The Company and its subsidiary banks are subject to a myriad ofnumerous other statutes and regulations affecting their activities. Some of the more important are:

In connection with TARP, the CPPCapital Purchase Program (“CPP”) was launched on October 14, 2008. Under the CPP, the Treasury announced a plan to use up to $250 billion of TARP funds to purchase equity stakes in certain eligible financial institutions, including the Company. The Company was preliminarily approved for $30received $30.0 million of equity capital in December 2008 withunder the transaction closingCPP in January 2009. In the transaction, the Company issued 30 thousand shares of fixed-rate cumulative perpetual preferred stock to the Treasury. The Company must pay a 5% cumulative dividend during the first five years the preferred shares are outstanding, resetting to 9% thereafter, if not redeemed, and includes

As required by the CPP, the Company also issued a warrant to the Treasury to purchase common shares equal to 15% of the value of the preferred stock, withstock. The warrant allowed the number of warrants and exercise price determined based on the 20-day average closing price of the common shares ending on the day prior to preliminary approval. The warrants allow the U.S. Treasury to purchase 223,992 shares of Company common stock at an exercise price of $20.09 per share. BothIn July 2012, the preferred shares and warrants are accounted for as additions toCompany repurchased the warrant from the Treasury at a mutually agreed upon price of $75 thousand. The repurchase of the warrant had no impact on the Company’s regulatory capital.

Volcker Rule.The Dodd-Frank Act prohibits insured depository institutions and their holding companies from engaging in proprietary trading except in limited circumstances, and prohibits certain ownership interests in and relationships with private equity and hedge funds (commonly referred to as the “Volcker Rule”). On December 10, 2013, U.S. financial regulators, including the Federal Reserve, adopted final rules to implement the Volcker Rule. The Final Rules are effective April 1, 2014, but the conformance period to bring activities and investments into compliance was extended until July 21, 2015. The Company has evaluated the implications of the Dodd-Frank Act are subjectfinal rules on its investments and does not expect any material financial impact.

Under the final rules, banking entities would have been prohibited from owning certain Collateralized Debt Obligations (“CDOs”) backed by trust preferred securities as of July 21, 2015, which could have required banking entities to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impactrecognize unrealized market losses based on the inability to hold any such investments to maturity. However, in January 2014, regulators issued an interim rule effective April 1, 2014 exempting trust preferred securities backed CDOs from the Volcker Rule if (i) the CDO was established prior to May 19, 2010, (ii) the banking entity reasonably believes that the offering proceeds of the CDO were used to invest primarily in trust preferred securities issued by banks with less than $15 billion in assets, and (iii) the banking entity acquired the CDO on or before December 10, 2013. The Company its customers or the financial industry more generally. Provisions in the legislation that affect deposit insurance assessments and payment of interest on commercial demand deposits could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate.

The Company’s subsidiary banks are subject to capital-based regulatory requirements. The Company has historically managed its banks’ capital levels with the goal of meeting the criteria established by its regulators for each bank subsidiaries to be “well-capitalized.” Historically, to be well-capitalized, a depository institution needed to have a Tier 1 leverage capitalLeverage ratio of at least 5%, a Tier 1 Risk-based Capital ratio of 6%, and a Total risk-based capitalRisk-based Capital ratio of 10%. As of December 31, 2010,2013, each of the Company’s four subsidiary banks satisfied these capital ratios.

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.

Other components in the regulatory order include stricter oversight and reporting to its regulators in terms of complying with the Consent 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.

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 havehas been met. The Company believes that it and its subsidiary banks are in compliance with the requirements identified in the regulatory agreements as of December 31, 2010, with the exception that the level of substandard loans at Farmers Bank exceed the target amount by $1.3 million. 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 Company competes primarily on the basis of quality of services, interest rates and fees charged on loans, and the rates of interest paid on deposit funds. The business of the Company is not dependent upon any one customer or on a few customers, and the loss of any one or a few customers would not have a material adverse effect on the Company.

Federal prohibitions against financial institutions paying interest on demand deposit accounts of business customers were repealed as part of the Dodd-Frank Act. As a result, beginning on July 21, 2011, financial institutions cancould offer to pay interest on commercial demand deposits to compete for customers. The Company cannot predict the interest rates other institutions may offer. The Company’sexpects that its interest expense is expected towould increase and its net interest margin is expected to decrease should it begin to pay interest on commercial demand deposits to attract additional customers or to keep current customers. This could result in a material adverse impact on the Company’s financial condition and results of operations.

The Company is required by federal and state regulatory authorities to maintain levels of capital to support its operations. Furthermore, in the wakeas a result of recent regularly scheduled examinations, regulators currently require two of three of its subsidiaries, the Company’s regulators have required these threesubsidiary banks to raise theirmaintain capital to levels significantly above the well-capitalized benchmark. The Company’s ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time and on the Company’s future financial condition and performance. Accordingly, the Company cannot make assurances with respect to its ability to raise additional capital on favorable terms, or at all. If the Company cannot raise additional capital when needed, its ability to further expand its operations through internal growth and acquisitions could be materially impaired and its financial condition and liquidity could be materially and adversely affected. The Parent Company is currently under no directive by its regulators to raise any additional capital.

A tightening of the credit and liquidity markets and the Company’s inability to obtain adequate funding to replace deposits may negatively affect its earnings and capital levels. In addition to deposit growth, maturity of investment securities, and loan payments from borrowers, the Company relies from time to time on advances from the Federal Home Loan Bank and other wholesale funding sources to fund loans and replace deposits. In the event of a further downturn in the economy, these additional funding sources could be negatively affected which could limit the funds available to the Company. The Company’s liquidity position could be significantly constrained if it were unable to access funds from the Federal Home Loan Bank or other wholesale funding sources.

The Company’s financial condition and outlook is highly dependent upon perceptions of its business practices and reputation. Its ability to attract and retain customers and employees could be adversely affected to the extent its reputation is damaged. Negative public opinion could result from its actual or alleged conduct in any number of activities, including regulatory actions taken against the Company, lending practices, corporate governance, regulatory compliance, mergers of its subsidiaries, or sharing or inadequate protection of customer information. Damage to the Company’s reputation could give rise to loss of customers and legal risks, which could have an adverse impact on its financial condition.

The Company conducts most of its operations in Central and Northern Kentucky. The banking and financial services businesses in these areas are highly competitive and increased competition in its primary market areas may adversely impact the level of its loans and deposits. Ultimately, the Company may not be able to compete successfully against current and future competitors. These competitors include national banks, regional banks, and other community banks. The Company also faces competition from many other types of financial institutions, including savings and loan associations, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks, and other financial intermediaries. In particular, the 

Company’s competitors include major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous locations and mount extensive promotional and advertising campaigns. Areas of competition include interest rates for loans and deposits, efforts to obtain loan and deposit customers, and a range in quality of products and services provided, including new technology-driven products and services. If the Company is unable to attract and retain banking customers, it may be unable to continueincrease its loan growthloans and level of deposits.

The market value of the Company’s common stock may also be affectedimpacted by conditions affecting the financial markets in general, including price and trading fluctuations. These conditions may result in: (1) volatility in the level of, and fluctuations in, the market prices of stocks generally and, in turn, the Company’s common stock and (2) sales of substantial amounts of the Company’s common stock in the market, in each case that could be unrelated or disproportionate to changes in the Company’s operating performance. These broad market fluctuations may adversely affect the market value of the Company’s common stock.

The Company is not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market price of the Company’s common stock could decline as a result of sales by the Company of a large number of shares of common stock or preferred stock or similar securities in the market or from the perception that such sales could occur.

The Company’s board of directors is authorized generally to cause it to issue additional common stock, as well as series ofand preferred stock without any action on the part of the Company’s shareholders, except as may be required under the listing requirements of the NASDAQ Stock Market. In addition, the board has the power, without shareholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, preferences, and other terms. This could include preferences over the common stock with respect to dividends or upon liquidation. If the Company issues preferred stock in the future that has a preference over the common stock with respect to the payment of dividends or upon liquidation, or if the Company issues preferred stock with voting rights that dilute the voting power of the common stock, the rights of holders of the common stock or the market price of the common stock could be adversely affected. The Parent Company is currently under no directive by its regulators to raise any additional capital.

Holders of the Company’s common stock are entitled to receive dividends only when, as, and if its board of directors declares them and as permitted by its regulators. Although the Company has (up through 2009) historically declared quarterly cash

dividends on its common stock, it is not required to do so. The Company’s board of directors reduced its quarterly common stock dividend in January 2009 from $.33 per share to $.25 per share and again in October 2009 to $.10 per share. The Company also agreed to not make interest payments on its trust preferred securities or dividends on its common or preferred stock without prior approval from the FRB St. Louis and the KDFI. Representatives of the FRB St. Louis and the 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.  However, there can be no assurance the Company’s regulators will provide such approvals in the future.

If the Company is in arrears on interest payments on its trust preferred securities, it may not pay dividends on its common stock until such interest obligations are brought current.

The Company’s common stock is listed for trading on the NASDAQ Global Select Stock Market. As of December 31, 20102013, the 50-day average trading volume of the Company’s common stock on NASDAQ was 7,14315,936 shares or .10%.21% of the total common shares outstanding of 7,411,676.7,478,706. An efficient public trading market is dependent upon the existence in the marketplace of willing buyers and willing sellers of a stock at any given time. The Company has no control over such individual decisions of investors and general economic and market conditions. Given the lower trading volume of the Company’s common stock, larger sales volumes of its common stock could cause the value of its common stock to decrease. Moreover, due to its lower trading volume it may take longer to liquidate your position in the Company’s common stock.

