 31, 2014		December 31, 2013		March 31, 2013		Previous Three-year High		Previous Three-year Low
Nonperforming loans	$	51,098	$	50,537	$	54,605	$	95,981	$	47,497
Nonaccrual loans		24,720		23,838		27,994		63,737		21,259
Loans past due 30-89 days and still accruing		2,465		1,460		2,689		11,940		1,460
Loans graded substandard or below		76,852		75,688		87,973		179,137		75,688
Impaired loans		58,460		58,339		63,750		161,750		58,339
Loans, net of unearned income		983,919		999,883		1,017,977		1,132,534		983,919

Nonperforming Loans

Nonperforming loans consist of nonaccrual loans, accruing restructured loans, and loans 90 days or more past due and still accruing interest. The accrual of interest on loans is discontinued when it is determined that the collection of interest or principal is doubtful, or when a default of interest or principal has existed for 90 days or more, unless such loan is well secured and in the process of collection. Restructured loans occur when a lender, because of economic or legal reasons related to a borrower’s financial difficulty, grants a concession to the borrower that it would not otherwise consider. Restructured loans typically include a reduction of the stated interest rate or an extension of the maturity date, among other possible concessions. The Company gives careful consideration to identifying which of its challenged credits merit a restructuring of terms that it believes will result in maximum loan repayments and mitigate possible losses. Cash flow projections are carefully scrutinized prior to restructuring any credits; past due credits are typically not granted concessions.

Nonperforming loans were $51.1 million at March 31, 2014, an increase of $561 thousand or 1.1% compared to $50.5 million at year-end 2013. The high level of nonperforming loans reflects ongoing weaknesses of a slow growing economy, which continues to strain many of the Company’s customers. Approximately 51% of the Company’s nonperforming loans consist of accruing restructured loans at March 31, 2014. Nonperforming loans, presented by class, were as follows for the periods indicated.

Nonperforming Loans

(In thousands)	March 31, 2014			December 31, 2013
Nonaccrual Loans
Real Estate:
Real estate mortgage - construction and land development	$	5,498		$	5,821
Real estate mortgage - residential		5,156			5,154
Real estate mortgage - farmland and other commercial enterprises		13,762			12,677
Commercial:
Commercial and industrial		220			160
Lease financing		70			22
Other		12			-
Consumer:
Secured		2			3
Unsecured		-			1
Total nonaccrual loans	$	24,720		$	23,838

Restructured Loans
Real Estate:
Real estate mortgage - construction and land development	$	4,219		$	4,391
Real estate mortgage - residential		4,790			4,826
Real estate mortgage - farmland and other commercial enterprises		16,885			16,987
Consumer:
Unsecured		50			51
Total restructured loans	$	25,944		$	26,255

Past Due 90 Days or More and Still Accruing
Real Estate:
Real estate mortgage - residential	$	-		$	10
Real estate mortgage - farmland and other commercial enterprises		434			434
Total past due 90 days or more and still accruing	$	434		$	444

Total nonperforming loans	$	51,098		$	50,537

Ratio of total nonperforming loans to total loans (net of unearned income)		5.2	%		5.1	%

The most significant components of nonperforming loans include nonaccrual and restructured loans. Activity during 2014 related to these two components was as follows:

(In thousands)	Nonaccrual Loans			Restructured Loans
Balance at December 31, 2013	$	23,838		$	26,255
Loans placed on nonaccrual status		2,749			-
Loans restructured		-			-
Principal paydowns		(1,118	)		(311	)
Transfers to performing status		(165	)		-
Transfers to other real estate owned		(335	)		-
Charge-offs		(249	)		-
Balance at March 31, 2014	$	24,720		$	25,944

The Company’s comprehensive risk-grading and loan review program includes a review of loans to assess risk and assign a grade to those loans, a review of delinquencies, and an assessment of loans for needed charge-offs or placement on nonaccrual status. The Company had loans in the amount of $76.8 million and $79.0 million at March 31, 2014 and year-end 2013, respectively, which were performing but considered potential problem loans and are not included in the nonperforming loan totals in the table above. These loans, however, are considered in establishing an appropriate allowance for loan losses. The balance outstanding for potential problem credits is mainly a result of ongoing weaknesses in the overall economy that continue to strain many of the Company’s customers. Potential problem loans include a variety of borrowers and are secured primarily by various types of real estate including commercial, construction properties, and residential real estate developments. At March 31, 2014, the five largest potential problem credits were $16.0 million in the aggregate compared to $16.7 million at year-end 2013.

