Edgar Filing: FARMERS CAPITAL BANK CORP

fcbc_10q-033112.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, 2012

Farmers Capital Bank Corporation

(Exact name of registrant as specified in its charter)

Kentucky	0-14412	61-1017851
(State or other jurisdiction	(Commission	(IRS Employer
of incorporation)	File Number)	Identification No.)

P.O. Box 309 Frankfort, KY		40602
(Address of principal executive offices)		(Zip Code)

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

	Not Applicable
	(Former name or former address, 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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 x 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” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer ¨

Non-accelerated filer x(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 x

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

7,453,883 shares outstanding at May 8, 2012

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3. Quantitative and Qualitative Disclosures About Market Risk	47

Item 4. Controls and Procedures	47

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 5. Other Information	48

Item 6. Exhibits	49

SIGNATURES	51

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Unaudited Consolidated Balance Sheets

	March 31,			December 31,
(Dollars in thousands, except share data)	2012			2011
Assets
Cash and cash equivalents:
Cash and due from banks	$	21,900		$	28,842
Interest bearing deposits in other banks		62,052			62,226
Federal funds sold and securities purchased under agreements to resell		4,717			3,241
Total cash and cash equivalents		88,669			94,309
Investment securities:
Available for sale, amortized cost of $620,061 (2012) and $583,951 (2011)		633,375			597,819
Held to maturity, fair value of $985 (2012) and $974 (2011)		875			875
Total investment securities		634,250			598,694
Loans, net of unearned income		1,046,561			1,072,108
Allowance for loan losses		(27,053	)		(28,264	)
Loans, net		1,019,508			1,043,844
Premises and equipment, net		38,335			38,770
Company-owned life insurance		27,153			27,461
Intangible assets, net		2,155			2,409
Other real estate owned		41,750			38,157
Other assets		39,007			39,946
Total assets	$	1,890,827		$	1,883,590
Liabilities
Deposits:
Noninterest bearing	$	234,658		$	224,259
Interest bearing		1,212,545			1,210,806
Total deposits		1,447,203			1,435,065
Federal funds purchased and other short-term borrowings		27,945			27,022
Securities sold under agreements to repurchase and other long-term borrowings		180,582			190,694
Subordinated notes payable to unconsolidated trusts		48,970			48,970
Dividends payable		188			188
Other liabilities		26,204			24,594
Total liabilities		1,731,092			1,726,533
Shareholders’ Equity
Preferred stock, no par value 1,000,000 shares authorized; 30,000 Series A shares issued and outstanding at March 31, 2012 and December 31, 2011; Liquidation preference of $30,000		29,218			29,115
Common stock, par value $.125 per share 14,608,000 shares authorized; 7,453,883 and 7,446,445 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively		932			931
Capital surplus		50,886			50,848
Retained earnings		72,351			69,520
Accumulated other comprehensive income		6,348			6,643
Total shareholders’ equity		159,735			157,057
Total liabilities and shareholders’ equity	$	1,890,827		$	1,883,590

See accompanying notes to unaudited consolidated financial statements.

Unaudited Consolidated Statements of Income

	Three Months Ended
	March 31,
(In thousands, except per share data)	2012			2011
Interest Income
Interest and fees on loans	$	14,281		$	16,180
Interest on investment securities:
Taxable		3,566			3,370
Nontaxable		527			533
Interest on deposits in other banks		35			83
Interest on federal funds sold and securities purchased under agreements to resell		1			2
Total interest income		18,410			20,168
Interest Expense
Interest on deposits		2,811			3,947
Interest on federal funds purchased and other short-term borrowings		25			62
Interest on securities sold under agreements to repurchase and other long-term borrowings		1,843			1,998
Interest on subordinated notes payable to unconsolidated trusts		524			505
Total interest expense		5,203			6,512
Net interest income		13,207			13,656
Provision for loan losses		977			2,441
Net interest income after provision for loan losses		12,230			11,215
Noninterest Income
Service charges and fees on deposits		2,003			2,053
Allotment processing fees		1,296			1,329
Other service charges, commissions, and fees		1,092			1,029
Data processing income		84			264
Trust income		462			427
Investment securities gains, net		3			410
Gains on sale of mortgage loans, net		310			141
Income from company-owned life insurance		760			235
Other		18			5
Total noninterest income		6,028			5,893
Noninterest Expense
Salaries and employee benefits		7,121			6,765
Occupancy expenses, net		1,176			1,232
Equipment expenses		570			610
Data processing and communication expenses		1,163			1,228
Bank franchise tax		568			631
Amortization of intangibles		254			286
Deposit insurance expense		687			889
Other real estate expenses, net		962			680
Deposit fraud loss		-			700
Other		2,092			2,261
Total noninterest expense		14,593			15,282
Income before income taxes		3,665			1,826
Income tax expense		356			781
Net income		3,309			1,045
Dividends and accretion on preferred shares		(478	)		(472	)
Net income available to common shareholders	$	2,831		$	573
Per Common Share
Net income, basic and diluted	$	.38		$	.08
Cash dividends declared		N/A			N/A
Weighted Average Shares Common Outstanding
Basic and diluted		7,447			7,412

See accompanying notes to unaudited consolidated financial statements.

Unaudited Consolidated Statements of Comprehensive Income

	Three Months Ended
	March 31,
(In thousands)	2012			2011
Net Income	$	3,309		$	1,045
Other comprehensive income:
Net unrealized holding gain on available for sale securities arising during the period on securities held at end of period, net of tax of $188 and $98, respectively		(350	)		(182	)

Reclassification adjustment for prior period unrealized gain previously reported in other comprehensive income recognized during current period, net of tax of $5 and $226, respectively		(10	)		(419	)

Change in unfunded portion of postretirement benefit obligation, net of tax of $36 and $32, respectively		65			58
Other comprehensive loss		(295	)		(543	)
Comprehensive Income	$	3,014		$	502

See accompanying notes to unaudited consolidated financial statements.

Unaudited Consolidated Statements of Cash Flows

Three months ended March 31, (In thousands)	2012			2011
Cash Flows from Operating Activities
Net income	$	3,309		$	1,045
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,124			1,237
Net premium amortization of available for sale investment securities		1,168			828
Provision for loan losses		977			2,441
Deferred income tax expense		427			2,063
Noncash employee stock purchase plan expense		10			17
Mortgage loans originated for sale		(16,497	)		(5,621	)
Proceeds from sale of mortgage loans		13,159			7,027
Gain on sale of mortgage loans, net		(310	)		(141	)
Net loss on sale and write downs of other real estate		751			396
Net gain on sale of available for sale investment securities		(3	)		(410	)
Decrease in accrued interest receivable		239			405
Increase in cash surrender value of company-owned life insurance		(214	)		(235	)
Death benefits in excess of cash surrender value on company-owned life insurance		(529	)		-
Decrease (increase) in other assets		394			(1,298	)
Decrease in accrued interest payable		(87	)		(133	)
Decrease in other liabilities		(489	)		(875	)
Net cash provided by operating activities		3,429			6,746
Cash Flows from Investing Activities
Proceeds from maturities and calls of available for sale investment securities		51,330			22,052
Proceeds from sale of available for sale investment securities		479			25,606
Purchase of available for sale investment securities		(86,797	)		(120,341	)
Principal collected on loans originated for investment, net		21,070			32,700
Proceeds from surrender of company-owned life insurance		-			2,248
Proceeds from death benefits of company-owned life insurance		1,051			-
Purchase of premises and equipment		(398	)		(436	)
Proceeds from sale of other real estate		1,593			982
Net cash used in investing activities		(11,672	)		(37,189	)
Cash Flows from Financing Activities
Net increase in deposits		12,138			9,685
Net increase in federal funds purchased and other short-term borrowings		923			25,401
Repayments of securities sold under agreements to repurchase and other long-term borrowings		(10,112	)		(2,171	)
Dividends paid, preferred		(375	)		(375	)
Shares issued under employee stock purchase plan		29			34
Net cash provided by financing activities		2,603			32,574
Net (decrease) increase in cash and cash equivalents		(5,640	)		2,131
Cash and cash equivalents at beginning of year		94,309			182,056
Cash and cash equivalents at end of period	$	88,669		$	184,187
Supplemental Disclosures
Cash paid during the period for:
Interest	$	5,290		$	6,645
Income taxes		-			750
Transfers from loans to other real estate		7,239			5,525
Sale and financing of other real estate		1,302			321
Cash dividends payable, preferred		188			188

See accompanying notes to unaudited consolidated financial statements.

Unaudited 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, 2012 and 2011	Stock		Shares		Amount		Surplus		Earnings			Income			Equity
Balance at January 1, 2012	$	29,115		7,446	$	931	$	50,848	$	69,520		$	6,643		$	157,057
Net income		-		-		-		-		3,309			-			3,309
Other comprehensive loss		-		-		-		-		-			(295	)		(295	)
Preferred stock dividends, $12.50 per share		-		-		-		-		(375	)		-			(375	)
Preferred stock discount accretion		103		-		-		-		(103	)		-			-
Shares issued pursuant to employee stock purchase plan		-		8		1		28		-			-			29
Expense related to employee stock purchase plan		-		-		-		10		-			-			10
Balance at March 31, 2012	$	29,218		7,454	$	932	$	50,886	$	72,351		$	6,348		$	159,735



Balance at January 1, 2011	$	28,719		7,412	$	926	$	50,675	$	68,678		$	898		$	149,896
Net income		-		-		-		-		1,045			-			1,045
Other comprehensive loss		-		-		-		-		-			(543	)		(543	)
Preferred stock dividends, $12.50 per share		-		-		-		-		(375	)		-			(375	)
Preferred stock discount accretion		97		-		-		-		(97	)		-			-
Shares issued pursuant to employee stock purchase plan		-		8		1		33		-			-			34
Expense related to employee stock purchase plan		-		-		-		17		-			-			17
Balance at March 31, 2011	$	28,816		7,420	$	927	$	50,725	$	69,251		$	355		$	150,074

See accompanying notes to unaudited consolidated financial statements.

Notes to Unaudited Consolidated Financial Statements

1. Basis of Presentation and Nature of Operations

The consolidated financial statements include the accounts of Farmers Capital Bank Corporation (the “Company” 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, First Citizens Bank (“First Citizens”) in Elizabethtown, KY, United Bank & Trust Company (“United Bank”) in Versailles, 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. In addition, 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.

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 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 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 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, 2011 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, 2011 included in the Company’s annual report on Form 10-K. The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and the footnotes required by 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 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, 2011.