Subject to consultation with, and approval from, its banking regulators, the Company intends to repurchase the Series A preferred stock and potentially the warrant, it issued to the Treasury when it believes the credit metrics in its loan portfolio have improved for the long-term and the overall economy has rebounded. However, there can be no assurance when the Series A preferred stock and warrant held by the Treasury can be repurchased, if at all. Until such time as the Series A preferred stock areis repurchased, the Company will remain subject to the terms and conditions of those instruments,the instrument, which, among other things, limit the Company’s ability to repurchase or redeem common stock or increase the dividends on its common stock over $.33 per share prior to 2012. Further, the Company’s continued participation in the CPP subjects it to increased regulatory and legislative oversight, including with respect to executive compensation. These new and any future oversight and legal requirements and implementing standards under the CPP may have unforeseen or unintended adverse effects on the financial services industry as a whole, and particularly on CPP participants such as the Company.stock.

· ●

in the case of a collateralized loan, uncertainties as to the future value of the collateral.

Due to the fact that the outstanding principal balances can be larger for commercial loans than other types of loans, such loans present a greater risk to the Company than other types of loans when non-payment by a borrower occurs.

In addition, consumer

Consumer loans typically have shorter terms and lower balances with higher yields compared to real estate mortgage loans, but generally carry higher risks of frequency of default than real estate mortgage and commercial loans. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans.

Inability to hire or retain certain key professionals, management, and staff could adversely affect the Company’s revenues and net income.

The Company relies on key personnel to manage and operate its business, including major revenue generating functions such as its loan and deposit portfolios. The loss of key staff may adversely affect the Company’s ability to maintain and manage these portfolios effectively, which could negatively affect our revenues. In addition, loss of key personnel could result in increased recruiting and hiring expenses, which could cause a decrease in our net income.

The Company’s controls and procedures may fail or be circumvented.

The Company’s management regularly reviews and updates its internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well-designed and operated, can provide only reasonable, not absolute, assurances that the objectives of the system of controls are met. Any failure or circumvention of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material and adverse effect on the Company’s business, results of operations, and financial condition.

The Company offers online banking services and both sends and receives confidential customer information electronically. This activity is vulnerable to security breaches and computer viruses which could expose the Company to litigation and adversely affect our reputation and overall operations.

The secure transmission of confidential information over the Internet is a significant element of online banking. The Company’s computer network or those of its customers could be vulnerable to unauthorized access, computer viruses, phishing schemes, and other security problems. The Company could be required to commit additional resources to protect against the threat of security breaches and computer viruses, or to remedy problems caused by security breaches or viruses. To the extent that the Company’s activities or the activities of its customers involve the storage and transmission of confidential information, security breaches and viruses could expose the Company to litigation and other possible liabilities. The inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in the Company’s systems and could adversely affect its reputation and overall operations.

The Company’s operations rely on certain external vendors.

The Company utilizes certain external vendors to provide products and services necessary to maintain its day-to-day operations. The Company is exposed to the risk that such vendors fail to perform under these arrangements. This could result in disruption to the Company’s business and have a material adverse impact on the Company’s results of operations and financial condition. There can be no assurance that the Company’s policies and procedures designed to monitor and mitigate vendor risks will be effective in preventing or limiting the effect of vendor non-performance.

The Company is subject to claims and litigation pertaining to fiduciary responsibility.

The Company’s customers or others may make claims and take legal action against us related to fiduciary responsibilities. If claims and legal action against the Company are not resolved in a favorable manner to the Company, it could result in a material financial liability or damage to our reputation.

The recently enacted Dodd-Frank Act may increase the Company’s costs of operations which could adversely impact the Company's results of operations, financial condition or liquidity.

On July 21, 2010, the Dodd-Frank Act was signed into law by President Obama.

The goals of the new legislationDodd-Frank Act include restoring public confidence in the financial system, that resulted from the recent financial and credit crises, preventing another financial crisis, and allowing regulators to identify failings in the system before another crisis can occur. As part of the reform, the Dodd-Frank Act createscreated the Financial Stability Oversight Council, with oversight authority for monitoring and regulating systemic risk, and the Bureau of Consumer Financial Protection, which will havehas broad regulatory and enforcement powers over consumer financial products and services.  The Dodd-Frank Act also changes the responsibilities of the current federal banking regulators, imposes additional corporate governance and disclosure requirements in areas such as executive compensation and proxy access, and limits or prohibits proprietary trading and hedge fund and private equity activities of banks. 

It also impacts areas such as deposit insurance, mortgage lending, capital requirements, securitizations, and insurance.

The scope of the Dodd-Frank Act impacts many aspects of the financial services industry and requires the development and adoption of manynumerous implementing regulations, over the next several months and years; consequently,some of which have yet to be finalized. Consequently, the effects of the Dodd-Frank Act on the financial services industry and the Company will depend, in large part, upon the extent to which regulators exercise the authority granted to them and the approaches taken to implement the regulations.  The Company has beguncontinues to assess the potential impact of the Dodd-Frank Act on its business and operations and believes that compliance with these new laws and regulations will likely result in additional costs, but at this early stage, the probable impact cannot be predictedmeasured with a high degree of certainty. Compliance with the new laws and regulations could adversely impact the Company’s results of operations, financial condition, or liquidity, any of which may impact the market price of the Company’s common stock. The Company believes that the Dodd-Frank Act will most likely impact it in the areas of corporate governance, deposit insurance assessments, capital requirements, and restrictions on fees charges to consumers.

36

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Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Company through its subsidiaries, owns or leases buildings that are used in the normal course of its business. The corporate headquarters is located at 202 W. Main Street, Frankfort, Kentucky, in a building owned by the Company. The Company’s subsidiaries own or lease various other offices in the counties and cities in which they operate. See the Notes to Consolidated Financial Statements contained in Item 8,“Financial Statement and Supplementary Data,” of this Form 10-K for information with respect to the amounts at which bank premises and equipment are carried and commitments under long-term leases.

Unless otherwise indicated, the properties listed below are owned by the Company and its subsidiaries as of December 31, 2010.

2013.

Corporate Headquarters

202 – 208 W. Main Street, Frankfort, KY

Banking Offices
Farmers Bank:
125 W. Main Street, Frankfort, KY
555 Versailles Road, Frankfort, KY
1401 Louisville Road, Frankfort, KY
154 Versailles Road, Frankfort, KY
1301 US 127 South, Frankfort, KY (leased)
128 S. Main Street, Lawrenceburg, KY
201 West Park Shopping Center, Lawrenceburg, KY
838 N. College Street, Harrodsburg, KY
1035 Ben Ali Drive, Danville, KY

United Bank:
100 United Drive, Versailles, KY
146 N. Locust Street, Versailles, KY
206 N. Gratz, Midway, KY
200 E. Main Street, Georgetown, KY
100 Farmers Bank Drive, Georgetown, KY (leased)
100 N. Bradford Lane, Georgetown, KY
3285 Main Street, Stamping Ground, KY
2509 Sir Barton Way, Lexington, KY
3098 Harrodsburg Road, Lexington, KY (leased)
100 United Drive, Versailles, KY
146 N. Locust Street, Versailles, KY
206 N. Gratz, Midway, KY
128 S. Main Street, Lawrenceburg, KY
201 West Park Shopping Center, Lawrenceburg, KY
838 N. College Street, Harrodsburg, KY
1035 Ben Ali Drive, Danville, KY (leased)
425 W. Dixie Avenue, Elizabethtown, KY
3030 Ring Road, Elizabethtown, KY
111 Towne Drive (Kroger Store) Elizabethtown, KY (leased)
645 S. Dixie Blvd., Radcliff, KY
4810 N. Preston Highway, Shepherdsville, KY
157 Eastbrooke Court, Mt. Washington, KY
103 Churchill Drive, Newport, KY
7300 Alexandria Pike, Alexandria, KY
164 Fairfield Avenue, Bellevue, KY
8730 US Highway 42, Florence, KY
34 N. Ft. Thomas Avenue, Ft. Thomas, KY
2911 Alexandria Pike, Highland Heights, KY
2006 Patriot Way, Independence, KY
2774 Town Center Blvd., Crestview Hills, KY (leased)
201 N. Main Street, Nicholasville, KY
995 S. Main Street (Kroger Store), Nicholasville, KY (leased)
986 N. Main Street, Nicholasville, KY
106 S. Lexington Avenue, Wilmore, KY
First Citizens:
425 W. Dixie Avenue, Elizabethtown, KY
3030 Ring Road, Elizabethtown, KY
111 Towne Drive (Kroger Store), Elizabethtown, KY (leased)
645 S. Dixie Blvd., Radcliff, KY
4810 N. Preston Highway, Shepherdsville, KY
157 Eastbrooke Court, Mt. Washington, KY
Citizens Northern:
103 Churchill Drive, Newport, KY
7300 Alexandria Pike, Alexandria, KY
164 Fairfield Avenue, Bellevue, KY
8730 US Highway 42, Florence, KY
34 N. Ft. Thomas Avenue, Ft. Thomas, KY
2911 Alexandria Pike, Highland Heights, KY
2006 Patriot Way, Independence, KY
2774 Town Center Blvd., Crestview Hills, KY (leased)

37

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Data Processing Center

102 Bypass Plaza, Frankfort, KY

Other

201 W. Main Street, Frankfort, KY

The Company considers its properties to be suitable and adequate based on its present needs.

Item 3. Legal Proceedings

As of December 31, 2010,2013, 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,It is the opinion of management, after discussion with legal counsel, believes that these actions are without merit and that the disposition or ultimate liability resulting from theseresolution of such claims and legal actions and proceedings, if any, will not have a material adverse effect upon the consolidated financial statements of the Company.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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 shares of common stock repurchased by the Company during the quarter ended December 31, 2010. The maximum number of2013. There are 84,971 shares that may still be purchased under previously announced repurchase plans is 84,971.