Potential problem loans are identified on the Company’s watch list and consist of loans that require close monitoring by management. Credits may be considered as a potential problem loan for reasons that are temporary or correctable, such as for a deficiency in loan documentation or absence of current financial statements of the borrower. Potential problem loans may also include credits where adverse circumstances are identified that may affect the borrower’s ability to comply with the contractual terms of the loan. Other factors which might indicate the existence of a potential problem loan include the delinquency of a scheduled loan payment, deterioration in a borrower’s financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment in which the borrower operates. Certain loans on the Company’s watch list are also considered impaired and specific allowances related to these loans were established in accordance with the appropriate accounting guidance.

Other Real Estate

Other real estate owned (“OREO”) includes real estate properties acquired by the Company through, or in lieu of, actual foreclosure. At March 31, 2014, OREO was $35.4 million, a decrease of $2.4 million or 6.3% compared to $37.8 million at year-end 2013. OREO has declined to lowest level since the second quarter of 2011, when it stood at $34.7 million. OREO activity for 2014 was as follows:

(In thousands)	Amount
Balance at December 31, 2013	$	37,826
Transfers from loans		335
Proceeds from sales		(1,901	)
Net gain on sales		90
Write-downs and other decreases, net		(906	)
Balance at March 31, 2014	$	35,444

The decrease in OREO was driven by a combination of sales and write-down activity. Property sales for the quarter include one larger-balance residential real estate development property sold at its carrying amount of $1.2 million. Write-downs during the quarter include impairment charges totaling $390 thousand related to one residential real estate development project resulting from an annual appraisal, which reduced its carrying value to $1.4 million.

Deposits

A summary of the Company’s deposits are as follows for the periods indicated.

	End of Period							Average
(In thousands)	March 31, 2014		December 31, 2013		Increase (Decrease)			(Three Months) March 31, 2014		(Twelve Months) December 31, 2013		Increase (Decrease)
Noninterest Bearing	$	269,911	$	277,294	$	(7,383	)	$	266,939	$	256,518	$	10,421

Interest Bearing
Demand		328,779		320,503		8,276			322,969		306,945		16,024
Savings		357,956		340,903		17,053			349,485		333,457		16,028
Time		452,586		471,515		(18,929	)		462,656		505,738		(43,082	)
Total interest bearing		1,139,321		1,132,921		6,400			1,135,110		1,146,140		(11,030	)

Total Deposits	$	1,409,232	$	1,410,215	$	(983	)	$	1,402,049	$	1,402,658	$	(609	)

Total end of period deposits were relatively unchanged in the comparison. The decrease in time deposits is a result of the Company’s overall high liquidity position and a strategy to lower overall funding costs, mainly by allowing higher-rate certificates of deposit to roll off or reprice at significantly lower interest rates. Many of those balances have been rolled into either interest bearing or noninterest bearing demand accounts by the customer. As rates have decreased throughout the deposit portfolio, many customers have opted to transfer funds from maturing time deposits or investments from other sources into short-term demand or savings accounts. The Company has not sought out or accepted brokered deposits in the past nor does it have plans to do so in the future.

Borrowed Funds

Total borrowed funds were $204 million at March 31, 2014, relatively unchanged from $206 million at year-end 2013. Short-term borrowings were $27.4 million at quarter-end. This represents a decrease of $1.7 million or 5.9% and makes up significantly all of the change in total borrowed funds. Short-term borrowings primarily represent repurchase agreements entered into with commercial depositors and, to a lesser extent, federal funds purchased through relationships with downstream correspondent banks. Long-term borrowings, which consist of long-term repurchase agreements, subordinated notes payable, and federal home loan borrowings, were virtually unchanged at $177 million.