2. 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 any 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 and are as follows: real estate loans, commercial loans, and consumer loans.

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.

Generally, 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. All interest accrued but not received for loans placed on nonaccrual status is reversed against interest income. Cash payments received on nonaccrual loans generally are applied to principal, and interest income is only recorded once principal recovery is reasonably assured. 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 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 or loans otherwise classified as substandard or doubtful. The general component covers non-classified 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 watch list and past due loans from the general portfolio and allocating specific amounts 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 actual twelve-quarter rolling historical loss rates, adjusted for qualitative risk factors.

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 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. Generally, impaired loans are also in nonaccrual status. In certain circumstances, however, the Company may continue to accrue interest on an impaired loan. Cash receipts on impaired loans are typically applied to the recorded investment in the loan, including any accrued interest receivable. 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 and, accordingly, they are not separately identified for impairment disclosures. 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.

Changes

During the first quarter of 2012, the Company refined the methodology it uses for calculating the allowance for loan losses. The Company, with assistance from an independent third party advisor, adopted the revisions to better reflect the impact of adjustments made to historic loss percentages, which are based on an evaluation of certain qualitative risk factors used in estimating credit losses inherent in the general component of the allowance for loan losses. Like the previously established model, the new methodology consists of a formula-based approach applied at the subsidiary bank level to estimate the allowance for segments of loans in the general component as well as specific allocations for individually identified impaired loans. Both the revised and previous methodologies use historical loss rates adjusted for qualitative factors. Prior to being formally adopted, the Company tested the updated methodology with live data over a period of several months to ensure that the allowance was supported and directionally consistent with changes in overall credit quality and that fluctuations were explainable and supportable.

The Company’s new methodology includes enhancements to the qualitative risk factors applied to the general component of its real estate, commercial, and consumer loan portfolio segments. Qualitative risk factors are adjustments for current market conditions that are likely to cause estimated credit losses to differ from historical loss experience. The most significant parts of the change by the Company to its methodology includes the addition of a considerably greater amount of economic and other qualitative input which are more reflective of current market conditions, the removal of a qualitative factor in which the objective was to quantify losses based on a migration analysis of loans from performing to nonperforming status over time which is no longer reflective of current credit quality trends, and the removal of a qualitative component for which the objective was to identify and capture larger, unexpected losses which is no longer relevant to the current portfolio composition. The net effect of the changes in the methodology related to the qualitative risk factors was a reduction in the allowance for loan losses of $2.9 million.

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 in 2006. Each factor is supported by a detailed analysis performed at each subsidiary bank and are 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

The qualitative risk factors above are used to adjust the actual twelve-quarter rolling historical loss rates for each loan segment. Components of the methodology that did not change include the computation of historical loss rates, loss estimates related to “Watch List” loans, and loss estimates related to loans 30 days or more past due that are not included in other components of the analysis.

In addition to the refinements made to the Company’s allowance for loans losses methodology as detailed above, the Company also made a policy change regarding how it identifies impaired loans. Previously, the Company identified as impaired all loans that were both in excess of a predetermined dollar threshold and that were also risk rated as substandard as part of its quarterly loan review analysis. Under the revised policy, certain substandard loans that previously were considered impaired may no longer be classified as such.

The determination of whether a loan is considered impaired is based on a loan’s individual impairment analysis and not strictly by the fact that it is rated as substandard and in excess of a certain dollar amount. An impairment analysis may indicate that an impaired loan needs no specific reserve allocation, but nonetheless the loan is still considered impaired. These situations occur primarily as a result of loans that are on nonaccrual status, loans that are troubled debt restructurings, or loans with prior charge-offs. There were loans in the amount of $28 million during the first quarter of 2012 that are no longer considered impaired as a result of the policy change. This change resulted in an increase in the allowance for loan losses in the amount of $945 thousand. Although impaired loans decreased as a result of the policy change, the amount of overall reserves increased because these loans previously had no specific reserves allocated. When these loans were removed from the impaired loan classification due to the policy change, reserve amounts attributable to the general component of the allowance methodology became applicable.

3. 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.

4. 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 and outstanding warrants. The effects of stock options and outstanding warrants 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 at March 31, 2012 and 2011.

	Three Months Ended March 31,
(In thousands, except per share data)	2012			2011

Net income, basic and diluted	$	3,309		$	1,045
Preferred stock dividends and discount accretion		(478	)		(472	)
Net income available to common shareholders, basic and diluted	$	2,831		$	573


Average common shares issued and outstanding, basic and diluted		7,447			7,412

Net income per common share, basic and diluted	$	.38		$	.08

Options to purchase 24,049 shares of common stock at March 31, 2012 and 2011 were excluded from the computation of net income per common share because they were antidilutive. There were 223,992 potential common shares associated with a warrant issued to the U.S. Treasury that were excluded from the computation of earnings per common share at March 31, 2012 and 2011 because they were antidilutive.

5. 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 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, 2012 and December 31, 2011 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, 2012
Obligations of U.S. government-sponsored entities	$	99,319		-	$	99,319		-
Obligations of states and political subdivisions		98,256		-		98,256		-
Mortgage-backed securities – residential		427,133		-		427,133		-
Mortgage-backed securities – commercial		94		-		94		-
Mutual funds and equity securities		1,319	$	1,319		-		-
Corporate debt securities		7,254		-		7,254		-
Total	$	633,375	$	1,319	$	632,056	$	0

			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, 2011
Obligations of U.S. government-sponsored entities	$	96,163		-	$	96,163		-
Obligations of states and political subdivisions		84,619		-		84,619		-
Mortgage-backed securities – residential		408,863		-		408,863		-
Mortgage-backed securities – commercial		209		-		209		-
Mutual funds and equity securities		1,601	$	1,601		-		-
Corporate debt securities		6,364		-		6,364		-
Total	$	597,819	$	1,601	$	596,218	$	0

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 other real estate owned (“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 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 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 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 expense.

The following tables represent 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 tables 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. 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, 2012
Impaired Loans
Real estate-construction and land development	$	10,632		-		-	$	10,632
Real estate mortgage-residential		9,463		-		-		9,463
Real estate mortgage-farmland and other commercial enterprises		8,242		-		-		8,242
Commercial and industrial		17		-		-		17
Consumer-secured		25		-		-		25
Consumer-unsecured		115		-		-		115
Total impaired loans	$	28,494		-		-	$	28,494

OREO
Real estate-construction and land development	$	1,874		-		-	$	1,874
Real estate mortgage-residential		1,581		-		-		1,581
Real estate mortgage-farmland and other commercial enterprises		1,044		-		-		1,044
Total OREO	$	4,499		-		-	$	4,499

			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, 2011
Impaired Loans
Real estate-construction and land development	$	18,636		-		-	$	18,636
Real estate mortgage-residential		8,160		-		-		8,160
Real estate mortgage-farmland and other commercial enterprises		12,928		-		-		12,928
Commercial and industrial		293		-		-		293
Consumer		47		-		-		47
Total impaired loans	$	40,064		-		-	$	40,064

OREO
Real estate-construction and land development	$	8,826		-		-	$	8,826
Real estate mortgage-residential		1,217		-		-		1,217
Real estate mortgage-farmland and other commercial enterprises		4,785		-		-		4,785
Total OREO	$	14,828		-		-	$	14,828

The following table presents quantitative information about unobservable inputs for assets measured on a nonrecurring basis using Level 3 measurements.

(In thousands)	Fair Value at March 31, 2012	Valuation Technique	Unobservable Inputs	Range (Average)
Impaired loans	$28,494	Discounted appraisals	Marketability discount	3%-20% (6%)
OREO	$4,499	Discounted appraisals	Marketability discount	3%-10% (6%)

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. The typical range of discounts is presented in the table above.

The following table represents impairment charges recorded in earnings for the periods indicated on assets measured at fair value on a nonrecurring basis.

(In thousands)
Three months ended	March 31, 2012		March 31, 2011
Impairment charges:
Impaired loans	$	4,306	$	1,134
OREO		503		229
Total	$	4,809	$	1,363

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.

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, 2012 and December 31, 2011. 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, 2012
Assets
Cash and cash equivalents	$	88,669	$	88,669	$	88,669		-		-
Held to maturity investment securities		875		985		-	$	985		-
Loans, net		1,019,508		1,016,973		-		-	$	1,016,973
Accrued interest receivable		6,380		6,380		-		6,380		-

Liabilities
Deposits		1,447,203		1,452,732		829,348		-		623,384
Federal funds purchased and other short-term borrowings		27,945		27,945		-		27,945		-
Securities sold under agreements to repurchase and other long-term borrowings		180,582		200,837		-		200,837		-
Subordinated notes payable to unconsolidated trusts		48,970		22,216		-		-		22,216
Accrued interest payable		2,288		2,288		-		2,288		-

December 31, 2011
Assets
Cash and cash equivalents	$	94,309	$	94,309	$	94,309		-		-
Held to maturity investment securities		875		974		-	$	974		-
Loans, net		1,043,844		1,043,824		-		-	$	1,043,824
Accrued interest receivable		6,619		6,619		-		6,619		-

Liabilities
Deposits		1,435,065		1,441,490		787,396		-		654,094
Federal funds purchased and other short-term borrowings		27,022		27,022		-		27,022		-
Securities sold under agreements to repurchase and other long-term borrowings		190,694		212,176		-		212,176		-
Subordinated notes payable to unconsolidated trusts		48,970		20,982		-		-		20,982
Accrued interest payable		2,375		2,375		-		2,375		-

6. Investment Securities

The following tables summarize the amortized costs and estimated fair value of the securities portfolio at March 31, 2012 and December 31, 2011. The summary is divided into available for sale and held to maturity investment securities.