On January 9, 2009,the various authorizations. However, 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 disclosedmust be granted permission by the Company. In addition,Federal Reserve Bank of St. Louis and the Company issued a warrant to the Treasury allowingKentucky Department of Financial Institutions before it to purchase 224 thousand sharescan repurchase or redeem any 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.

The Company’s participation in the CPP restricts its ability to repurchase its outstanding common stock.  Until January 9, 2012, the Company generally must have the Treasury’s approval before it may repurchase anyor preferred stock as a result of its shares of common stock, unless all of the Series A preferred stock has been redeemed by the Company or transferred by the Treasury.

regulatory agreement.

Performance Graph

The following graph sets forth a comparison of the five-year cumulative total returns among the shares of Company Common Stock, the NASDAQ Composite Index ("broad market index"), and Southeastern Banks under 1Under $1 Billion Market-Capitalization ("peer group index"). Cumulative shareholder return is computed by dividing the sum of the cumulative amount of dividends for the measurement period and the difference between the share price at the end and the beginning of the measurement period by the share price at the beginning of the measurement period.

38

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The broad market index includes over 3,000 domestic and international based common shares listed on The NASDAQ Stock Market. The peer group index consists of 4437 banking companies in the Southeastern United States. The Company is included among the 44 companies includedthose in the peer group index.

		2008				2009				2010				2011				2012				2013
Farmers Capital Bank Corporation		$	100.00			$	44.10			$	21.06			$	19.37			$	52.85			$	93.84
NASDAQ Composite			100.00				144.88				170.58				171.30				199.99				283.39
Southeastern Banks Under $1 Billion Market-Capitalization			100.00				75.91				89.69				92.08				105.08				149.42

		2005				2006				2007				2008				2009				2010
Farmers Capital Bank Corporation		$	100.00			$	117.65			$	97.31			$	92.66			$	40.86			$	19.51
NASDAQ Composite			100.00				111.74				124.67				73.77				107.12				125.93
Southeastern Banks Under 1 Billion Market-Capitalization			100.00				119.54				91.33				77.91				54.70				66.90

Corporate Address

The headquarters of Farmers Capital Bank Corporation is located at:

202 West Main Street

Frankfort, Kentucky 40601

Direct correspondence to:

Farmers Capital Bank Corporation

P.O. Box 309

Frankfort, Kentucky 40602-0309

Phone: (502) 227-1668

www.farmerscapital.com

39

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Annual Meeting

The annual meeting of shareholders of Farmers Capital Bank Corporation will be held Tuesday, May 10, 201113, 2014 at 11:00 a.m. at the main office of Farmers Bank & Capital Trust Company, Frankfort, Kentucky.

Form 10-K

For a free copy of Farmers Capital Bank Corporation's Annual Report on Form 10-K filed with the Securities and Exchange Commission, please write:

C. Douglas Carpenter, Executive Vice President, Secretary, and Chief Financial Officer

Farmers Capital Bank Corporation

P.O. Box 309

Frankfort, Kentucky 40602-0309

Phone: (502) 227-1668

Web Site Access to Filings

All reports filed electronically by the Company towith the United States Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are available at no cost on the Company’s Web sitewebsite at www.farmerscapital.com.

www.farmerscapital.com.

NASDAQ Market Makers
J.J.B. Hilliard, W.L. Lyons, Inc.LLC	Morgan, Keegan and& Company, Inc.
(502) 588-8400	(800) 260-0280
(800) 444-1854
UBS Securities, LLC	Howe Barnes Hoefer Raymond James & Arnett,Associates, Inc.
(859) 269-6900	(800) 621-2364248-8863
(502) 589-4000

The Transfer Agent and Registrar for Farmers Capital Bank Corporation is American Stock Transfer & Trust Company.

Company, LLC.

American Stock Transfer & Trust Company,

LLC

Shareholder Relations

59 Maiden Lane - Plaza Level

New York, NY 10038

PH:

Phone: (800) 937-5449

Fax: (718) 236-2641

Email: Info@amstock.com

Website: www.amstock.com

 

Additional information is set forth under the captions“Shareholder Information” and“Common Stock Price” on page 73 under Part II, Item 7 and Note 18 17“Regulatory Matters” in the notes to the Company's 20102013 audited consolidated financial statements on pages 105117 to 108120 of this Form 10-K and is hereby incorporated by reference.

40

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Item 6.6. Selected Financial Data

Selected Financial Highlights

December 31, (In thousands, except per share data)		2013				2012				2011				2010				2009
Results of Operations
Interest income		$	66,733			$	71,222			$	78,349			$	89,751			$	100,910
Interest expense			11,995				18,258				24,670				34,948				47,065
Net interest income			54,738				52,964				53,679				54,803				53,845
Provision for loan losses			(2,600	)			2,772				13,487				17,233				20,768
Noninterest income			22,116				24,654				24,391				34,110				28,169
Noninterest expense1			61,573				59,787				62,492				62,711				115,141
Net income (loss)			13,446				12,149				2,738				6,932				(44,742	)
Dividends and accretion on preferred shares			1,951				1,922				1,896				1,871				1,802
Net income (loss) available to common shareholders			11,495				10,227				842				5,061				(46,544	)
Per Common Share Data
Basic and diluted net income (loss)		$	1.54			$	1.37			$	.11			$	.68			$	(6.32	)
Cash dividends declared			-				-				-				-				.85
Book value			18.73				18.54				17.18				16.35				16.11
Tangible book value2			18.61				18.35				16.86				15.87				15.44
Selected Ratios
Percentage of net income (loss) to:
Average shareholders’ equity (ROE)			7.97	%			7.38	%			1.77	%			4.55	%			(22.68	)%
Average total assets (ROA)			.74				.65				.14				.33				(1.99	)
Percentage of common dividends declared to net income			-				-				-				-			N/M
Percentage of average shareholders’ equity to average total assets			9.34				8.85				8.05				7.32				8.76
Total shareholders’ equity		$	170,055			$	168,021			$	157,057			$	149,896			$	147,227
Total assets			1,809,555				1,807,232				1,883,590				1,935,693				2,171,562
Long term borrowings			176,850				178,267				239,664				252,209				316,932
Senior perpetual preferred stock			29,988				29,537				29,115				28,719				28,348
Weighted average common shares outstanding - basic and diluted			7,474				7,457				7,424				7,390				7,365

1	The Company recorded a $52.4 million pretax goodwill impairment charge during 2009, representing the entire amount of goodwill previously reported.

2	Represents total common equity less intangible assets divided by the number of common shares outstanding at the end of the period.

N/M-Not meaningful.

Selected Financial Highlights
December 31, (In thousands, except per share data)		2010				2009				2008				2007				2006
Results of Operations
Interest income		$	89,751			$	100,910			$	113,920			$	114,257			$	92,340
Interest expense			34,948				47,065				55,130				56,039				41,432
Net interest income			54,803				53,845				58,790				58,218				50,908
Provision for loan losses			17,233				20,768				5,321				3,638				965
Noninterest income			34,110				28,169				9,810				24,157				20,459
Noninterest expense			62,711				115,141				60,098				58,823				53,377
Income (loss) from continuing operations			6,932				(44,742	)			4,395				15,627				13,665
Income from discontinued operations1																			7,707
Net income (loss)			6,932				(44,742	)			4,395				15,627				21,372
Dividends and accretion on preferred shares			(1,871	)			(1,802	)
Net income (loss) available to common shareholders			5,061				(46,544	)			4,395				15,627				21,372
Per Common Share Data
Basic:
Income (loss) from continuing operations		$	.68			$	(6.32	)		$	.60			$	2.03			$	1.82
Net income(loss)			.68				(6.32	)			.60				2.03				2.85
Diluted:
Income (loss) from continuing operations			.68				(6.32	)			.60				2.03				1.82
Net income (loss)			.68				(6.32	)			.60				2.03				2.84
Cash dividends declared			N/A				.85				1.32				1.32				1.43
Book value			16.35				16.11				22.87				22.82				22.43
Tangible book value2			15.87				15.44				14.81				14.43				15.81
Selected Ratios
Percentage of income (loss) from continuing operations to:
Average shareholders’ equity (ROE)			4.55	%			(22.68	)%			2.62	%			8.88	%			8.49	%
Average total assets3 (ROA)			.33				(1.98	)			.21				.83				.85
Percentage of common dividends declared to income from continuing operations			N/A				N/M				220.96				64.52				78.89
Percentage of average shareholders’ equity to average total assets3			7.24				8.72				7.86				9.33				10.04
Total shareholders’ equity		$	149,896			$	147,227			$	168,296			$	168,491			$	177,063
Total assets			1,935,693				2,171,562				2,202,167				2,068,247				1,825,108
Other term borrowings and notes payable			252,209				316,932				335,661				316,309				87,992
Senior perpetual preferred stock			28,719				28,348
Weighted Average Common Shares Outstanding
Basic			7,390				7,365				7,357				7,706				7,511
Diluted			7,390				7,365				7,357				7,706				7,526

1Includes gain on disposals of $6,417 during 2006.

2Represents total common equity less intangible assets divided by the number of common shares outstanding at the end of the period.

3Excludes assets of discontinued operations in 2006.

N/A-Not applicable.

N/M-Not meaningful.