LIQUIDITY

The primary source of funds for the Parent Company is the receipt of dividends from its subsidiary banks, cash balances maintained, and borrowings from nonaffiliated sources. Payment of dividends by the Company’s subsidiary banks is subject to certain regulatory restrictions as set forth in national and state banking laws and regulations. In addition, United Bank & Trust Company (“United Bank”) and Citizens Bank of Northern Kentucky, Inc. (“Citizens Northern”) each must obtain regulatory approval to declare or pay dividends to the Parent Company as a result of increased capital required in connection with prior regulatory exams. Capital ratios at each of the Company’s four subsidiary banks exceed regulatory established “well-capitalized” status at March 31, 2014 under the prompt corrective action regulatory framework; however, United Bank and Citizens Northern are required to maintain capital ratios at higher levels as outlined in their regulatory agreements.

The Parent Company’s primary uses of cash include the payment of dividends to its preferred and common shareholders, injecting capital into subsidiaries, paying interest expense on borrowings, and paying for general operating expenses. The regulatory agreement entered into during 2009 between the Company and its primary banking regulators was terminated in March 2014. Therefore, the Company is no longer required to receive permission from its banking regulators to make interest payments on its trust preferred securities or to pay dividends on its common and preferred stock. However, the Company has no intention of declaring or paying any dividend on its common stock prior to redeeming all of its outstanding preferred stock. The Company announced during the first quarter that it would redeem 10,000 shares, or one-third, of its outstanding preferred stock on May 15, 2014 at its liquidation amount of $1 thousand per share, plus accrued dividends. The impact of redeeming the preferred shares on earnings, liquidity, and capital ratios is not significant. Further redemptions, which require regulatory approval, will be based on satisfactory financial performance and take into consideration the Company’s capital position, earnings, asset quality, and other factors. The timing and amount of any further redemption by the Company of its remaining outstanding preferred stock will be disclosed when it is assured.

The Parent Company had cash balances of $36.7 million and $36.5 million at March 31, 2014 and year-end 2013, respectively. Significant cash receipts of the Parent Company for the first quarter of 2014 include a return of capital from a nonbank subsidiary in the amount of $1.0 million and management fees from subsidiaries of $960 thousand. Significant cash payments by the Parent Company for the same period include $586 thousand for salaries, payroll taxes, and employee benefits, $375 thousand for the payment of dividends on its outstanding preferred stock, and $213 thousand for the payment of interest expense on subordinated notes payable.

The Company's objective as it relates to liquidity is to ensure that its 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. For assets, those sources of funds include liquid assets that are readily marketable or that can be pledged, or which mature in the near future. These assets primarily include cash and due from banks, federal funds sold, and cash flow generated by the repayment of principal and interest on loans and investment securities. For liabilities, sources of funds primarily include the subsidiary banks' core deposits, Federal Home Loan Bank (“FHLB”) and other 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, 2014, the Company had $238 million of 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 the Company’s liquidity from these sources. The Company’s borrowing capacity has increased $10.1 million or 4.4% since year-end 2013 primarily as a result of additional amounts available from the FHLB.

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 available for sale investment securities. At March 31, 2014, consolidated liquid assets were $703 million, an increase of $21.7 million or 3.2% from year-end 2013. The increase in liquid assets was driven by higher cash and cash equivalents of $26.7 million or 39.1%. The Company’s liquidity position remains elevated mainly as a result of the Company’s overall net funding position and weak loan demand. The overall funding position of the Company changes as loan demand, deposit levels, and other sources and uses of funds fluctuate. Cash levels have also increased since year-end in part for the upcoming redemption of a portion of the Company’s preferred stock in the amount of $10.0 million, plus accrued dividends.

Net cash provided by operating activities was $11.2 million and $5.6 million for the first quarter of 2014 and 2013, respectively. This represents an increase of $5.6 million or 100% due mainly to a higher net amount of mortgage loans sold. Net cash flow from investing activities was $18.6 million for 2014 compared with a net use of $7.0 million for the prior year. This represents a change of $25.6 million and is due primarily to net loan activity. The Company had net repayment activity of $11.6 million for 2014 as overall paydowns exceeded new loan demand. For 2013, an increase in loan demand resulted in net origination activity of $11.7 million.