March 31, 2012 (In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available For Sale
Obligations of U.S. government-sponsored entities	$	99,070	$	331	$	82	$	99,319
Obligations of states and political subdivisions		94,711		3,715		170		98,256
Mortgage-backed securities – residential		416,769		10,562		198		427,133
Mortgage-backed securities – commercial		92		2		-		94
Mutual funds and equity securities		1,312		16		9		1,319
Corporate debt securities		8,107		46		899		7,254
Total securities – available for sale	$	620,061	$	14,672	$	1,358	$	633,375
Held To Maturity
Obligations of states and political subdivisions	$	875	$	110	$	0	$	985

December 31, 2011 (In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available For Sale
Obligations of U.S. government-sponsored entities	$	95,770	$	408	$	15	$	96,163
Obligations of states and political subdivisions		80,801		3,903		85		84,619
Mortgage-backed securities – residential		397,675		11,384		196		408,863
Mortgage-backed securities – commercial		203		6		-		209
Mutual funds and equity securities		1,601		-		-		1,601
Corporate debt securities		7,901		-		1,537		6,364
Total securities – available for sale	$	583,951	$	15,701	$	1,833	$	597,819
Held To Maturity
Obligations of states and political subdivisions	$	875	$	99	$	0	$	974

The amortized cost and estimated fair value of the debt securities portfolio at March 31, 2012, 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. 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
March 31, 2012 (In thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	11,863	$	11,849		-		-
Due after one year through five years		100,541		101,080		-		-
Due after five years through ten years		72,256		74,925		-		-
Due after ten years		17,228		16,975	$	875	$	985
Mortgage-backed securities		416,861		427,227		-		-
Total	$	618,749	$	632,056	$	875	$	985

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

	Three Months Ended
	March 31,
(In thousands)	2012		2011

Gross realized gains	$	7	$	413
Gross realized losses		4		3
Net realized gains	$	3	$	410

Investment securities with unrealized losses at March 31, 2012 and December 31, 2011 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, 2012 (In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored entities	$	27,268	$	82		-		-	$	27,268	$	82
Obligations of states and political subdivisions		12,272		130	$	6,486	$	40		18,758		170
Mortgage-backed securities – residential		45,277		198		-		-		45,277		198
Mutual funds and equity securities		318		9		-		-		318		9
Corporate debt securities		696		8		4,951		891		5,647		899
Total	$	85,831	$	427	$	11,437	$	931	$	97,268	$	1,358

	Less than 12 Months				12 Months or More				Total
December 31, 2011 (In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored entities	$	13,494	$	15		-		-	$	13,494	$	15
Obligations of states and political subdivisions		2,913		20	$	6,886	$	65		9,799		85
Mortgage-backed securities – residential		56,249		196		-		-		56,249		196
Corporate debt securities		-		-		4,299		1,537		4,299		1,537
Total	$	72,656	$	231	$	11,185	$	1,602	$	83,841	$	1,833

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 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, 2012, the Company’s investment securities portfolio had gross unrealized losses of $1.4 million, an improvement of $475 thousand or 25.9% from year-end 2011. Of the total gross unrealized losses at March 31, 2012, $931 thousand relates to investments that have been in a continuous loss position for 12 months or more. Unrealized losses on corporate debt securities make up $891 thousand of the total unrealized loss on investment securities in a continuous loss position of 12 months or more. This represents an improvement of $646 thousand or 42.0% from year-end 2011.

Corporate debt securities in the Company’s investment securities portfolio at March 31, 2012 include $5.0 million carrying value of single-issuer trust preferred capital securities issued by a national and global financial services firm. These securities are currently performing and the issuer continues to be rated as investment grade by major rating agencies. The total unrealized loss on corporate debt securities is primarily attributed to the single-issuer trust preferred capital securities. The unrealized losses on these securities is mainly a result of the general decline in financial markets and illiquidity events that began in 2008 and is not due to adverse changes in the expected cash flows of the individual securities. Overall market declines, particularly of banking and financial institutions, are a result of significant stress throughout the regional and national economy that began during 2008 which has not fully stabilized.

The Company attributes the unrealized losses in other sectors of its investment securities portfolio to changes in market interest rates. In general, market rates for these securities exceed the yield available at the time many of the securities in the portfolio were purchased. The Company does not expect to incur a loss on these securities unless they are sold prior to maturity. The Company’s current intent is to hold these securities until recovery.

Investment securities with unrealized losses at March 31, 2012 are performing according to their contractual terms. The Company does not have the intent to sell these securities and likely will not be required to sell these securities before 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:

	March 31, 2012			December 31, 2011
(Dollars in thousands)	Amount			Amount

Real Estate:
Real estate – construction and land development	$	118,428		$	119,989
Real estate – residential		439,390			445,464
Real estate mortgage – farmland and other commercial enterprises		373,761			384,331
Commercial:
Commercial and industrial		48,110			48,771
States and political subdivisions		23,189			23,601
Lease financing		5,903			7,578
Other		19,065			21,435
Consumer:
Secured		12,256			14,214
Unsecured		6,751			7,151
Total loans		1,046,853			1,072,534
Less unearned income		(292	)		(426	)
Total loans, net of unearned income	$	1,046,561		$	1,072,108

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

Three months ended March 31, 2012 (Dollars in thousands)	Real Estate			Commercial			Consumer			Total

Balance, beginning of period	$	23,538		$	3,508		$	1,218		$	28,264
Provision for loan losses		2,593			(1,296	)		(320	)		977
Recoveries		127			99			56			282
Loans charged off		(2,268	)		(73	)		(129	)		(2,470	)
Balance, end of period	$	23,990		$	2,238		$	825		$	27,053

Three months ended March 31, 2011 (Dollars in thousands)	Real Estate			Commercial			Consumer			Total

Balance, beginning of period	$	24,527		$	3,260		$	997		$	28,784
Provision for loan losses		2,187			227			27			2,441
Recoveries		68			39			59			166
Loans charged off		(2,173	)		(72	)		(124	)		(2,369	)
Balance, end of period	$	24,609		$	3,454		$	959		$	29,022

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

March 31, 2012 (In thousands)	Recorded Investment		Unpaid Principal Balance		Allowance for Loan Losses Allocated
Impaired loans with no related allowance recorded:
Real Estate
Real estate – construction and land development	$	23,965	$	33,742
Real estate mortgage – residential		7,922		8,127
Real estate mortgage – farmland and other commercial enterprises		25,356		28,704
Total	$	57,243	$	70,573

Impaired loans with an allowance recorded:
Real Estate
Real estate – construction and land development	$	11,504	$	11,752	$	716
Real estate mortgage – residential		16,071		15,997		1,675
Real estate mortgage – farmland and other commercial enterprises		15,232		15,039		1,628
Commercial
Commercial and industrial		742		738		453
Consumer
Secured		105		104		80
Unsecured		190		189		75
Total	$	43,844	$	43,819	$	4,627

Three Months Ended March 31, (In thousands)	2012		2011
Average of individually impaired loans:
Real Estate
Real estate – construction and land development	$	35,550	$	57,996
Real estate mortgage – residential		24,133		31,097
Real estate mortgage – farmland and other commercial enterprises		41,107		73,105
Commercial
Commercial and industrial		765		4,314
Consumer
Secured		106		203
Unsecured		192		-
Total average of impaired loans	$	101,853	$	166,715

Interest income recognized during impairment:
Real Estate
Real estate – construction and land development	$	171	$	271
Real estate mortgage – residential		532		382
Real estate mortgage – farmland and other commercial enterprises		707		821
Commercial
Commercial and industrial		14		50
Consumer
Secured		5		3
Unsecured		4		-
Total interest income recognized during impairment	$	1,433	$	1,527

Cash-basis interest income recognized:
Real Estate
Real estate – construction and land development	$	160	$	237
Real estate mortgage – residential		522		360
Real estate mortgage – farmland and other commercial enterprises		541		719
Commercial
Commercial and industrial		14		50
Consumer
Secured		5		2
Unsecured		4		-
Total cash-basis interest income recognized	$	1,246	$	1,368

December 31, 2011 (In thousands)	Recorded Investment		Unpaid Principal Balance		Allowance for Loan Losses Allocated
Impaired loans with no related allowance recorded:
Real Estate
Real estate – construction and land development	$	26,363	$	26,337
Real estate mortgage – residential		22,923		22,843
Real estate mortgage – farmland and other commercial enterprises		43,765		43,438
Commercial
Commercial and industrial		2,982		2,939
Consumer
Unsecured		19		18
Total	$	96,052	$	95,575

Impaired loans with an allowance recorded:
Real Estate
Real estate – construction and land development	$	13,440	$	13,425	$	139
Real estate mortgage – residential		13,239		13,197		998
Real estate mortgage – farmland and other commercial enterprises		15,070		15,035		600
Commercial
Commercial and industrial		456		453		159
Consumer
Secured		60		58		30
Total	$	42,265	$	42,168	$	1,926

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, 2012 and December 31, 2011.

March 31, 2012 (In thousands)	Real Estate		Commercial		Consumer		Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	4,019	$	453	$	155	$	4,627
Collectively evaluated for impairment		19,971		1,785		670		22,426
Total ending allowance balance	$	23,990	$	2,238	$	825	$	27,053

Loans
Loans individually evaluated for impairment	$	100,050	$	742	$	295	$	101,087
Loans collectively evaluated for impairment		831,529		95,233		18,712		945,474
Total ending loan balance, net of unearned income	$	931,579	$	95,975	$	19,007	$	1,046,561

December 31, 2011 (In thousands)	Real Estate		Commercial		Consumer		Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,737	$	159	$	30	$	1,926
Collectively evaluated for impairment		21,801		3,349		1,188		26,338
Total ending allowance balance	$	23,538	$	3,508	$	1,218	$	28,264

Loans
Loans individually evaluated for impairment	$	134,800	$	3,438	$	79	$	138,317
Loans collectively evaluated for impairment		814,984		97,521		21,286		933,791
Total ending loan balance, net of unearned income	$	949,784	$	100,959	$	21,365	$	1,072,108

The following tables present the recorded investment in nonperforming loans by class of loans as of March 31, 2012 and December 31, 2011.

March 31, 2012 (In thousands)	Nonaccrual		Restructured Loans		Loans Past Due 90 Days or More and Still Accruing
Real Estate:
Real estate – construction and land development	$	25,413	$	6,175		-
Real estate mortgage – residential		13,975		3,409	$	18
Real estate mortgage – farmland and other commercial enterprises		21,021		7,967		-
Commercial:
Commercial and industrial		687		-		-
Lease financing		158		-		28
Consumer:
Secured		96		-		-
Unsecured		8		-		4
Total	$	61,358	$	17,551	$	50

December 31, 2011 (In thousands)	Nonaccrual		Restructured Loans		Loans Past Due 90 Days or More and Still Accruing
Real Estate:
Real estate – construction and land development	$	30,744	$	6,207		-
Real estate mortgage – residential		14,578		4,894		-
Real estate mortgage – farmland and other commercial enterprises		13,831		8,024		-
Commercial:
Commercial and industrial		386		-		-
Lease financing		124		-		-
Consumer:
Secured		80		-		-
Unsecured		12		-	$	1
Total	$	59,755	$	19,125	$	1

The Company has allocated $503 thousand of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2012. The Company has no commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the current period ending March 31, 2012, the Company had no loans that were modified as troubled debt restructurings. The Company also had no restructured credits during the same time period for which there was a payment default within twelve months following the modification.