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Item 7.7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Glossary of Financial Terms

Allowance for loan losses

A valuation allowance to offset credit losses specifically identified in the loan portfolio, as well as management’s best estimate of probable incurred losses in the remainder of the portfolio at the balance sheet date. Management estimates the allowance balance required using past loan loss experience, an assessment of the financial condition of individual borrowers, a determination of the value and adequacy of underlying collateral, the condition of the local economy, an analysis of the levels and trends of the loan portfolio, and a review of delinquent and classified loans. Actual losses could differ significantly from the amounts estimated by management.

Dividend payout

Cash dividends paid on common shares, divided by net income.

Basis points

Each basis point is equal to one hundredth of one percent. Basis points are calculated by multiplying percentage points times 100. For example: 3.7 percentage points equals 370 basis points.

Interest rate sensitivity

The relationship between interest sensitive earning assets and interest bearing liabilities.

Net charge-offs

The amount of total loans charged off net of recoveries of loans that have been previously charged off.

Net interest income

Total interest income less total interest expense.

Net interest margin

Taxable equivalent net interest income expressed as a percentage of average earning assets.

Net interest spread

The difference between the taxable equivalent yield on earning assets and the rate paid on interest bearing funds.

Other real estate owned

Real estate not used for banking purposes. For example, real estate acquired through foreclosure.

Provision for loan losses

The charge against current income needed to maintain an adequate allowance for loan losses.

Return on average assets (ROA)

Net income (loss) divided by average total assets. Measures the relative profitability of the resources utilized by the Company.

Return on average equity (ROE)

Net income (loss) divided by average shareholders’ equity. Measures the relative profitability of the shareholders' investment in the Company.

Tax equivalent basis (TE)

Income from tax-exempt loans and investment securities havehas been increased by an amount equivalent to the taxes that would have been paid if this income were taxable at statutory rates. In order to provide comparisons of yields and margins for all earning assets, the interest income earned on tax-exempt assets is increased to make them fully equivalent to other taxable interest income investments.

Weighted average number of common shares outstanding

The number of shares determined by relating (a) the portion of time within a reporting period that common shares have been outstanding to (b) the total time in that period.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following pages present management’s discussion and analysis of the consolidated financial condition and results of operations of Farmers Capital Bank Corporation (the “Company” or “Parent Company”), a bank holding company, and its bank and nonbank subsidiaries. Bank subsidiaries include Farmers Bank & Capital Trust Company (“Farmers Bank”) in Frankfort, KY, United Bank & Trust Company (“United Bank”) in Versailles, KY, First Citizens Bank (“First Citizens”) in Elizabethtown, KY, and its significant wholly-ownedCitizens Bank of Northern Kentucky, Inc. (“Citizens Northern”) in Newport, KY.

At year-end 2013, Farmers Bank had three primary subsidiaries, which 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. The Lawrenceburg Bank and Trust Company, which previously was a separate bank subsidiary of the Parent Company, was merged into Farmers Bank on May 8, 2010; First Citizens Bank in Elizabethtown, KY; United Bank & Trust Company (“United Bank”) in Versailles, KY which, during 2008, was the surviving company after the merger with two sister companies of Farmers Bank and Trust Company (“Farmers Georgetown”) and Citizens Bank of Jessamine County; United Bank had one direct subsidiary at year-end 2010,2013, EGT Properties, Inc. EGT Properties, Inc. is involved in real estate management and liquidation for certain repossessed properties of United Bank; andBank. First Citizens Bank of Northern Kentucky, Inc. in Newport, KY (“Citizens Northern”); Citizens Northern had one subsidiary at year-end 2010,2013, HBJ Properties, LLC. HBJ Properties, LLC is involved in real estate management and liquidation for certain repossessed properties of First Citizens. Citizens Northern had one direct subsidiary at year-end 2013, ENKY Properties, Inc. ENKY Properties, Inc., which 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 created in 2008formed 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. All significant intercompany transactions and balances are eliminated in consolidation.

For a complete list of the Company’s subsidiaries, please refer to the discussion under the heading“Organization” included in Part 1, Item 1 of this Form 10-K. The following discussion should be read in conjunction with the audited consolidated financial statements and related footnotes that follow.

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 the 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”Factors” in this report, 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 nonperformingnon-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.

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Discontinued Operations

In June 2006, the Company announced that it had entered into a definitive agreement to sell Kentucky Banking Centers, Inc., its former wholly-owned subsidiary based in Glasgow, Kentucky.  In addition, Farmers Georgetown entered into a definitive agreement during August 2006 to sell its Owingsville and Sharpsburg branches in Bath County (the “Branches”).  These sales were completed during the fourth quarter of 2006.

Application of Critical Accounting Policies

The Company’s audited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices applicable to the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments 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 reported period. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments.statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility from period to period.between reporting periods. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.

The most significant accounting policies followed by the Company are presented in Note 1 of the Company’s 20102013 audited consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this management’s discussionManagement’s Discussion and analysisAnalysis of financial conditionFinancial Condition and resultsResults of operations,Operations, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses and fair value measurements and accounting for goodwill to be the accounting areas that requiresrequire the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

Allowance for Loan Losses

The allowance for loan losses represents credit losses specifically identified in the loan portfolio, as well as management's estimate of probable incurred credit losses in the loan portfolio at the balance sheet date. Determining the amount of the allowance for loan losses and the related provision for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change.changes. The loan portfolio also represents the largest asset group on the consolidated balance sheets. Additional information related to the allowance for loan losses that describes the methodology and risk factors can be found under the captions“Asset Quality” and“Nonperforming Assets” in this management’s discussionManagement’s Discussion and analysisAnalysis of financial conditionFinancial Condition and resultsResults of operation,Operations, as well as Notes 1 and 43 of the Company’s 20102013 audited consolidated financial statements.

Fair Value Measurements

The carrying value of certain financial assets and liabilities of the Company is impacted by the application of fair value measurements, either directly or indirectly.  Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit

(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. In certain cases, an asset or liability is measured and reported at fair value on a recurring basis, such as investment securities classified as available for sale.  In other cases, management must rely on estimates or judgments to determine if an asset or liability not measured at fair value warrants an impairment write-down or whether a valuation reserve should be established.  

The Company estimates the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. The Company characterizes activeActive markets asare those where transaction volumes are sufficient to provide objective pricing information with reasonably narrow bid/ask spreads and where received quoted prices do not vary widely. When the financial instruments are not actively traded, other observable market inputs such as quoted prices of securities with similar characteristics may be used, if available, to determine fair value. Inactive markets are characterized by low transaction volumes, price quotations that vary substantially among market participants, or in which minimal information is released publicly.

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When observable market prices do not exist, the Company estimates fair value primarily by using cash flow and other financial modeling methods. The valuation methods may also consider factors such as liquidity and concentration concerns. Other factors such as model assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Changes in these underlying factors, assumptions, or estimates in any of these areas could materially impact the amount of revenue or loss recorded.

Additional information regarding fair value measurements can be found in Notes 1 and 1918 of the Company’s 20102013 audited consolidated financial statements.  The following is a summary of the Company’s more significant assets that may be affected by fair value measurements, as well as a brief description of the current accounting practices and valuation methodologies employed by the Company:

Available For Sale Investment Securities

Investment securities classified as available for sale are measured and reported at fair value on a recurring basis. Available for sale investment securities are valued primarily by independent third party pricing services under the market valuation approach that include, but are not limited to, the following inputs:

· ●

U.S. Treasury securities are priced using dealer quotes from active market makers Mutual funds and real-time trading systems.

·

Marketable equity securities are priced utilizing real-time data feeds from active market exchanges for identical securities.securities; and

· ●

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.

At December 31, 2010,2013, all of the Company’s available for sale investment securities were measured using observable market data.

Other Real Estate Owned

Other real estate owned (“OREO”) includes properties acquired by the Company through, or in lieu of, actual loan foreclosures and is initially carried at fair value less estimated costs to sell. Fair value of OREO is generally based on third party appraisals of the property that includes comparable sales data compriseddata. The carrying value of significant unobservable inputs.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. OREO is subsequently accounted for at the lower of carrying amount or fair value less estimated costs to sell. At December 31, 20102013, OREO was $30.5$37.8 million compared to $31.2$52.6 million at year-end 2009.

2012.

Impaired Loans

Loans are considered impaired when full paymentit is probable that the Company will be unable to collect all amounts due under the contractual terms is not expected.of the loan agreement. Impaired loans are 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 based on recent appraisals if the loan is collateral dependent. If the value of an impaired loan is less than the unpaid balance, the difference is credited to the allowance for loan losses with a corresponding charge to provision for loan losses. Loan losses are charged against the allowance for loan losses when management believes the uncollectibility of a loan is confirmed.

Appraisals used in connection with valuing collateral dependentcollateral-dependent loans 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 usually significant and typically include significant unobservable inputsnot included in certain appraisals or to update appraised collateral values as a result of market declines of similar properties for determining fair value.which a newer appraisal is available. These adjustments can be significant. Impaired loans were $130$58.3 million and $108$63.9 million at year-end 20102013 and 2009,2012, respectively.

Accounting for Goodwill

During the fourth quarter of 2009, the Company determined that its previously recorded goodwill was fully impaired and recorded a pre-tax impairment charge of $52.4 million. See Note 22 “Goodwill and Intangible Assets” of the Company’s 2010 audited consolidated financial statements for further information.

EXECUTIVE LEVEL OVERVIEW

The Company offers a variety of financial products and services at its 36 banking locations in 23 communities throughout Central and Northern Kentucky. The Company has four separately chartered commercial banks that operate under a community banking philosophy. This philosophy focuses primarily on understanding the banking needs of those in our local and surrounding communities and providing them with competitively priced products and a high level of personalized service. The most significant products and services the Company offers include consumer and commercialbusiness lending, receiving deposits,checking, savings, and other deposit accounts, automated teller machines, electronic bill payments, and providing trust services and offering other traditional banking products and services. The primary goals of the Company are to continually improve profitability and shareholder value, increase and maintain a strong capital position, provide excellent service to our customers through our community banking structure, and to provide a challenging and rewarding work environment for our employees.