Net cash used in financing activities was $3.1 million for the first quarter of 2014, a decrease of $13.7 million or 81.5% compared to $16.8 million for the prior year. The decrease in net cash used in financing activities is primarily attributed to deposit activity. For the first quarter of 2014, deposits decreased $983 thousand compared with deposit outflows of $16.0 million for the first quarter of 2013.

Commitments to extend credit are entered into with customers in the ordinary course of providing traditional banking services and are considered in addressing the Company’s liquidity management. The Company does not expect these commitments to significantly affect its liquidity position in future periods. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options, or similar instruments.

CAPITAL RESOURCES

Shareholders’ equity was $177 million at March 31, 2014, an increase of $6.6 million or 3.9% compared to $170 million at year-end 2013. The increase in shareholders’ equity was driven by net income of $3.4 million and other comprehensive income of $3.7 million. The increase in other comprehensive income is due mainly to an increase in the after-tax value of the available for sale investment securities portfolio, which occurred as a result of favorable changes in market interest rates during the quarter, primarily on longer dated maturities.

On January 9, 2009, the Company issued 30 thousand shares of Series A, no par value cumulative perpetual preferred stock. The dividend rate on the preferred shares increased to 9% from 5% on February 15, 2014. The Company announced it will redeem 10 thousand, or one-third, of its outstanding preferred shares on May 15, 2014, which will mitigate the impact of the rate increase on earnings per common share. The amount of dividends payable for a full quarter without the redemption would have resulted in an increase of $300 thousand, equal to $.04 per common share per quarter. After the redemption, the increase in dividends for a full quarter will amount to only $75 thousand or $.01 per common share per quarter. The Company’s goal is to redeem the remaining outstanding preferred shares as soon as its capital position, earnings, asset quality, and other factors indicate it is warranted. Further redemptions, however, will also require the approval of banking regulators. The timing and amount of any further redemption by the Company of its remaining outstanding preferred shares will be disclosed when it is assured.

The agreement entered into during 2009 between the Parent Company and its primarily regulators was terminated during the first quarter 2014 as a result of continued satisfactory compliance, most notably from the progress made in lowering nonperforming assets and increasing capital levels. Therefore, the Company is no longer required to receive permission from its banking regulators to make interest payments on its trust preferred securities or to pay dividends on its common and preferred stock. However, the Company has no intention of declaring or paying any dividend on its common stock prior to redeeming all of its outstanding preferred stock.

The Parent Company is under no directive by its regulators to raise any additional capital, although it periodically evaluates potential capital raising scenarios. However, no determination has been made as to if or when a capital raise will be completed. Net proceeds from a potential sale of securities could be used for any corporate purpose determined by the Company’s board of directors.

At March 31, 2014, the Company’s tangible capital ratio was 9.69%, an increase of 34 basis points compared to 9.35% at year-end 2013. The tangible capital ratio is defined as tangible equity as a percentage of tangible assets and excludes intangible assets. Tangible common equity to tangible assets, which further excludes outstanding preferred stock, was 8.04% and 7.70% at March 31, 2014 and year-end 2013, respectively. This represents an increase of 34 basis points in the comparison.

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 and the regulatory minimums are as follows as of the dates indicated.

	March 31, 2014									December 31, 2013
	Tier 1 Risk-based Capital¹			Total Risk-based Capital¹			Tier 1 Leverage²			Tier 1 Risk-based Capital¹			Total Risk-based Capital¹			Tier 1 Leverage²
Consolidated		19.43	%		20.68	%		12.10	%		18.95	%		20.21	%		11.90	%

Farmers Bank & Capital Trust Company		18.08			19.33			9.81			17.56			18.82			9.60
United Bank³		15.33			16.60			9.84			15.06			16.33			9.67
First Citizens Bank		13.84			14.53			9.60			12.92			13.67			9.03
Citizens Northern³		13.66			14.91			9.56			13.57			14.82			9.67

Regulatory minimum		4.00			8.00			4.00			4.00			8.00			4.00
Well-capitalized status		6.00			10.00			5.00			6.00			10.00			5.00

²Tier 1 Leverage ratio is computed by dividing a bank’s Tier 1 Capital by its total quarterly average assets, as defined by regulation.