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, 2012 (In thousands)	30-89 Days Past Due		90 Days or More Past Due		Total		Current		Total Loans
Real Estate:
Real estate – construction and land development	-		$	20,782	$	20,782	$	97,646	$	118,428
Real estate mortgage – residential	$	2,411		12,122		14,533		424,857		439,390
Real estate mortgage – farmland and other commercial enterprises		9,161		11,285		20,446		353,315		373,761
Commercial:
Commercial and industrial		66		608		674		47,436		48,110
States and political subdivisions		-		-		-		23,189		23,189
Lease financing, net		23		186		209		5,402		5,611
Other		26		-		26		19,039		19,065
Consumer:
Secured		126		102		228		12,028		12,256
Unsecured		17		4		21		6,730		6,751
Total	$	11,830	$	45,089	$	56,919	$	989,642	$	1,046,561

December 31, 2011 (In thousands)	30-89 Days Past Due		90 Days or More Past Due		Total		Current		Total Loans
Real Estate:
Real estate – construction and land development	$	3,343	$	18,970	$	22,313	$	97,676	$	119,989
Real estate mortgage – residential		5,836		7,352		13,188		432,276		445,464
Real estate mortgage – farmland and other commercial enterprises		1,684		12,497		14,181		370,150		384,331
Commercial:
Commercial and industrial		98		300		398		48,373		48,771
States and political subdivisions		-		-		-		23,601		23,601
Lease financing, net		80		96		176		6,976		7,152
Other		29		-		29		21,406		21,435
Consumer:
Secured		200		17		217		13,997		14,214
Unsecured		61		5		66		7,085		7,151
Total	$	11,331	$	39,237	$	50,568	$	1,021,540	$	1,072,108

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 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. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows for the dates indicated.

	Real Estate						Commercial
March 31, 2012 (In thousands)	Real Estate-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	$	67,007	$	383,285	$	296,530	$	42,312	$	23,189	$	5,449	$	18,050
Special Mention		7,754		19,168		24,044		4,429		-		-		1,000
Substandard		43,450		35,739		51,528		1,267		-		162		15
Doubtful		217		1,198		1,659		102		-		-		-
Total	$	118,428	$	439,390	$	373,761	$	48,110	$	23,189	$	5,611	$	19,065

	Real Estate						Commercial
December 31, 2011 (In thousands)	Real Estate-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	$	65,306	$	386,134	$	303,512	$	41,556	$	23,601	$	7,022	$	20,415
Special Mention		7,443		16,585		19,393		2,969		-		6		1,000
Substandard		47,091		41,468		59,395		4,103		-		124		20
Doubtful		149		1,277		2,031		143		-		-		-
Total	$	119,989	$	445,464	$	384,331	$	48,771	$	23,601	$	7,152	$	21,435

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, 2012 and December 31, 2011.

	March 31, 2012				December 31, 2011
	Consumer				Consumer
(In thousands)	Secured		Unsecured		Secured		Unsecured
Credit risk profile based on payment activity:
Performing	$	12,160	$	6,731	$	14,134	$	7,138
Nonperforming		96		20		80		13
Total	$	12,256	$	6,751	$	14,214	$	7,151

8. Other Real Estate Owned

OREO was as follows as of the date indicated:

(In thousands)	March 31, 2012		December 31, 2011
Construction and land development	$	25,460	$	21,951
Residential real estate		4,573		5,591
Farmland and other commercial enterprises		11,717		10,615
Total	$	41,750	$	38,157

OREO activity for the three months ended March 31, 2012 and 2011 was as follows:

Three months ended March 31, (In thousands)	2012			2011
Beginning balance	$	38,157		$	30,545
Transfers from loans		7,239			5,525
Proceeds from sales		(2,895	)		(1,303	)
Loss on sales		(242	)		(170	)
Write downs and other decreases, net		(509	)		(226	)
Ending balance	$	41,750		$	34,371

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, 2012 and 2011.

Three months ended March 31, (In thousands)	2012		2011
Service cost	$	154	$	108
Interest cost		152		151
Amortization of transition obligation		26		26
Recognized prior service cost		64		64
Recognized net actuarial loss		14		-
Net periodic benefit cost	$	410	$	349

The Company expects benefit payments of $330 thousand for 2012, of which $64 thousand have been made during the first three months of 2012.

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, 2012									December 31, 2011
	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		16.88	%		18.14	%		10.17	%		16.68	%		17.95	%		9.99	%
Farmers Bank		17.79			19.05			9.70			17.58			18.84			9.47
First Citizens		12.97			13.71			8.70			13.47			14.21			8.93
United Bank		14.85			16.13			9.21			13.51			14.79			8.44
Citizens Northern		12.36			13.62			8.62			12.24			13.49			8.48

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, as defined by regulation, by its total quarterly average assets.

Summary of Regulatory Agreements

Below is a summary of the regulatory agreements that the Parent Company and three of its subsidiary banks have entered into with their primary regulators. For a more complete discussion and additional information regarding these regulatory actions, please refer to the section captioned “Capital Resources” under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Parent Company

Primarily due to the regulatory actions and capital requirements at three of the Company’s subsidiary banks (as discussed below), the Federal Reserve Bank of St. Louis (“FRB St. Louis”) and Kentucky Department of Financial Institutions (“KDFI”) proposed the Company enter into a Memorandum of Understanding (“Memorandum”). The Company’s board approved entry into the Memorandum at a regular board meeting during the fourth quarter of 2009. Pursuant to the Memorandum, the Company agreed that it would develop an acceptable capital plan to ensure that the consolidated organization remains well-capitalized and each of its subsidiary banks meet the capital requirements imposed by their regulator as summarized below.

The Company also agreed to reduce its common stock dividend in the fourth quarter of 2009 from $.25 per share down to $.10 per share and not make interest payments on the Company’s trust preferred securities or dividends on its common or preferred stock without prior approval from FRB St. Louis and KDFI. Representatives of the FRB St. Louis and KDFI have indicated that any such approval for the payment of dividends will be predicated on a demonstration of adequate, normalized earnings on the part of the Company’s subsidiaries sufficient to support quarterly payments on the Company’s trust preferred securities and quarterly dividends on the Company’s common and preferred stock. While both regulatory agencies have granted approval of all subsequent quarterly Company requests to make interest payments on its trust preferred securities and dividends on its preferred stock, the Company has not (based on the assessment by Company management of both the Company’s capital position and the earnings of its subsidiaries) sought regulatory approval for the payment of common stock dividends since the fourth quarter of 2009. Moreover, the Company will not pay any such dividends on its common stock in any subsequent quarter until the regulator’s assessment of the earnings of the Company’s subsidiaries, and the Company’s assessment of its capital position, both yield the conclusion that the payment of a Company common stock dividend is warranted.

Other components in the regulatory order for the parent company include requesting and receiving regulatory approval for the payment of new salaries/bonuses or other compensation to insiders; assisting its subsidiary banks in addressing weaknesses identified in their reports of examinations; providing periodic reports detailing how it will meet its debt service obligations; and providing progress reports with its compliance with the regulatory Memorandum.

Farmers Bank

In November of 2009, the KDFI and FRB St. Louis entered into a Memorandum with Farmers Bank. The Memorandum requires that Farmers Bank obtain written consent prior to declaring or paying the Parent Company a cash dividend and to achieve and maintain a Tier 1 Leverage ratio of 8.0% by June 30, 2010. The Parent Company injected from its reserves $11 million in capital into Farmers Bank subsequent to the Memorandum.

At June 30, 2010, Farmers Bank had a Tier 1 Leverage ratio of 7.98% and a Total Risk-based Capital ratio of 15.78%. Subsequent to June 30, 2010, the Parent Company injected into Farmers Bank an additional $200 thousand in capital in order to raise its Tier 1 Leverage ratio to 8.0% to comply with the Memorandum. At March 31, 2012, Farmers Bank had a Tier 1 Leverage ratio of 9.70% and a Total Risk-based Capital ratio of 19.05%.

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, developing and implementing a written profit plan and strategic plans, and evaluating policies and procedures for monitoring construction loans and use of interest reserves. 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.

United Bank

In November of 2009, the Federal Deposit Insurance Corporation (“FDIC”) and United Bank entered into a Cease and Desist Order (“C&D”) 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% no later than March 31, 2012.

During the first quarter of 2012, the Parent Company injected from its reserves $2.5 million in capital into United Bank in order for it to comply with the Consent Order. At March 31, 2012, United Bank had a Tier 1 Leverage ratio of 9.21% and a Total Risk-based Capital ratio of 16.13%. The Parent Company has injected from its reserves $14.9 million of capital into United Bank since 2009.

Other components in the regulatory order include stricter oversight and reporting to its regulators in terms of complying with the Order. It also includes an increase 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 Consent Order.

Citizens Northern

The KDFI and the FDIC entered into a Memorandum with Citizens Northern on September 8, 2010. The Memorandum requires that Citizens Northern obtain written consent prior to declaring or paying a dividend and to increase Tier 1 Leverage ratio to equal or exceed 7.5% prior to September 30, 2010 and to achieve and maintain Tier 1 Leverage ratio to equal or exceed 8.0% prior to December 31, 2010. In December 2010, the Parent Company injected $250 thousand of capital into Citizens Northern to bring its Tier 1 Leverage ratio up to 8.04% as of year-end 2010. At March 31, 2012, Citizens Northern had a Tier 1 Leverage ratio of 8.62% and a Total Risk-based Capital ratio of 13.62%.

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. At the Parent Company and at each of its bank subsidiaries, 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 and its subsidiary banks are in compliance with the requirements identified in the regulatory agreements as of March 31, 2012.

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.

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; the possibility that acquired entities may not perform as well as expected; unexpected claims or litigation against the Company; technological or operational difficulties; the impact of new accounting pronouncements and changes in policies and practices that may be adopted by regulatory agencies; acts of war or terrorism; the ability of the parent company to receive dividends from its subsidiaries; the impact of larger or similar financial institutions encountering difficulties, which may adversely affect the banking industry or the Company; the Company or its subsidiary banks’ ability to maintain required capital levels and adequate funding sources and liquidity; and other risks or uncertainties detailed in the Company’s filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company.

The Company’s forward-looking statements are based on information available at the time such statements are made. The Company expressly disclaims any intent or obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events, or other changes.

RESULTS OF OPERATIONS

First Quarter 2012 Compared to First Quarter 2011

The Company reported net income of $3.3 million for the quarter ended March 31, 2012, an increase of $2.3 million or 217% compared with net income of $1.0 million for the first quarter a year ago. On a per common share basis, net income for the current quarter was $.38, and increase of $.30 or 375% compared to the $.08 reported for the first quarter of 2011. Selected income statement amounts and related data are presented in the table below.