The Company generates a significant amount of its revenue, cash flows, and net income from interest income and net interest income, respectively.  Interest income is generated by earnings on the Company’s earning assets, primarily loans and investment securities.  Net interest income is the excess of the interest income earned on earning assets over the interest expense paid on amounts borrowed to support those

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earning assets.  Interest expense is paid primarily on deposit accounts and other short and long-term borrowing arrangements.income. The ability to properly manage net interest income under changing market environments is crucial to the success of the Company.

Managing credit risk or the risk of loss due to customers or other counterparties not being able to meet their financial obligations under agreed upon terms, is also has a factor that can significantlysignificant influence on the operating results of the Company. The severe downturn in financial markets and inAlthough the overall economy showed moderate growth during 2008 and into 2009 created unprecedented market volatility. During that time, certain capital markets ceased to function and credit markets were unavailable to many businesses and consumers. In response, the U.S. government took extraordinary steps to stabilize financial markets by enacting broad legislation and regulatory initiatives that included the largest stimulus plan in its history. Improvement in the U.S. financial markets andyear, the overall economy occurred during 2010. However, certain key metrics, such as high unemployment and lower real estate values persist. This has had a significant negative effectdecline experienced from the early years of the recent economic downturn continue to weigh on the Company’s operationsCompany primarily in the form of still-elevated nonperforming assets. Unemployment rates remain high and federal fiscal policy is constraining economic growth.

The most significant issues to impact the Company��s operating results for 2013 continue to include elevated amounts of nonperforming loans, allowance forassets and the lack of high quality loan losses, and net loan charge-offs.

Following is a summarydemand. The Company remained focused on reducing nonperforming assets, which fell $18.1 million or 17.0% during the year to the lowest balance since the third quarter of 2009. The overall credit quality of the more significant issues that impactedloan portfolio also improved, as historical loss rates and other measures showed widespread improvement. While certain measures of the economy are showing incremental improvements, economic growth is slow and quality loan demand remains soft.

For 2014, the Company during 2010 and thatintends to add to the improvements made over the last few years. Reducing nonperforming assets will continue to havebe a focal point. Seeking out and funding high quality loan demand and improving profitability is also an impact beyond 2010:important goal. The Company plans to repay a portion of its outstanding preferred stock, although this is subject to approval by its banking regulators. United Bank, a subsidiary of the Company, in early 2014 received notice that the formal Consent Order it entered into with its regulators during 2011 had been terminated and replaced with a stepped-down enforcement action in the form of an informal Memorandum. Removal of formal enforcement actions by regulators, such as the Consent Order, is an important step toward being able to repay a portion of the preferred stock. The Company is diligently working to improve its overall financial condition and for the removal of all enforcement actions with its banking regulators.

·

The level of nonperforming assets is currently the most important issue facing the Company. Nonperforming assets remain elevated due to a high number of borrowers that are unable to repay their loans, which has been heavily impacted by ongoing economic challenges that the Company’s borrowers and their customers face. This has resulted in lower levels of interest income, elevated levels of the provision for loans losses, and impairment charges related to properties that the Company has repossessed in an attempt to satisfy customer loan obligations.

·

Nonperforming loans and assets, although higher at year-end 2010 compared to year-end 2009, have decreased when compared to the recent high that occurred in the first quarter of 2010.

·

With the naming of Lloyd C. Hillard, Jr. as its president and chief executive officer in the first quarter of 2010, the Company has refocused its effort to establishing a culture of excellence within the organization. Initial efforts have been focused on improving the customer experience and building a strong credit culture. These initiatives have included expanded employee training and reinforcement, strengthening loan policies, and improving underwriting standards.

·

The Parent Company and its subsidiary banks that have entered into agreements with banking regulators have exceeded the capital levels required under those agreements.

·

Although the Parent Company continues to explore potential capital raising scenarios, there is currently no directive by regulators to raise any additional capital and no determination has been made as to if or when a capital raise will be completed. Net proceeds from a possible sale of securities could be used for any corporate purpose determined by the Company’s board of directors.

RESULTS OF OPERATIONS

The Company reported net income of $6.9$13.4 million for 2013 an increase of $1.3 million or $.6810.7% compared to $12.1 million for 2012. On a per common share basis, net income was $1.54 and $1.37 for 2013 and 2012, respectively. Selected income statement amounts and related information is presented in 2010 comparedthe table below.

(In thousands, except per share data) Twelve Months Ended December 31,		2013				2012				Increase (Decrease)
Interest income		$	66,733			$	71,222			$	(4,489	)
Interest expense			11,995				18,258				(6,263	)
Net interest income			54,738				52,964				1,774
Provision for loan losses			(2,600	)			2,772				(5,372	)
Net interest income after provision for loan losses			57,338				50,192				7,146
Noninterest income			22,116				24,654				(2,538	)
Noninterest expenses			61,573				59,787				1,786
Income before income taxes			17,881				15,059				2,822
Income tax expense			4,435				2,910				1,525
Net income		$	13,446			$	12,149			$	1,297
Less preferred stock dividends and discount accretion			1,951				1,922				29
Net income available to common shareholders		$	11,495			$	10,227			$	1,268
Basic and diluted net income per common share		$	1.54			$	1.37			$	.17
Weighted average common shares outstanding – basic and diluted			7,474				7,457				17
Return on average assets			.74	%			.65	%		9 bp
Return on average equity			7.97	%			7.38	%		59 bp

bp = basis points.

The more significant components related to a net loss of $44.7 million or $6.32 per common share for 2009. This represents an improvement of $51.7 million or $7.00 per common share. The prior year net loss was mainly attributed to a one-time $46.5 million after tax non-cash goodwill charge representing the Company’s write offresults of its entire previously reported goodwill.

Other significant factors impacting net income in the annual comparison include the following:

·

Net interest income increased $958 thousand or 1.8% in the year to year comparison. Interest income decreased $11.2 million or 11.1%, but was offset by lower interest expense of $12.1 million or 25.7%. The decrease in interest income was the result of lower rates and lower volume in both the loan and investment securities portfolios. The decrease in interest expense was led by a reduction in interest on deposit accounts, primarily time deposits which, decreased $10.3 million mainly due to a lower average rate paid.

operations are included below. ·

The provision for loan losses decreased $3.5 million or 17.0% in 2010 compared to the prior year. The provision for loan losses decreased mainly because there are fewer new nonperforming and impaired loans requiring specific allocations in the current period compared to the same quarter a year ago. A decrease in loan volume contributed to a lesser extent. The Company experienced a lower rate of increase in nonperforming loans during 2010 compared to 2009. Net nonperforming loans increased $14.6 million or 19.2% in 2010. During 2009, nonperforming loans increased $50.9 million or 200%, $31.9 million of which occurred during the fourth quarter.

·

Net interest margin was 3.00% for 2010, an increase of 15 basis points from 2.85% for 2009. Net interest spread was 2.78%, up 17 basis points compared to 2.61%.

·

Noninterest income in 2010 increased $5.9 million or 21.1% due primarily to a $5.4 million increase in net gains on the sale of investment securities. Significant other favorable increases included net gains on the sale of loans of $210 thousand or 20.3%, allotment processing fees of $170 thousand or 3.1%, and non-deposit service charges, commissions, and fees of $152 thousand or 3.4%. Decreases in noninterest income line items include service charges and fees on deposits of $176 thousand or 1.9% and trust income of $75 thousand or 4.3%.

·

Total noninterest expenses decreased $52.4 million in the annual comparison. The $52.4 million goodwill impairment charge recorded in the fourth quarter of 2009 was the main driver of the improvement. All other expenses, on a net basis, were unchanged. Improvements

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continue to be made in a significant number of noninterest expense categories. Some of the larger decreases in noninterest expense categories include salaries and employee benefits of $2.8 million or 9.4%, amortization of intangible assets of $515 thousand or 26.4%, equipment expense of $428 thousand or 13.9%, and correspondent banking fees of $391 thousand or 38.8%. Net expenses related to repossessed assets increased $4.0 million or 192%. Deposit insurance expense and bank franchise taxes were up $502 thousand or 13.3% and $217 thousand or 9.6%, respectively.

·

Income tax expense was $2.0 million for 2010 with an effective income tax rate of 22.7%. For 2009, the Company recorded an income tax benefit of $9.2 million that was driven by the impact of the goodwill impairment charge recorded during the fourth quarter. A portion of the Company’s previously recorded goodwill was created in taxable business combinations and therefore was able to record a tax benefit of $5.9 million attributed to the impairment charge.

Return on assets (“ROA”) was .33% in 2010, an increase of 231 basis points from (1.98)% for 2009. The increase in ROA is due mainly to the goodwill impairment charge that was recorded in 2009, which negatively impacted ROA in the prior year by 232 basis points. An increase in net interest margin and a lower provision for loan losses make up for 15 basis points and 10 basis points, respectively, of the increase in ROA. Higher noninterest income, mainly from investment securities gains, increased ROA by 38 basis points offset by a 49 basis point decrease attributed to income taxes. Return on equity (“ROE”) for 2010 was 4.55% compared to (22.68)% for 2009.