³See Note 10 to the Company’s unaudited condensed consolidated financial statements included as part of this Form 10-Q for minimum capital ratios required as part of the banks regulatory agreement.

Regulatory Agreements

United Bank and Citizens Northern are each a party to supervisory agreements with their primary banking regulator. These agreements are summarized in Note 10 to the unaudited condensed consolidated financial statements of this Form 10-Q. These agreements are discussed in significantly greater detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 under the caption “Capital Resources” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The agreement entered into during 2009 between the Parent Company and its primarily regulators was terminated during the first quarter 2014 as a result of continued satisfactory compliance.

There have been no changes to the regulatory agreement at Citizens Northern in 2014. For United Bank, the Consent Order it was under with its regulators was terminated and replaced in the first quarter of 2014 with a stepped-down enforcement action in the form of an informal Memorandum of Understanding. The Company believes it is adequately addressing all issues of the regulatory agreements to which it is subject and is in compliance with those agreements. However, only the respective regulatory agencies can determine if compliance with the applicable regulatory agreements have been met. Regulators continue to monitor the Company’s progress and compliance with the agreements through periodic on-site examinations, regular communications, and quarterly data analysis. The results of these examinations and communications show satisfactory progress toward meeting the requirements included in the regulatory agreements.

The Parent Company maintains cash available to fund a certain amount of additional injections of capital to its bank subsidiaries if required by its regulators. If needed, further amounts in excess of available cash may be funded by future public or private sales of securities, although the Parent Company is currently under no directive by its regulators to raise any additional capital.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company uses a simulation model as a tool to monitor and evaluate interest rate risk exposure. The model is designed to measure the sensitivity of net interest income and net income to changing interest rates over future 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 and 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, 2014, the model indicated that if rates were to gradually increase by 150 basis points during the remainder of the calendar year, then tax equivalent net interest income and net income would decrease 0.04% and 0.17%, respectively for the year ending December 31, 2014 when compared to the forecasted results for the most likely rate environment. The model indicated that if rates were to gradually decrease by 150 basis points over the same period, then tax equivalent net interest income and net income would decrease 0.69% and 1.73%, respectively.

Item 4. Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report, and have concluded that the Company’s disclosure controls and procedures were adequate and effective to ensure that all material information required to be disclosed in this report has been made known to them in a timely fashion.

The Company’s Chief Executive Officer and Chief Financial Officer have also concluded that there were no significant changes during the quarter ended March 31, 2014 in the Company’s internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

As of March 31, 2014, 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. It is the opinion of management, after discussion with legal counsel, that the disposition or ultimate resolution of such claims and legal actions 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

At various times, the Company’s Board of Directors has authorized the purchase of shares of the Company’s outstanding common stock. No stated expiration dates have been established under any of the previous authorizations. There were no Company shares purchased during the quarter ended March 31, 2014. There are 84,971 shares that may still be purchased under the various authorizations.

Item 6. Exhibits

List of Exhibits

3.1	Second Amended and Restated Articles of Incorporation of Farmers Capital Bank Corporation (incorporated by reference to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006 (File No. 000-14412)).

3.2	Articles of Amendment to Second Amended and Restated Articles of Incorporation of Farmers Capital Bank Corporation dated January 6, 2009 (incorporated by reference to the Current Report on Form 8-K dated January 13, 2009 (File No. 000-14412)).

3.3	Articles of Amendment to Second Amended and Restated Articles of Incorporation of Farmers Capital Bank Corporation dated November 16, 2009 (incorporated by reference to the Current Report on Form 8-K dated November 17, 2009 (File No. 000-14412)).

3.4	Amended and Restated Bylaws of Farmers Capital Bank Corporation (incorporated by reference to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009 (File No. 000-14412)).

4.1*	Junior Subordinated Indenture, dated as of July 21, 2005, between Farmers Capital Bank Corporation and Wilmington Trust Company, as Trustee, relating to unsecured junior subordinated deferrable interest notes that mature in 2035.