(In thousands except per share data)
Three Months Ended March 31,	2012			2011			Change
Interest income	$	18,410		$	20,168		$	(1,758	)
Interest expense		5,203			6,512			(1,309	)
Net interest income		13,207			13,656			(449	)
Provision for loan losses		977			2,441			(1,464	)
Net interest income after provision for loan losses		12,230			11,215			1,015
Noninterest income		6,028			5,893			135
Noninterest expenses		14,593			15,282			(689	)
Income before income tax expense		3,665			1,826			1,839
Income tax expense		356			781			(425	)
Net income	$	3,309		$	1,045		$	2,264
Preferred stock dividends and discount accretion		(478	)		(472	)		6
Net income available to common shareholders	$	2,831		$	573		$	2,258

Basic and diluted net income per common share	$	.38		$	.08		$	.30

Weighted average common shares outstanding – basic and diluted		7,447			7,412			35
Return on average assets		.70	%		.22	%		48	bp
Return on average equity		8.35	%		2.80	%		555	bp

The $2.3 million increase in net income for the current quarter compared to the first quarter a year earlier was driven mainly by a $1.5 million or 60.0% decrease in the provision for loan losses, lower noninterest expenses of $689 thousand or 4.5%, a decrease in income tax expense of $425 thousand or 54.4%, partially offset by a decrease in net interest income of $449 thousand or 3.3%. 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, 2012, as measured by the Treasury yield curve, edged upward when compared to year-end 2011 with incremental increases for each successive time period along the curve. Shorter-term yields for three and six-month maturities increased six basis points and eight basis points, respectively. Longer-term maturities increased 15, 21, 33, and 44 basis points for the three, five, ten, and 30-year maturity periods. The overall rate environment continues near historic lows which makes managing the Company’s net interest margin very challenging. At March 31, 2012 the short-term federal funds target interest rate was between zero and 0.25%, which has remained unchanged since December 2008. The Federal Reserve Board has indicated an objective of holding short-term interest rates at exceptionally low levels through 2014.

Net interest income was $13.2 million for the first three months of 2012, a decrease of $449 thousand or 3.3% compared to $13.7 million for the first three months of 2011. The decrease in net interest income is attributed mainly to a $1.8 million or 8.7% decrease in interest income, primarily on loans, which was partially offset by a $1.3 million or 20.1% decrease in interest expense, primarily on deposits. The decrease in total interest income and interest expense is attributed to both rate and volume declines of interest earning assets and interest paying liabilities and is the result of both the overall weak economic environment and the Company’s balance sheet management strategy, which includes being more selective in pricing deposits and extending loans in an effort to improve net interest margin, overall profitability, and capital position. The Company is generally earning and paying less interest from its earning assets and funding sources as the average rates earned and paid have decreased. This includes repricing of variable and floating rate assets and liabilities that have reset to net overall lower amounts since their previous repricing date as well as activity related to new earning assets and funding sources. Additionally, an increase in available funds has been invested in lower yielding investment securities or cash equivalents in response to a decrease in high quality loan demand.

Interest income and interest expense related to nearly all categories of the Company’s earning assets and interest paying liabilities have declined in the quarterly comparison. The $1.8 million decrease from interest income in the comparison is primarily made up of lower interest on loans of $1.9 million or 11.7%, partially offset by an increase in interest on investment securities of $190 thousand or 4.9%. The decrease in interest on loans was driven primarily by a $115 million or 9.8% decrease in average volume and, to a lesser extent, a decrease in the average rate earned of 17 basis points to 5.5% from 5.7%. For investment securities, the increase in interest income is mainly volume driven, as a $148 million or 31.1% increase in the average balance outstanding was enough to offset a 75 basis point lower average rate earned of 2.8% in a lower interest rate environment.

The $1.3 million decrease in interest expense is primarily a result of lower interest expense on deposits of $1.1 million or 28.8% followed by lower interest on borrowings of $173 thousand or 6.7%. The decrease in interest expense on deposits was driven by lower interest on time deposits of $912 thousand or 26.0% due to decreases in both the volume and average rate paid. Average outstanding balances of time deposits were $632 million for the current quarter, a decrease of $78.1 million or 11.0% compared to a year ago. The average rate paid on time deposits was 1.7% and 2.0% for the current and year-ago periods, respectively. Interest expense on borrowings decreased mainly as a result of maturities related to outstanding long-term Federal Home Loan Bank advances, which offset an overall increase in the average rate paid on borrowed funds of 19 basis points.

The net interest margin on a taxable equivalent basis decreased four basis points to 3.14% during the first quarter of 2012 compared to 3.18% in the same quarter of 2011. The decrease in net interest margin is due mainly to a three basis point decrease in the spread between the average rate earned on earning assets and the average rate paid on interest bearing liabilities to 2.91% in the current quarter from 2.94% for the first quarter of 2011. The Company expects its net interest margin to remain relatively flat or trend upward in the near term according to internal modeling using expectations about future market interest rates, the maturity structure of the Company’s earning assets and liabilities, and other factors. 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

Quarter Ended March 31,	2012									2011
(In thousands)	Average Balance			Interest			Average Rate			Average Balance			Interest			Average Rate
Earning Assets
Investment securities
Taxable	$	542,649		$	3,566			2.64	%	$	407,817		$	3,370			3.35	%
Nontaxable1		78,888			774			3.95			66,099			785			4.82
Interest bearing deposits in banks, federal funds sold and securities purchased under agreements to resell		71,723			36			.20			155,608			85			.22
Loans1,2,3		1,058,277			14,483			5.50			1,173,677			16,399			5.67
Total earning assets		1,751,537		$	18,859			4.33	%		1,803,201		$	20,639			4.64	%
Allowance for loan losses		(28,323	)		-			-			(28,938	)		-			-
Total earning assets, net of allowance for loan losses		1,723,214			-			-			1,774,263			-			-
Nonearning Assets
Cash and due from banks		18,824			-			-			20,233			-			-
Premises and equipment, net		38,495			-			-			39,291			-			-
Other assets		125,838			-			-			124,301			-			-
Total assets	$	1,906,371			-			-		$	1,958,088			-			-
Interest Bearing Liabilities
Deposits
Interest bearing demand	$	275,856		$	64			.09	%	$	260,828		$	94			.15	%
Savings		301,348			158			.21			285,784			352			.50
Time		632,413			2,589			1.65			710,504			3,501			2.00
Federal funds purchased and other short-term borrowings		27,478			25			.37			46,086			62			.55
Securities sold under agreements to repurchase and other long-term borrowings		232,814			2,367			4.09			250,591			2,503			4.05
Total interest bearing liabilities		1,469,909		$	5,203			1.42	%		1,553,793		$	6,512			1.70	%
Noninterest Bearing Liabilities
Other demand deposits		224,782			-			-			207,741			-			-
Other liabilities		52,323			-			-			45,229			-			-
Total liabilities		1,747,014			-			-			1,806,763			-			-
Shareholders’ equity		159,357			-			-			151,325			-			-
Total liabilities and shareholders’ equity	$	1,906,371			-			-		$	1,958,088			-			-
Net interest income		-			13,656			-			-			14,127			-
TE basis adjustment		-			(449	)		-			-			(471	)		-
Net interest income		-		$	13,207			-			-		$	13,656			-
Net interest spread		-			-			2.91	%		-			-			2.94	%
Impact of noninterest bearing sources of funds		-			-			.23			-			-			.24
Net interest margin		-			-			3.14	%		-			-			3.18	%

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 $261 thousand and $233 thousand in 2012 and 2011, respectively.

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

(In thousands)	Variance			Variance Attributed to
Quarter Ended March 31,		2012/2011	1	Volume			Rate

Interest Income
Taxable investment securities	$	196		$	3,649		$	(3,453	)
Nontaxable investment securities2		(11	)		589			(600	)
Interest bearing deposits in banks, federal funds sold and securities purchased under agreements to resell		(49	)		(42	)		(7	)
Loans2		(1,916	)		(1,468	)		(448	)
Total interest income		(1,780	)		2,728			(4,508	)
Interest Expense
Interest bearing demand deposits		(30	)		36			(66	)
Savings deposits		(194	)		126			(320	)
Time deposits		(912	)		(352	)		(560	)
Federal funds purchased and other short-term borrowings		(37	)		(20	)		(17	)
Securities sold under agreements to repurchase and other long-term borrowings		(136	)		(295	)		159
Total interest expense		(1,309	)		(505	)		(804	)
Net interest income	$	(471	)	$	3,233		$	(3,704	)
Percentage change		100.0	%		(686.4	)%		786.4	%

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 maintain an allowance for loan losses at an adequate level based on 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 Company’s loan quality has been negatively impacted by adverse conditions in certain real estate sectors since the downturn in the overall economy and financial markets that started to take place in late 2007 and more significantly during 2008 and has yet to fully stabilize. This has led to declines in real estate values and deterioration in the financial condition of many of the Company’s borrowers, particularly borrowers in the commercial and real estate development industry. The Company has, in turn, lowered its loan quality ratings on certain commercial and real estate development loans as part of its normal internal review process. Declining real estate values have resulted in loans that have become under collateralized, which has elevated nonperforming loans, net charge-offs, and the provision for loan losses.

The provision for loan losses for the current quarter was $977 thousand, a decrease of $1.5 million or 60.0% compared to $2.4 million for the first quarter of 2011. The allowance for loan losses as a percentage of outstanding loans (net of unearned income) was 2.58% at March 31, 2012 compared to 2.64% and 2.52% at year-end 2011 and March 31, 2011, respectively. The $1.5 million decrease in the provision for loan losses is attributed to a decrease in nonperforming and substandard loans with an improvement related to the historical loss rates, as adjusted for current risk factors, applied to a shrinking loan portfolio.

The lower provision for loan losses is attributed mainly to improvements to the qualitative risk factors used to adjust historical loss rates that are applied to the general pool of loans in establishing the allowance for loan losses. Nonperforming loans, which were relatively unchanged at $79.0 million at March 31, 2012 compared to year-end 2011 and $15.3 million or 16.2% lower than at March 31 a year earlier, is also a factor to a lesser extent. The improvement to current risk factors in the determination of the allowance for loan losses resulted from a refinement to the Company’s allowance for loan losses methodology that occurred during the first quarter of 2012. The Company, with assistance from an independent third party advisor, adopted revisions to its methodology primarily in order to better reflect the impact of qualitative factors used in estimating credit losses inherent in the general component of the allowance for loan losses. Prior to being formally adopted, the Company tested the updated methodology with live data over a period of several months to ensure that significant changes in the allowance were supported and directionally consistent with changes in overall credit quality and that significant fluctuations were explainable and supportable. For additional detail related to the revised methodology, please refer to Note 2 to the unaudited consolidated financial statements of this Form 10-Q.