Interest Income

Interest income results from interest earned on earning assets, which primarily includes loans and investment securities. Interest income is affected by volume (average balance), the composition of earning assets, and the related rates earned on those assets. Total interest income for 20102013 was $89.8$66.7 million, a decrease of $11.2$4.5 million or 11.1%6.3% compared to $101$71.2 million for 2009. Interest2012. With the exception of nontaxable investment securities, interest income decreased across all major earning asset categoriescategories. The decrease in interest income relates tolower interest on loans and was driven primarily by lower interest rates and, in the case for loans, a lower average volume. Rate declines were driven mainly byinvestment securities, which decreased due to a combination of continuing weak economic conditions inboth rate and volume declines. Rate declines continue to be driven by a slow-growth economy and related competitive factors combined with the Company’s markets as well asoverall strategy by the Company’s overall strategyCompany of being more selective in pricing depositsboth its loans and extending loans. Actions takendeposits. While longer-term market interest rates began to climb toward the last half of 2013, actions by the Federal Reserve Board has also(“Federal Reserve”) have kept the level of interest rates low, with the objective of holding short-term interest rates at near historic lows throughout 2010.exceptionally low levels until unemployment rates decline to a target of 6.5%. In general, the Company’s variable and floating rate assets and liabilities that have resetresetting since the prior year, as well as activity related to new earning assets and funding sources, have repriced downward to reflectin the overall lowercurrent interest rate environment. The Company’s tax equivalent yield on earning assets was 4.9%4.1% for 2010,2013, a decrease of 3812 basis points compared to 5.2%4.2% for 2009.

2012.

Interest Expense

Interest expense results from incurring interest on interest bearing liabilities, which are made up of interest bearing deposits, federal funds purchased, securities sold under agreements to repurchase, and other short and long-term borrowed funds. Interest expense is affected by volume, composition of interest bearing liabilities, and the related rates paid on those liabilities. Total interest expense was $34.9$12.0 million for 2010,2013, a decrease of $12.1$6.3 million or 25.7%34.3% compared to $47.1$18.3 million for 2009. Interest expense decreased mainly as a result of a lower average rate paid on deposits in an overall lower interest rate environment. Volume reductions, primarily on time deposits, also contributed to lower interest expense as the Company has made decisions to strategically reduce certain higher-rate deposits. The average rate paid on interest bearing liabilities was 2.1% for 2010, a decrease of 55 basis points compared to 2.6% for 2009.

2012. The decrease in interest expense for 2010 exceededis attributed to lower interest on deposits and long-term borrowings. Both rate declines and lower volume contributed to the decrease in interest

expense for each of these items. For deposits, substantially all of the decrease in interest income as theexpense was related to time deposits. The Company has been ablecontinued to more aggressively reduce its funding costs, particularly relatedreprice higher-rate maturing time deposits downward to lower market rates or to allow them to mature without renewal. For long-term borrowings, the decrease in interest on deposits. The federalexpense reflects two events that occurred during the fourth quarter of 2012: a $50.0 million principal repayment of borrowed funds rate, which was at 4.25% atdrove down the beginning of 2008, fell to near zero percent by the end of 2008average balance for 2013 and has remained at that level for all of 2009 and 2010. New deposits and other borrowing arrangements as well as the repricing of existing deposits and borrowings$23.2 million of 6.60% fixed rate subordinated debt to a floating interest rate of three-month LIBOR plus 132 basis points. The interest rate in effect at lower market interest rates, particularlyyear-end 2013 for shorter-term instruments, contributed to the overall lower interest expense in the comparable periods.

this portion of outstanding debt was 1.56%.

Net Interest Income

Net interest income is the most significant component of the Company’s operating earnings. Net interest income is the excess of the interest income earned on earning assets over the interest paid for funds to support those assets. The two most common metrics used to analyze net interest income are net interest spread and net interest margin. Net interest spread represents the difference between the taxable-equivalenttaxable equivalent yields on earning assets and the rates paid on interest bearing liabilities. Net interest margin represents the percentage of taxable equivalent net interest income to average earning assets. Net interest margin will exceed net interest spread because of the existence of noninterest bearing sources of funds, principally demand deposits and shareholders’ equity, which are also available to fund earning assets. Changes in net interest income and margin result from the interaction between the volume and composition of earning assets, their related yields, and the associated cost and composition of the interest bearing liabilities. Accordingly, portfolio size, composition, and the related yields earned and the average rates paid can have a significant impact on net interest spread and margin. The table following this discussion represents the major components of interest earning assets and interest bearing liabilities on a tax equivalent basis. To compare the tax-exempt asset yields to taxable yields, amounts in the table are adjusted to pretax equivalents based on the marginal corporate Federal tax rate of 35%.

Net interest income was $54.8 million for 2010, an increase of $958 thousand or 1.8% compared to $53.8 million for 2009. Interest income for 2010 decreased $11.2 million, but was offset by a $12.1 million or 25.7% decrease in total interest expense. The Company reported a de-

47

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crease in all major interest income and interest expense line items that was mainly attributed to lower interest rates. Generally, variable and floating rate assets and liabilities that have reset since the prior reporting period as well as activity related to new earning assets and funding sources, have repriced downward to reflect an overall lower interest rate environment. Rate declines for both earning assets and interest bearing liabilities were driven mainly by continuing weak economic conditions in the Company’s markets as well as the Company’s overall strategy of being more selective in pricing deposits and extending loans in an effort to improve net interest margin, overall profitability, and capital position.

In addition to the impact of lower overall interest rates, a decrease in volume also contributed to lower interest income on loans and interest expense on time deposits and long term borrowings. Volume decreases for loans and deposits have been largely strategy driven, whereby the Company has been more selective in pricing deposits and extending loans in a more focused effort to improve net interest margin and overall profitability. The decrease in the volume of long term borrowings were impacted by the maturity during the fourth quarter of 2010 of $50 million of borrowed funds associated with the Company’s 2007 balance sheet leverage transaction.

Tax equivalent net interest income was $57.0$56.4 million for 2010,2013, an increase of $623 thousand$1.7 million or 1.1%3.1% compared to $56.4$54.7 million for 2009.2012. Net interest margin was 3.40%, an increase of 22 basis points from 3.18% for the prior year. The increase in net interest margin was 3.0%, andriven by a 27 basis point increase of 15 basis points from 2.85% in the prior year. Netnet interest spread, accountedwhich was 3.23% for 17 basis points of the higher net interest margin and was 2.78% for 20102013 compared to 2.61%2.96% for 2009. The impact of noninterest bearing sources of funds negatively impacted net interest margin by 2 basis points in the comparison.  The effect of noninterest bearing sources of funds on net interest margin typically decreases as the average cost of funds declines.

2012.

The Company continues to actively monitormonitors and proactively managemanages the rate sensitive components of both its assets and liabilities in a continuously changing and difficult market environment. This task has become increasingly more difficult following the extreme market disruptions and economic downturn that began in 2008. Competition in the Company’s market areas continues to be intense. The overallintense, and while longer term interest rate environment remainsrates shifted upward during the last half of 2013, they remain low by historical measures. The Federal Reserve has kept its short-term federal funds target rate at near zero percent since mid-December 2008 and has indicated that it expects to maintain that rate at an exceptionally low level for an extended period of time.while unemployment rates remain above 6.5%. Yields on the 5-year, 10-year, and 30-year Treasury securities of mediumare up 102 basis points, 127 basis points, and longer-term maturity structures have decreased as of102 basis points at year-end 20102013, respectively, compared to a year earlier. The twoYields on the 3-month and 10-year notes decreased 542 basis points and 543 basis points, respectively in the comparison while the 30-year bond dropped 307 basis points.

6-month Treasuries are relatively unchanged.

Similar to the short-term federal funds target rate, the prime interest rate has not changed since December 2008. The Company uses the prime interest rate as part of its pricing model primarily on variable rate commercial real estate loans. The prime interest rate can have a significant impact on the Company’s interest income on loans that reprice based on changes to the prime interestthis rate. The Company’s variable interest rate loans contain provisions that limit the amount of increase or decrease in the interest rate during the life of thea loan. This will limit the increase or decrease in interest income on loans that have interest rates tied to the prime interest rate. For 2010,2013, the average yield earned on loans was 5.7%5.4%, which is in excess ofexceeded the prime interest rate of 3.25% at year-end 2010.year-end. Predicting the movement of future interest rates is uncertain.

During 2010,2013, the average ratesrate for two of the Company’s most significant components of net interest income, for the Company, loans and time deposits, both declined. As previously noted, theThe average rate earned on the Company’s loan portfolio for 2013 declined 1911 basis points to 5.7% for 2010. The5.4% and the average rate paid on time deposits decreased 8742 basis points to 2.5%1.0% compared to 2012. The Company expects its net interest margin to trend modestly upward in the annual comparison. Shouldnear term, primarily from a decrease in its cost of funds, according to internal modeling using expectations about future market interest rates, onthe maturity structure of the Company’s earning assets and interest paying liabilities, reprice lower, the Company’s yield on earning assetsand other factors. Future results, however, could potentially decrease fasterbe significantly different than its cost of funds. Should interest rates reprice higher, the Company’s cost of funds may also increase and could continue to increase faster than the yields on earning assets, resulting in a lower net interest margin.expectations.