4.2*	Amended and Restated Trust Agreement, dated as of July 21, 2005, among Farmers Capital Bank Corporation, as Depositor, Wilmington Trust Company, as Property and Delaware Trustee, the Administrative Trustees (as named therein), and the Holders (as defined therein).

4.3*	Guarantee Agreement, dated as of July 21, 2005, between Farmers Capital Bank Corporation, as Guarantor, and Wilmington Trust Company, as Guarantee Trustee.

4.4*	Junior Subordinated Indenture, dated as of July 26, 2005, between Farmers Capital Bank Corporation and Wilmington Trust Company, as Trustee, relating to unsecured junior subordinated deferrable interest notes that mature in 2035.

4.5*	Amended and Restated Trust Agreement, dated as of July 26, 2005, among Farmers Capital Bank Corporation, as Depositor, Wilmington Trust Company, as Property and Delaware Trustee, the Administrative Trustees (as named therein), and the Holders (as defined therein).

4.6*	Guarantee Agreement, dated as of July 26, 2005, between Farmers Capital Bank Corporation, as Guarantor, and Wilmington Trust Company, as Guarantee Trustee.

4.7*	Indenture, dated as of August 14, 2007 between Farmers Capital Bank Corporation, as Issuer, and Wilmington Trust Company, as Trustee, relating to fixed/floating rate junior subordinated debt due 2037.

4.8*	Amended and Restated Declaration of Trust, dated as of August 14, 2007, by Farmers Capital Bank Corporation, as Sponsor, Wilmington Trust Company, as Delaware and Institutional Trustee, the Administrative Trustees (as named therein), and the Holders (as defined therein).

4.9*	Guarantee Agreement, dated as of August 14, 2007, between Farmers Capital Bank Corporation, as Guarantor, and Wilmington Trust Company, as Guarantee Trustee.

4.10	Form of Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated by reference to the Current Report on Form 8-K dated January 13, 2009 (File No. 000-14412)).

4.11	Letter Agreement, dated January 9, 2009, between Farmers Capital Bank Corporation and the United States Treasury, with respect to the issuance and sale of the Series A Preferred Stock and the Warrant, and Securities Purchase Agreement-Standard Terms attached thereto as Exhibit A (incorporated by reference to the Current Report on Form 8-K dated January 13, 2009 (File No. 000-14412)).

10.1	Employee Stock Purchase Plan of Farmers Capital Bank Corporation (incorporated by reference to Form S-8 effective June 24, 2004 (File No. 333-116801)).

10.2	Nonqualified Stock Option Plan of Farmers Capital Bank Corporation (incorporated by reference to Form S-8 effective September 8, 1998 (File No. 333-63037)).

10.3	Employment agreement dated December 10, 2012 between Farmers Capital Bank Corporation and Lloyd C. Hillard, Jr. (incorporated by reference to Exhibit 10.1 to Form 8-K/A filed December 26, 2012 (File No. 000-14412)).

10.4	Amendment No. 1 to Employment agreement dated December 10, 2012 between Farmers Capital Bank Corporation and Lloyd C. Hillard, Jr. (incorporated by reference to Exhibit 10.1 to Form 8-K filed December 30, 2013 (File No. 000-14412)).

10.5	Employment agreement dated December 17, 2013 between Farmers Capital Bank Corporation and Rickey D. Harp (incorporated by reference to Exhibit 10.1 to Form 8-K filed December 30, 2013 (File No. 000-14412)).

31.1**	CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2**	CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32**	CEO & CFO Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101	Interactive Data Files

* Exhibit not included pursuant to Item 601(b)(4)(iii) and (v) of Regulation S-K. The Company will provide a copy of such exhibit to the Securities and Exchange Commission upon request.

** Filed with this Quarterly Report on Form 10-Q.

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 8, 2014	/s/ Lloyd C. Hillard, Jr.
		Lloyd C. Hillard, Jr.
		President and CEO
		(Principal Executive Officer)

Date:	May 8, 2014	/s/ Doug Carpenter
		C. Douglas Carpenter
		Executive Vice President, Secretary, and CFO
		(Principal Financial and Accounting Officer)