Net charge-offs were $2.2 million in the current quarter, unchanged when compared to the first quarter of 2011. Of the $2.2 million in net charge-offs in the current quarter, $1.1 million is attributed to three separate credit relationships secured by real estate. Two of these charge-offs totaling $692 thousand are secured by commercial real estate, and the third charge-off in the amount of $378 thousand represents a real estate construction credit. On an annualized basis, quarterly net charge-offs were .83% of average loans outstanding for the three months ended March 31, 2012 compared to .76% for the first quarter of a year ago.

Noninterest Income

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

Three Months Ended March 31, (In thousands)	2012		2011		Change
Service charges and fees on deposits	$	2,003	$	2,053	$	(50	)
Allotment processing fees		1,296		1,329		(33	)
Other service charges, commissions, and fees		1,092		1,029		63
Data processing income		84		264		(180	)
Trust income		462		427		35
Investment securities gains, net		3		410		(407	)
Gain on sale of mortgage loans, net		310		141		169
Income from company-owned life insurance		760		235		525
Other		18		5		13
Total noninterest income	$	6,028	$	5,893	$	135

The more significant items for discussion are included below.

Service charges and fees on deposits decreased $50 thousand or 2.4% driven by a decline in fees from overdraft/insufficient funds of $121 thousand or 9.4% related to lower transaction volume.

Allotment processing fees declined $33 thousand or 2.5% mainly as a result of lower processing volumes.

The decrease in data processing income of $180 thousand or 68.2% is driven by a $124 thousand or 67.5% decline in fees related to the winding down of the Commonwealth of Kentucky (“Commonwealth”) depository services contract. Decreases in data processing revenues related to the general depository contract have been partially offset by noninterest expense reductions spread over multiple line items categories. Data processing fees have also declined $56 thousand or 96.7% due to lower processing volumes attributed to an increase in paperless payment transactions related to the Commonwealth’s Women, Infants, and Children (“WIC”) supplemental nutrition program. Such transactions are now being processed by an unrelated third party. The Company expects to continue processing a relatively small number of transactions that are subject to manual processing.

The $407 thousand or 99.3% decrease in the gain on the sale of investment securities is attributed to the volume and timing of securities sold, with such sales often taking place at irregular intervals based on asset and liability management strategies. The Company periodically sells investment securities to lock in gains, increase yield, restructure expected future cash flows, and/or enhance its capital position as opportunities occur.

Gains on the sale of mortgage loans increased $169 thousand or 120% as the volume of loans sold increased $6.0 million or 87.0%. The increase in loans sold is mainly due to the overall low interest rate environment. While market interest rates are below already low levels from a year ago, rates have risen slightly since year-end 2011. This has prompted many borrowers to refinance or purchase a home in anticipation that rates may rise further in the near future.

The $525 thousand or 223% increase in income from company-owned life insurance is mainly the result of a $529 thousand gain related to death benefit proceeds received in the current quarter.

Noninterest Expense

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

Three Months Ended March 31, (In thousands)	2012		2011		Change
Salaries and employee benefits	$	7,121	$	6,765	$	356
Occupancy expenses, net		1,176		1,232		(56	)
Equipment expenses		570		610		(40	)
Data processing and communication expense		1,163		1,228		(65	)
Bank franchise tax		568		631		(63	)
Amortization of intangibles		254		286		(32	)
Deposit insurance expense		687		889		(202	)
Other real estate expenses, net		962		680		282
Deposit fraud loss		-		700		(700	)
Other		2,092		2,261		(169	)
Total noninterest expense	$	14,593	$	15,282	$	(689	)

The more significant items for discussion are included below.

The $356 thousand or 5.3% increase in salaries and employee benefits is due mainly to an increase in health insurance and postretirement benefit expenses, additional personnel hired in the credit administration and nonperforming asset management positions, and modest annual employee pay increases.

Deposit insurance expense decreased $202 thousand or 22.7% mainly as a result of the change in the FDIC’s assessment base and rate structure that went into effect during the second quarter of 2011. Under the revised rules, the assessment base was changed from a deposit based approach to average assets less average tangible equity during the assessment period. The new assessment methodology generally shifts a greater share of total assessments to banks with more than $10 billion in assets, resulting in a lower amount attributed to many smaller community banks.

The $282 thousand or 41.5% increase in other real estate expenses is due primarily to higher impairment charges of $280 thousand or 122% recorded in the current quarter compared to a year ago. The increase in impairment charges correlates with the higher level of repossessed properties in the comparable periods.

The $700 thousand decrease related to deposit fraud loss relates to a non-routine fraudulent transaction on a deposit account involving one of the Company’s customers in the first quarter of 2011.

All other expenses decreased $425 thousand or 6.8% in the comparison. Included in this total is a non-routine loss of $303 thousand related to a write-down during the first quarter of 2011 attributed to uncollectible amounts of property tax receivables at the Company’s leasing subsidiary. Other decreases are mainly the result of ongoing efforts to trim operating costs and improve efficiency.

The Company entered into a new payment card processing agreement during the current quarter that will reduce data processing and communication expense by approximately $500 thousand during 2012 and by $850 thousand for 2013 when compared to the amount of expense incurred during 2011.

Income Taxes

Income tax expense was $356 thousand for the first quarter of 2012, a decrease of $425 thousand or 54.4% compared to $781 thousand in the first quarter of 2011. The effective tax rate for the current quarter was 9.7% compared to 42.8% for the same quarter a year ago. The decrease in the effective tax rate between the periods is due mainly to a high rate in the prior period. The Company accrued an additional $449 thousand in income tax expense in 2011 after learning that one of its tax-exempt customers had received notification that the Internal Revenue Service intended to issue an adverse ruling to the customer regarding the qualified status of their debt arrangement with the Company. The loan contract contains provisions that the customer will indemnify the Company for any penalties, taxes, or interest thereon for which the Company becomes liable as a result of a determination of taxability. The Company intends to exercise its rights under the contract; however, due to the contingent nature of the indemnification provisions, the Company will not record the effects of the indemnification until it is realized. Additional information related to this matter is set forth in footnote 10 of the Company’s 2011 audited consolidated financial statements.

As contrasted to the high effective tax rate for the first quarter of 2011, the effective tax rate for the current quarter is well below the statutory tax rate due mainly to the relative relationship between tax-free revenues and total net income before tax combined with tax credits.

FINANCIAL CONDITION

Total assets were $1.9 billion at March 31, 2012, an increase of $7.2 million or .4% from year-end 2011. The net increase in total assets is attributed mainly to an increase in investment securities and repossessed real estate of $35.6 million and $3.6 million, respectively, partially offset by a $24.3 million decrease in loans (net of unearned income and allowance) and a $5.6 million decrease in cash and equivalents.

The increase in investment securities is due to the Company’s desire to redeploy excess liquidity from cash and equivalents into higher yielding investment securities in response to a decrease in high quality loan demand. The decrease in loans reflects the lack of high quality loan demand sought by the Company as it continues a cautious and measured approach to new lending while working to reduce its high level of nonperforming assets. This has resulted in principal repayments on existing loans or loans transferred into other real estate through foreclosure that has exceeded new loans. Investment securities have increased as loan volume has declined.

Total liabilities were $1.7 billion at March 31, 2012, an increase of $4.6 million or .3% compared to December 31, 2011. Total deposits increased $12.1 million or .8% in the comparison. Noninterest bearing deposits increased $10.4 million or 4.6% and interest bearing deposits increased $1.7 million or .1%. Long-term borrowings decreased $10.1 million or 4.2% due to principal repayments related to scheduled maturities of federal home loan bank borrowings.

Shareholders’ equity was $160 million at March 31, 2012 compared to $157 million at year-end 2011. This represents an increase of $2.7 million or 1.7% from year-end 2011 and was driven by net income of $3.3 million for the current quarter.

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. At March 31, 2012, temporary investments were $66.8 million, an increase of $1.3 million or 2.0% compared to $65.5 million at year-end 2011.

Investment Securities

The investment securities portfolio is comprised primarily of residential mortgage-backed securities, U.S. government-sponsored agency securities, and tax-exempt securities of states and political subdivisions. Substantially all of the Company’s investment securities are designated as available for sale. Total investment securities were $634 million at March 31, 2012, an increase of $35.6 million or 5.9% compared to $599 million at year-end 2011. Investment securities have increased as high quality loan demand has declined. The Company also seeks to move balances from lower earning temporary investments to higher yielding investment securities as liquidity has remained stable and adequate to meet its needs.

Net amortized cost amounts increased $36.1 million or 6.2% and the net unrealized gain related to investments in the available for sale portfolio decreased $554 thousand or 4.0%. The increase in amortized cost amounts is attributed to net purchase activity, which exceeded activity related to sales, maturities, and calls of securities. During the first quarter of 2012, the Company purchased $89.1 million of available for sale investment securities which exceeded the amounts sold, matured, and called of $479 thousand, $2.2 million, and $49.1 million, respectively. The decrease in the net unrealized gain was driven by a slight tick upward in market interest rates during the quarter. As market interest rates increase, the value of fixed rate investments decline.

At March 31, 2012, the Company holds $5.8 million amortized cost amounts of single-issuer trust preferred capital securities of a global and national financial services firm with an estimated fair value of $5.0 million. These securities had an estimated fair value of $4.3 million at year-end 2011. This represents an increase of $651 thousand or 15.2% since year-end 2011.

The Company’s investment in the trust preferred capital securities continue to perform according to contractual terms and the issuer of these securities is rated as investment grade by major rating agencies. The issuer recently passed stringent stress testing by its regulator as well as receiving regulatory approval to both increase their per share common dividend payments and initiate a new equity repurchase program. 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 general uncertainties in the financial markets and market volatility. The Company believes that it will be able to 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 $1.0 billion at March 31, 2012, a decrease of $25.5 million or 2.4% compared to year-end 2011. The Company continues to take a measured and cautious approach to loan originations by strengthening its overall credit culture and tightening its underwriting standards. The Company seeks higher quality loan demand while it works to reduce high levels of nonperforming assets in a weak economy that has been slow to recover. Nonperforming assets increased sharply in the fourth quarter of 2009 and into the first quarter of 2010 as a result of the lingering effects of one of the most severe recessions in recent history. While nonperforming assets have declined from their peak, they remain elevated.