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

Years Ended December 31,		2013												2012												2011
(In thousands)		Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate
Earning Assets
Investment securities
Taxable		$	477,626			$	10,575				2.21	%		$	532,197			$	12,872				2.42	%		$	494,341			$	14,387				2.91	%
Nontaxable1			109,861				3,726				3.39				88,369				3,313				3.75				63,837				2,848				4.46
Interest bearing deposits with banks, federal funds sold and securities purchased under agreements to resell			66,686				154				.23				66,757				160				.24				106,037				241				.23
Loans1,2,3			1,006,662				53,944				5.36				1,035,959				56,639				5.47				1,130,273				62,635				5.54
Total earning assets			1,660,835			$	68,399				4.12	%			1,723,282			$	72,984				4.24	%			1,794,488			$	80,111				4.46	%
Allowance for loan losses			(22,968	)											(26,772	)											(29,856	)
Total earning assets, net of allowance for loan losses			1,637,867												1,696,510												1,764,632
Nonearning Assets
Cash and due from banks			23,435												25,165												19,349
Premises and equipment, net			36,319												37,612												39,319
Other assets			108,037												100,659												95,785
Total assets		$	1,805,658											$	1,859,946											$	1,919,085
Interest Bearing Liabilities
Deposits
Interest bearing demand		$	306,945			$	216				.07	%		$	281,076			$	240				.09	%		$	258,244			$	355				.14	%
Savings			333,457				635				.19				311,724				626				.20				293,526				1,204				.41
Time			505,738				5,071				1.00				588,544				8,373				1.42				687,517				12,929				1.88
Federal funds purchased and other short-term borrowings			29,440				74				.25				26,134				96				.37				38,043				191				.50
Securities sold under agreements to repurchase and other long-term borrowings			176,891				5,999				3.39				223,722				8,923				3.99				246,153				9,991				4.06
Total interest bearing liabilities			1,352,471			$	11,995				.89	%			1,431,200			$	18,258				1.28	%			1,523,483			$	24,670				1.62	%
Noninterest Bearing Liabilities
Demand deposits			256,518												238,443												217,357
Other liabilities			27,979												25,697												23,685
Total liabilities			1,636,968												1,695,340												1,764,525
Shareholders’ equity			168,690												164,606												154,560
Total liabilities and shareholders’ equity		$	1,805,658											$	1,859,946											$	1,919,085
Net interest income							56,404												54,726												55,441
TE basis adjustment							(1,666	)											(1,762	)											(1,762	)
Net interest income						$	54,738											$	52,964											$	53,679
Net interest spread											3.23	%											2.96	%											2.84	%
Impact of noninterest bearing sources of funds											.17												.22												.25
Net interest margin											3.40	%											3.18	%											3.09	%

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 $1.3 million, $1.1 million, and $912 thousand for 2013, 2012, and 2011, respectively.

Years Ended December 31,		2010												2009												2008
		Average								Average				Average								Average				Average								Average
(In thousands)		Balance				Interest				Rate				Balance				Interest				Rate				Balance				Interest				Rate
Earning Assets
Investment securities
Taxable		$	441,635			$	16,565				3.75	%		$	445,329			$	20,424				4.59	%		$	425,206			$	22,894				5.38	%
Nontaxable1			82,327				4,149				5.04				97,960				5,186				5.29				86,784				4,653				5.36
Interest bearing deposits with banks, federal funds sold and securities purchased under agreements to resell			133,586				280				.21				129,092				302				.23				65,477				1,199				1.83
Loans 1,2,3			1,236,202				70,946				5.74				1,306,800				77,522				5.93				1,302,394				87,509				6.72
Total earning assets			1,893,750			$	91,940				4.85	%			1,979,181			$	103,434				5.23	%			1,879,861			$	116,255				6.18	%
Allowance for loan losses			(25,467	)											(18,965	)											(14,757	)
Total earning assets, net of allowance for loan  losses			1,868,283												1,960,216												1,865,104
Nonearning Assets
Cash and due from banks			64,216												96,965												72,373
Premises and equipment, net			39,541												41,069												40,649
Other assets			129,618												163,804												159,228
Total assets		$	2,101,658											$	2,262,054											$	2,137,354
Interest Bearing Liabilities
Deposits
Interest bearing demand		$	258,674			$	453				.18	%		$	247,235			$	713				.29	%		$	256,129			$	1,805				.70	%
Savings			272,080				1,663				.61				256,063				1,976				.77				261,692				3,499				1.34
Time			807,730				20,257				2.51				902,066				30,508				3.38				793,561				33,741				4.25
Federal funds purchased and other short-term borrowings			46,755				324				.69				62,948				453				.72				81,180				1,785				2.20
Securities sold under agreements to repurchase and other long-term borrowings			304,356				12,251				4.03				331,073				13,415				4.05				330,468				14,300				4.33
Total interest bearing liabilities			1,689,595			$	34,948				2.07	%			1,799,385			$	47,065				2.62	%			1,723,030			$	55,130				3.20	%
Noninterest Bearing Liabilities
Commonwealth of Kentucky deposits			1,347												34,992												37,025
Other demand deposits			209,020												191,656												177,347
Other liabilities			49,490												38,725												31,952
Total liabilities			1,949,452												2,064,758												1,969,354
Shareholders’ equity			152,206												197,296												168,000
Total liabilities and shareholders’ equity		$	2,101,658											$	2,262,054											$	2,137,354
Net interest income							56,992												56,369												61,125
TE basis adjustment							(2,189	)											(2,524	)											(2,335	)
Net interest income						$	54,803											$	53,845											$	58,790
Net interest spread											2.78	%											2.61	%											2.98	%
Effect of noninterest bearing sources of funds											.22												.24												.27
Net interest margin											3.00	%											2.85	%											3.25	%

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 $1.4 million, $1.8 million, and $2.3 million for 2010, 2009, and 2008, respectively.

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The following table is an analysis of the change in net interest income.

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

		Variance				Variance Attributed to								Variance				Variance Attributed to
(In thousands)			2010/2009	1		Volume				Rate					2009/2008	1		Volume				Rate
Interest Income
Taxable investment securities		$	(3,859	)		$	(168	)		$	(3,691	)		$	(2,470	)		$	1,036			$	(3,506	)
Nontaxable investment securities2			(1,037	)			(800	)			(237	)			533				594				(61	)
Interest bearing deposits with banks, federal funds sold and securities purchased under agreements to resell			(22	)			8				(30	)			(897	)			631				(1,528	)
Loans2			(6,576	)			(4,128	)			(2,448	)			(9,987	)			296				(10,283	)
Total interest income			(11,494	)			(5,088	)			(6,406	)			(12,821	)			2,557				(15,378	)
Interest Expense
Interest bearing demand deposits			(260	)			31				(291	)			(1,092	)			(61	)			(1,031	)
Savings deposits			(313	)			117				(430	)			(1,523	)			(73	)			(1,450	)
Time deposits			(10,251	)			(2,962	)			(7,289	)			(3,233	)			4,235				(7,468	)
Federal funds purchased and other short-term borrowings			(129	)			(111	)			(18	)			(1,332	)			(333	)			(999	)
Securities sold under agreements to repurchase and other long-term borrowings			(1,164	)			(1,097	)			(67	)			(885	)			26				(911	)
Total interest expense			(12,117	)			(4,022	)			(8,095	)			(8,065	)			3,794				(11,859	)
Net interest income		$	623			$	(1,066	)		$	1,689			$	(4,756	)		$	(1,237	)		$	(3,519	)
Percentage change			100.0	%			(171.1	)%			271.1	%			100.0	%			26.0	%			74.0	%

1

Variance     Variance Attributed to     Variance     Variance Attributed to   (In thousands)   2013/20121     Volume     Rate     2012/20111     Volume     Rate   Interest Income                                                 Taxable investment securities   $ (2,297 )   $ (1,244 )   $ (1,053 )   $ (1,515 )   $ 1,041     $ (2,556 ) Nontaxable investment securities2     413       752       (339 )     465       970       (505 ) Interest bearing deposits with banks, federal funds sold and securities purchased under agreements to resell     (6 )     -       (6 )     (81 )     (92 )     11   Loans2     (2,695 )     (1,575 )     (1,120 )     (5,996 )     (5,208 )     (788 ) Total interest income     (4,585 )     (2,067 )     (2,518 )     (7,127 )     (3,289 )     (3,838 ) Interest Expense                                                 Interest bearing demand deposits     (24 )     26       (50 )     (115 )     28       (143 ) Savings deposits     9       41       (32 )     (578 )     71       (649 ) Time deposits     (3,302 )     (1,064 )     (2,238 )     (4,556 )     (1,688 )     (2,868 ) Federal funds purchased and other short-term borrowings     (22 )     11       (33 )     (95 )     (52 )     (43 ) Securities sold under agreements to repurchase and other long-term borrowings     (2,924 )     (1,702 )     (1,222 )     (1,068 )     (898 )     (170 ) Total interest expense     (6,263 )     (2,688 )     (3,575 )     (6,412 )     (2,539 )     (3,873 ) Net interest income   $ 1,678     $ 621     $ 1,057     $ (715 )   $ (750 )   $ 35   Percentage change     100.0 %     37.0 %     63.0 %     100.0 %     104.9 %     (4.9 )% 1The changes which 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.

2	Income stated at fully tax equivalent basis using the marginal corporate Federal tax rate of 35%.

Noninterest Income

Noninterest income for 2010 was $34.1 million, an increaseallocation.

²Income stated at fully tax equivalent basis using the marginal corporate Federal tax rate of $5.9 million or 21.1% compared35%.

Provision for Loan Losses

The Company recorded a credit to $28.2 million for 2009. The increase in noninterest income was due primarily to a $5.4 million increase in net gains on the sale of investment securities. Significant other favorable increases included net gains on the sale of loans of $210 thousand or 20.3%, allotment processing fees of $170 thousand or 3.1%, non-deposit service charges, commissions, and fees of $152 thousand or 3.4%, and other income of $230 thousand or 190%. Decreases in noninterest income line items include service charges and fees on deposits of $176 thousand or 1.9% and trust income of $75 thousand or 4.3%.

The sale of investment securities in 2010 were strategically made to lock in some of the increase in their values and to  bolster capital and to help counterbalance the high level of provision for loan losses and expenses related to repossessed real estate. The sales were made after careful analysis of multiple reinvestment scenarios that would minimize the negative impact on the net interest margin on a go forward basis.