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

	March 31, 2012					December 31, 2011
(Dollars in thousands)	Amount		%			Amount		%

Commercial, financial, and agriculture	$	90,364		8.6	%	$	93,807		8.7	%
Real estate – construction and land development		118,428		11.3			119,989		11.2
Real estate mortgage - residential		439,390		42.0			445,464		41.6
Real estate mortgage - farmland and other commercial enterprises		373,761		35.7			384,331		35.8
Installment		19,007		1.8			21,365		2.0
Lease financing		5,611		.6			7,152		.7
Total	$	1,046,561		100.0	%	$	1,072,108		100.0	%

On average, loans represented 60.4% of earning assets for the current three month period, a decrease of 257 basis points compared to 63.0% for year-end 2011. Average loans represent a lower percentage of earning assets due to a lower average outstanding balance that makes up for a significant portion of the overall reduction in average total earning assets. Investment securities make up a larger percentage of earning assets at March 31, 2012 compared to year-end 2011. As loan demand fluctuates, the available funds are reallocated between loans and temporary investments or investment securities, which typically involve a decrease in credit risk and lower yields.

The Company does not have direct exposure to the subprime mortgage market. The Company does not originate subprime mortgages nor has it invested in bonds that are secured by such mortgages. Subprime mortgage lending is defined by the Company generally as lending to a borrower that would not qualify for a mortgage loan at prevailing market rates or whereby the underwriting decision is based on limited or no documentation of the ability to repay.

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 to reflect the 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.

In general, the allowance for loan losses and related provision for loan losses increase as the relative level of nonperforming and impaired loans increase. 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 in the Company’s most recent annual report on Form 10-K and Note 2 to the unaudited consolidated financial statements of this Form 10-Q.

The allowance for loan losses was $27.1 million or 2.58% of outstanding loans (net of unearned income) at March 31, 2012. This compares to $28.3 million or 2.64% of net loans outstanding at year-end 2011. The decrease in the allowance for loan losses as a percentage of net loans outstanding from year-end 2011 is the result of net charge-offs that exceed the provision for loan losses by $1.2 million combined with a $25.5 million or 2.4% decrease in loans outstanding (net of unearned income). As a percentage of nonperforming loans, the allowance for loan losses was 34.3% at March 31, 2012 compared to 35.8% at year-end 2011.

The decrease in the allowance for loan losses from year-end 2011 is mainly a result of a relatively unchanged amount of nonperforming loans outstanding and a decrease in substandard loans combined with an improvement related to the historical loss rates, as adjusted for current risk factors, applied to the general loan portfolio. The improvement to current risk factors in the determination of the allowance for loan losses resulted from a refinement to the Company’s allowance for loan losses methodology that occurred during the first quarter of 2012. The Company, with assistance from an independent third party advisor, adopted revisions to its methodology primarily in order to better reflect the impact of qualitative factors used in estimating credit losses inherent in the general component of the allowance for loan losses. Prior to being formally adopted, the Company tested the updated methodology with live data over a period of several months to ensure that significant changes in the allowance were supported and directionally consistent with changes in overall credit quality and that significant fluctuations were explainable and supportable. For additional detail related to the revised methodology, please refer to Note 2 to the unaudited consolidated financial statements of this Form 10-Q.

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 $79.0 million at March 31, 2012, up $78 thousand or .1% compared to $78.9 million at year-end 2011. The high level of nonperforming loans is a result of ongoing weaknesses in the overall economy that continues to strain the Company and many of its customers, particularly real estate development lending. Nonperforming loans were as follows at March 31, 2012 and December 31, 2011 and are presented by loan class.

Nonperforming Loans

(In thousands)	March 31, 2012			December 31, 2011
Nonaccrual Loans
Real Estate:
Real estate-construction and land development	$	25,413		$	30,744
Real estate mortgage-residential		13,975			14,578
Real estate mortgage-farmland and other commercial enterprises		21,021			13,831
Commercial:
Commercial and industrial		687			386
Lease financing		158			124
Consumer:
Secured		96			80
Unsecured		8			12
Total nonaccrual loans	$	61,358		$	59,755

Restructured Loans
Real Estate:
Real estate-construction and land development	$	6,175		$	6,207
Real estate mortgage-residential		3,409			4,894
Real estate mortgage-farmland and other commercial enterprises		7,967			8,024
Total restructured loans	$	17,551		$	19,125

Past Due 90 Days or More and Still Accruing
Real Estate:
Real estate mortgage-residential	$	18			-
Commercial:
Lease financing		28			-
Consumer:
Unsecured		4		$	1
Total past due 90 days or more and still accruing	$	50		$	1

Total nonperforming loans	$	78,959		$	78,881

Ratio of total nonperforming loans to total loans (net of unearned income)		7.5	%		7.4	%

Nonaccrual loans make up the largest component of nonperforming assets. These loans were $61.4 million at March 31, 2012, an increase of $1.6 million or 2.7% compared to $59.8 million at year-end 2011. The net increase in nonaccrual loans was driven higher by the addition of a group of related credits in the amount of $9.5 million secured by farmland with an aggregate value in excess of the carrying amount. Restructured loans decreased by $1.6 million or 8.2% in the comparison primarily as a result of the reclassification of two separate larger-balance credits totaling $1.5 million secured by residential real estate to nonaccrual status.

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 $118 million and $125 million at March 31, 2012 and year-end 2011, 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 the Company and many of its customers. Potential problem loans include a variety of borrowers and are secured primarily by real estate. At March 31, 2012 the five largest potential problem credits were $28.9 million in the aggregate compared to $33.6 million at year-end 2011 and secured by various types of real estate including commercial, construction properties, and residential real estate development.

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 foreclosure. At March 31, 2012, OREO was $41.8 million, an increase of $3.6 million or 9.4% compared to $38.2 million at year-end 2011. The net increase in OREO during the quarter is due mainly to the Company taking possession of four separate larger-balance properties totaling $5.1 million securing loans previously classified as nonaccrual. Of the larger-balance properties repossessed, two represent construction and land development projects in the amount of $3.6 million, one represents commercial real estate in the amount of $959 thousand, and one represents residential real estate in the amount of $532 thousand. The Company sold repossessed properties totaling $3.1 million during the quarter and recorded impairment charges in the amount of $509 thousand to write down certain properties to their estimated fair value.

Deposits

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

	End of Period							Average
(In thousands)	March 31, 2012		December 31, 2011		Difference			(Three Months) March 31, 2012		(Twelve Months) December 31, 2011		Difference
Noninterest Bearing	$	234,658	$	224,259	$	10,399		$	224,782	$	217,357	$	7,425

Interest Bearing
Demand		289,600		261,920		27,680			275,856		258,244		17,612
Savings		305,090		301,217		3,873			301,348		293,526		7,822
Time		617,855		647,669		(29,814	)		632,413		687,517		(55,104	)
Total		1,212,545		1,210,806		1,739			1,209,617		1,239,287		(29,670	)

Total Deposits	$	1,447,203	$	1,435,065	$	12,138		$	1,434,399	$	1,456,644	$	(22,245	)

The increase in end of period deposits is mainly due to an increase in noninterest bearing deposits outstanding of $10.4 million or 4.6%. Although end of period time deposits decreased $29.8 million or 4.6%, overall interest bearing deposits were up $1.7 million primarily from higher outstanding interest bearing demand accounts. The Company’s liquidity position has enabled it to lower its cost of funds 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 other investment funds from other sources into short-term demand or savings accounts.

Borrowed Funds

Total borrowed funds were $257 million at March 31, 2012, a decrease of $9.2 million or 3.4% from $267 million at year-end 2011. Long-term borrowings decreased $10.1 million or 4.2% due to principal repayments related to scheduled maturities of federal home loan bank borrowings. Short-term borrowings increased $923 thousand or 3.4%. These borrowings represent a mix of federal funds purchased through relationships with downstream correspondent banks as well as repurchase agreements entered into primarily with commercial depositors.

LIQUIDITY

The primary source of funds for the Parent Company is the receipt of dividends from its subsidiary banks, cash balances maintained, short-term investments, 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, Farmers Bank & Capital Trust Company (“Farmers Bank”), 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, 2012 under the prompt corrective action regulatory framework; however, Farmers Bank, 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 common and preferred shareholders, injecting capital into subsidiaries, paying interest expense on borrowings, and paying for general operating expenses. Due to its agreement with regulators, dividend payments on the Parent Company’s common and preferred stock and interest payments on its trust preferred borrowings must have regulatory approval before being paid. While regulatory agencies have so far granted approval to all of the Company’s requests to make interest payments on its trust preferred securities and dividends on its preferred stock, the Company has not (based on the assessment by Company management of both the Company’s capital position and the earnings of its subsidiaries) sought regulatory approval for the payment of common stock dividends since the fourth quarter of 2009. Moreover, the Company will not pay any such dividend on its common stock in any subsequent quarter until the regulator’s assessment of the earnings of the Company’s subsidiaries, and the Company’s assessment of its capital position, both yield the conclusion that the payment of a Company common stock dividend is warranted.

The Parent Company had cash and cash equivalents of $17.5 million at March 31, 2012, a decrease of $882 thousand or 4.8% from $18.4 million at year-end 2011. Significant cash receipts of the Parent Company during 2012 include $2.5 million in dividends from First Citizens and management fees from subsidiaries of $855 thousand. Significant cash payments by the Parent Company during 2012 include $2.5 million additional capital investment in United Bank, salaries, payroll taxes, and employee benefits of $625 thousand, interest expense on borrowed funds of $524 thousand, and $375 thousand for the payment of dividends on preferred stock.

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 that can be used for liquidity purposes. 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, 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, 2012, the Company had $228 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 increased $40.6 million or 35.1% since year-end 2011 primarily as a result of additional borrowings available from the FHLB. This additional borrowing capacity resulted from improving credit metrics at one of the Company’s subsidiary banks. As such, the FHLB in the first quarter of 2012 updated the collateral pledging method of the subsidiary bank to blanket-lien status from possession (delivery) status. Blanket lien status is the least restrictive collateral arrangement used by the FHLB. This status is generally assigned to lower risk institutions that pledge loan collateral related to their borrowings.

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, 2012, consolidated liquid assets were $722 million, an increase of $29.9 million or 4.3% from year-end 2011. The increase in liquid assets was made up by higher available for sale investment securities of $35.6 million or 5.9%, partially offset by lower cash and cash equivalents of $5.6 million or 6.0%. Liquid assets remain elevated mainly as a result of the Company’s overall net funding position, which has been influenced by a strategy that included realigning the balance sheet and reducing its overall size while managing a high level of nonperforming assets. The overall funding position of the Company changes as loan demand, deposit levels, and other sources and uses of funds fluctuate.

Net cash provided by operating activities was $3.4 million for the first quarter of 2012, a decrease of $3.3 million compared to $6.7 million for the same period of 2011. Net cash used in investing activities was $11.7 million for 2012 compared to $37.2 million for 2011. The $25.5 million reduction in net cash outflows is mainly due to a $37.7 million reduction in net cash outflows related to investment securities partially offset by a decrease in net cash inflows related to loan activity of $11.6 million. These cash flow activities correlate to the overall increase in investment securities and decrease in outstanding loan balances in their respective three month periods.

Net cash provided by financing activities was $2.6 million for the first quarter of 2012, a decrease of $30.0 million or 92.0% compared to $32.6 million for the first quarter of 2011. Net cash flows provided by financing activities declined in the comparison mainly due to short-term borrowing activity. For 2012, net short-term borrowings resulted in cash inflows of $923 thousand, a reduction of $24.5 million compared to cash inflows of $25.4 million for 2011. For 2011, short-term borrowings were boosted by a large deposit received from the Commonwealth of Kentucky at the end of the quarter that was placed into a repurchase agreement. The decrease in net cash flows provided by financing activities was also attributed to cash outflows related to long-term borrowings, which were $7.9 million higher for 2012 compared to a year earlier due to higher repayments in the current period related to FHLB borrowings.

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 the 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 $160 million at March 31, 2012 compared to $157 million at year-end 2011. This represents an increase of $2.7 million or 1.7% and is attributed mainly to net income during the quarter of $3.3 million. Discount accretion increased the carrying value of outstanding preferred stock by $103 thousand during the quarter. The net unrealized gain on available for sale investment securities (net of tax) decreased $360 thousand or 4.0% which was driven mainly by a slight increase in the overall market interest rate environment that occurred during the first quarter. As market interest rates increase, the overall market value of fixed rate investment securities decline.

On January 9, 2009, as part of the U.S. Department of Treasury’s (“Treasury”) Capital Purchase Program, the Company received a $30.0 million equity investment by issuing 30 thousand shares of Series A, no par value cumulative perpetual preferred stock to the Treasury. The Company also issued a warrant to the Treasury allowing it to purchase 223,992 shares of the Company’s common stock at an exercise price of $20.09. The Series A preferred shares pay a cumulative cash dividend quarterly at 5% per annum during the first five years the preferred shares are outstanding and reset to 9% thereafter if not redeemed. The Company’s goal is to repurchase the preferred shares either in whole or in part prior to the dividend rate resetting to 9%, using internally generated cash flows for the potential repurchase.

Although the Parent Company is under no directive by its regulators to raise any additional capital, the Company filed a registration statement on Form S-3 with the SEC that became effective on October 19, 2009. Currently, as part of that filing, equity securities of the Company of approximately one-third of the market value of Company common stock held by non-affiliates (which as of May 1, 2012 one-third of the market value of common stock held by non-affiliates would have equaled approximately $14.1 million) could be offered for sale by the Company in one or more public offerings at an appropriate time. Similarly, the Company could also seek to offer for sale debt or equity securities in a private placement exempt from the registration requirements of the Securities Act of 1933. The Company periodically evaluates potential capital raising scenarios and could seek a securities offering in the future. 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, 2012, the Company’s tangible capital ratio was 8.34%, up 12 basis points compared to 8.22% at year-end 2011. 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 6.80% at March 31, 2012, an increase of 13 basis points compared to 6.67% at year-end 2011.

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, 2012									December 31, 2011
	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		16.88	%		18.14	%		10.17	%		16.68	%		17.95	%		9.99	%

Farmers Bank 3		17.79			19.05			9.70			17.58			18.84			9.47
First Citizens		12.97			13.71			8.70			13.47			14.21			8.93
United Bank3		14.85			16.13			9.21			13.51			14.79			8.44
Citizens Northern3		12.36			13.62			8.62			12.24			13.49			8.48

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, as defined by regulation, by its total quarterly average assets.

3See Note 10 to the Company’s unaudited 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

The Parent Company, Farmers Bank, United Bank, and Citizens Northern have each entered into supervisory agreements with their primary banking regulator. These agreements are summarized in Note 10 to the unaudited consolidated financial statements of this Form 10-Q. These agreements are also discussed in significantly greater detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 under the caption “Capital Resources” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

There have been no changes to the regulatory agreements since year-end 2011. The Company believes that it is adequately addressing all issues included in the regulatory agreements. However, only the respective regulatory agencies can determine if compliance with the applicable regulatory agreements have been met. The Company and its subsidiary banks are in compliance with the requirements identified in the regulatory agreements as of March 31, 2012, with the exception that the level of substandard loans established by United Bank and Farmers Bank exceed their target amounts by $3.8 million and $644 thousand, respectively. Target levels are established based on projections of individual substandard loan amounts and will fluctuate depending on the actual amount of newly classified loans, principal reductions, or repossession activity. 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 time periods. Forecasting net interest income and its sensitivity to changes in interest rates requires the Company to make assumptions about the volume and characteristics of many attributes, including assumptions relating to the replacement of maturing earning assets and liabilities. Other assumptions include, but are not limited to, projected prepayments, projected new volume, and the predicted relationship between changes in market interest rates and changes in customer account balances. These effects are combined with the Company’s estimate of the most likely rate environment to produce a forecast of net interest income and net income. The forecasted results are then adjusted for the effect of a gradual increase and decrease in market interest rates on the Company’s net interest income and net income. Because assumptions are inherently uncertain, the model cannot precisely estimate net interest income or net income or the effect of interest rate changes on net interest income and net income. Actual results could differ significantly from simulated results.

At March 31, 2012, the model indicated that if rates were to gradually increase by 150 basis points during the remainder of the calendar year, then net interest income and net income would decrease .34% and 1.1%, respectively for the year ending December 31, 2012 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 net interest income and net income would decrease .68% and 2.4%, respectively.

In the current relatively low interest rate environment, it is not practical or possible to reduce certain deposit rates by the same magnitude as rates on earning assets. The average rate paid on many of the Company’s deposits is below 2%. This situation magnifies the model’s predicted results when modeling a decrease in interest rates, as earning assets with higher yields have more of an opportunity to reprice at lower rates than lower-rate deposits.

Item 4. Controls and Procedures

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, 2012 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, 2012, there were various pending legal actions and proceedings against the Company arising from the normal course of business and in which claims for damages are asserted. Management, after discussion with legal counsel, believes that these actions are without merit and that the ultimate liability resulting from these legal actions and proceedings, if any, will not have a material effect upon the consolidated financial statements of the Company.

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

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, 2012. There are 84,971 shares that may still be purchased under the various authorizations. However, the Company must be granted permission by the Federal Reserve Bank of St. Louis and the Kentucky Department of Financial Institutions before it can repurchase or redeem any of its outstanding common or preferred stock as a result of its regulatory agreement.

On January 9, 2009, the Company received a $30.0 million equity investment by issuing 30 thousand shares of Series A, no par value preferred stock to the Treasury pursuant to a Letter Agreement and Securities Purchase Agreement that was previously disclosed by the Company. In addition, the Company issued a warrant to the Treasury allowing it to purchase 224 thousand shares of the Company’s common stock at an exercise price of $20.09. The warrant can be exercised immediately and has a term of 10 years. The Series A preferred stock and warrant were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

Item 5. Other Information

The Company held its Annual Meeting of Shareholders on May 8, 2012 (the “Meeting”). Listed below are the voting results on proposals considered and voted upon at the Meeting, all of which were described in the Company’s Proxy Statement filed with the Securities and Exchange Commission on April 2, 2012.

A proposal to ratify the appointment of BKD LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2012.

Votes For	Votes Against	Votes Abstained
5,205,499	128,080	44,713

The election of the following nominees as directors of the Company.

Nominee	Votes For	Votes Withheld	Broker Non-votes
J. Barry Banker	3,050,709	294,826	2,032,757
Fred N. Parker	3,066,330	279,205	2,032,757
David Young Phelps	3,118,760	226,776	2,032,757
Charles Frederick Sutterlin	2,970,457	375,079	2,032,757

A proposal to approve, on an advisory basis, the Company’s overall executive compensation programs.

Votes For	Votes Against	Votes Abstained	Broker Non-votes
3,065,332	206,654	73,548	2,032,757

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).

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).

3.3	Articles of Amended and 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).

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).

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).

4.11	Warrant for Purchase of Shares of Common Stock (incorporated by reference to the Current Report on Form 8-K dated January 13, 2009).

4.12	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).

10.1	Agreement and Plan of Merger, Dated July 1, 2005, as Amended, by and among Citizens Bancorp, Inc., Citizens Acquisition Subsidiary Corp, and Farmers Capital Bank Corporation (incorporated by reference to Appendix A of Registration Statement filed on Form S-4 on October 11, 2005).

10.2	Amended and Restated Plan of Merger of Citizens National Bancshares, Inc. with and into FCBC Acquisition Subsidiary, LLC (incorporated by reference to Appendix A of Proxy Statement for Special Meeting of Shareholders of Citizens National Bancshares, Inc. and Prospectus in connection with an offer of up to 600,000 shares of its common stock of Farmers Capital Bank Corporation filed on Form 424B3 on August 7, 2006).

10.3	Stock Purchase Agreement Dated June 1, 2006 by and among Farmers Capital Bank Corporation, Kentucky Banking Centers, Inc. and Citizens First Corporation (incorporated by reference to Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008).

10.4	Employee Stock Purchase Plan of Farmers Capital Bank Corporation (incorporated by reference to Form S-8 effective June 24, 2004).

10.5	Nonqualified Stock Option Plan of Farmers Capital Bank Corporation (incorporated by reference to Form S-8 effective September 8, 1998).

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***	The following financial information from Farmers Capital Bank Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Shareholders’ Equity, and (vi) the Notes to the Consolidated Financial Statements.

* 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.

***As provided in Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 are deemed not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities and Exchange Act of 1934.

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, 2012	/s/ Lloyd C. Hillard, Jr.
		Lloyd C. Hillard, Jr.
		President and CEO
		(Principal Executive Officer)

Date:	May 8, 2012	/s/ Doug Carpenter
		C. Douglas Carpenter
		Executive Vice President, Secretary, and CFO
		(Principal Financial and Accounting Officer)