The $210 thousand increase in net gains on the sale of loans is volume related, as the amount of loans sold in 2010 were $51.5$2.6 million up $5.6 million or 12.2% compared to 2009. The increase in loans sold is due to a higher volume of secondary market origination activity. Loan originations and refinance activities, buoyed by the low interest rate environment, picked up during the latter half of 2010 particularly in the months of October and November. The $170 thousand increase in allotment processing fees is due to overall higher transaction volumes. The increase in other non-deposit service charges, commissions, and fees of $152 thousand was driven by higher interchange fees of $220 thousand or 10.7% mainly resulting from higher transaction volumes. The $230 thousand increase in other income is mainly due to a $261 thousand lower aggregate loss attributed to tax credit partnerships. The loss attributed to these partnerships in 2010 was $145 thousandfor 2013 compared to a losscharge of $406 thousand$2.8 million for 2009.2012. The aggregate carrying amountallowance for loan losses as a percentage of the Company’s investment in the partnershipsoutstanding loans (net of unearned income) was 2.06% at December 31, 2013 compared to 2.43% at year-end 2010 was $425 thousand.

The $176 thousand decrease in service charges and fees on deposits is mainly attributed to lower overdraft/insufficient funds charges of $134 thousand or 2.1%.2012. The decrease in feesthe provision for loan losses is attributed to volume declines, which led to lower fees of $124 thousand or 7.7% and $143 thousand or 8.8% during the fourth quarter of 2010 compared to the linked third quarter and fourth quarter a year ago, respectively. Beginningimproving trends in the third quartercredit quality of 2010, the Federal Reserve Board began to prohibit financial institutions from charging fees to customers for paying overdrafts on one-time debit cardloan portfolio and automated teller machine transactions without the customer opting-in to the overdraft service for those transactions. The rule change, combined witha lower level of loans outstanding. Further information about improvements in the Company’s earlier adoption during 2010 of certain regulatory “best practices” related to overdraft

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charges, have contributed tooverall credit quality is included under the decrease in revenue from overdraft/insufficient funds. However, the Company is unable to precisely quantify the impact related to these events. The Company is also unable to predict how this rule will impact the level of overdraft/insufficient funds fees it will collect in future periods.

The $75 thousand decrease in trust income is due to lower overall asset values on which trust fees are based combined with the collection of a large fee in the second quarter of the prior year.

Noninterest Expense

Total noninterest expensescaptions“Allowance for Loan Losses” and“Nonperforming Loans” that follows.

Net charge-offs were $62.7$1.3 million and $6.6 million for 2010,2013 and 2012, respectively. This represents a decrease of $52.4$5.3 million or 45.5%80.8%. Net charge-offs were .13% of average loans outstanding for 2013 compared to $115 million.64% for 2009. the prior year.

Noninterest Income

The decrease incomponents of noninterest expense inincome are as follows for the comparison periods is mainly attributed to a $52.4 million one-time, non-cash goodwill impairment charge that was recorded in the fourth quarter of 2009. All other expenses, on a net basis, were unchanged for 2010 compared to 2009. Improvements continue to be made in aindicated:

(Dollars in thousands) Years Ended December 31,		2013				2012				Increase (Decrease)				%
Service charges and fees on deposits		$	8,196			$	8,124			$	72				0.9	%
Allotment processing fees			4,922				5,215				(293	)			(5.6	)
Other service charges, commissions, and fees			4,983				4,478				505				11.3
Data processing income			102				242				(140	)			(57.9	)
Trust income			1,993				1,909				84				4.4
Investment securities (losses) gains, net			(50	)			1,209				(1,259	)			(104.1	)
Gain on sale of mortgage loans, net			1,036				1,918				(882	)			(46.0	)
Income from company-owned life insurance			962				1,524				(562	)			(36.9	)
Other			(28	)			35				(63	)			(180.0	)
Total noninterest income		$	22,116			$	24,654			$	(2,538	)			(10.3	)%

The more significant numberitems impacting noninterest income are included below.

●

The decrease in allotment processing fees is attributed primarily to volume declines, due in part to reductions in military troop levels and deployments. The Company expects the rate of decrease from its allotment fees to slow or modestly increase beginning mid-2014 from an anticipated pickup in volume, resulting from a large competing vendor that is exiting this line of business in the coming year.

●

The increase in other service charges, commissions, and fees is attributed to higher interchange fees and loan servicing of $301 thousand or 12.8% and $90 thousand or 23.2%, respectively. The increase in interchange fees is due to higher debit card transaction volumes. Loan servicing income is up due to a $27.9 million or 16.2% growth in the mortgage loan servicing portfolio.

●

Data processing income began to decrease sharply during 2011 as a result of the initial termination of the Company’s depository services contract with the Commonwealth of Kentucky (“Commonwealth”). Fees from the Commonwealth continued to decline over an additional one-year transition period as the contract wound down and ultimately terminated in June 2012. These fee reductions have been partially offset by decreases in related noninterest expenses spread over multiple line items categories.

●

Investment securities include a $57 thousand loss for 2013 attributed to a single municipal bond where the issuer participated in the Build America Bond (“BAB”) program. BAB is a federal government program whereby the U.S. Treasury pays a direct subsidy to the issuer to support interest costs of qualified bonds. Federal budget sequestration events during 2013 reduced the subsidy to the issuer, triggering an extraordinary redemption feature related to these bonds. This bond had a carrying value in excess of its par value due to the unamortized premium. The issuer redeemed the bond at par value, which resulted in the loss. Given the current interest rate environment, the Company expects another bond issue related to the BAB program to be called during the first quarter of 2014, resulting in a loss of approximately $156 related to unamortized premiums. The net gain recorded in the prior year is attributed to normal asset/liability management strategies, as the Company periodically sells investment securities to lock in gains, increase yield, restructure expected future cash flows, and/or enhance its capital position.

●

The decrease in net gains on the sale of mortgage loans is due to lower origination and refinancing activity. The volume of loans sold in 2013 decreased $34.7 million or 41.0% compared to 2012. Mortgage refinancing and home purchases rose sharply during 2012 fueled by interest rate declines. Those rates have since increased which has reduced customer demand.

●

Income from company-owned life insurance decreased primarily because the prior year includes a nonrecurring gain in the amount of $529 thousand related to death benefit proceeds. Lower crediting rates represent the remaining decrease.

●

Other income for 2013 includes a net loss of $306 thousand related to the Company’s equity interest in two low income tax credit partnerships. For 2012, the loss was $226 thousand.

Noninterest Expense

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

(Dollars in thousands) Years Ended December 31,		2013				2012				Increase (Decrease)				%
Salaries and employee benefits		$	29,681			$	28,190			$	1,491				5.3	%
Occupancy expenses, net			4,767				4,757				10				0.2
Equipment expenses			2,398				2,364				34				1.4
Data processing and communication expenses			3,946				4,271				(325	)			(7.6	)
Bank franchise tax			2,354				2,381				(27	)			(1.1	)
Amortization of intangibles			540				1,014				(474	)			(46.7	)
Deposit insurance expense			2,265				2,690				(425	)			(15.8	)
Other real estate expenses, net			6,999				5,232				1,767				33.8
Legal expenses			780				1,220				(440	)			(36.1	)
Other			7,843				7,668				175				2.3
Total noninterest expense		$	61,573			$	59,787			$	1,786				3.0	%

The more significant decreases initems impacting noninterest expense categories in the comparison include salaries and employee benefits of $2.8 million or 9.4%, amortization of intangible assets of $515 thousand or 26.4%, equipment expense of $428 thousand or 13.9%, and correspondent banking fees of $391 thousand or 38.8%. Net expenses related to repossessed assets increased $4.0 million or 192%. Deposit insurance expense and bank franchise taxes were up $502 thousand or 13.3% and $217 thousand or 9.6%, respectively.

The $52.4 million goodwill impairment charge recorded in 2009 was a result of the Company’s annual goodwill impairment testing during the fourth quarter. During that testing, the Company concluded that as a result of continuing economic weaknesses and heightened market concern surrounding the credit risk and market capital position of the overall financial institutions industry, the fair value of the Company’s single reporting unit would more likely than not be below its carrying amount. The Company engaged an independent third party to assist with its goodwill impairment analysis and determined that the implied fair value of its goodwill was significantly less than the carrying value, resulting in the non-cash impairment charge.

The $2.8 million decrease in salaries and employee benefits is due to an overall shrinking workforce and a decrease in the Company’s matching contributions to its salary savings plan that took effect in the first quarter of 2010. The average number of full time equivalent employees was 528 for 2010, down 33 or 5.9% from 561 for 2009. In addition, starting in the first quarter of 2010 the Company began to match 50% of eligible employee deferrals up to a maximum of 6% of the participants’ compensation related to its salary saving plan. For 2009, the Company matched all eligible employee contributions up to 6% of the participants’ compensation.

Amortization of intangible assets, which relate to customer lists and core deposits from prior acquisitions, is decreasing as a result of amortization schedules that allocate a higher amount of amortization in the earlier periods following an acquisition consistent with how the assets are used. The $428 thousand decrease in equipment expenses for 2010 is mainly due to lower depreciation expense of $273 thousand. The decrease in depreciation expense is a result of a relatively small amount of net additions to the Company’s fixed assets. A decrease in depreciation expense on existing fixed assets exceeded the amount of depreciation expense related to net new fixed assets in the comparison. The sharp decrease in correspondent bank fees of $391 thousand are mainly a function of lower volume related to a custodial services contract with the Kentucky Teachers’ Retirement System that expired at the end of the second quarter of 2010 that was not renewed.

The $4.0 million increase in net other real estate expenses is attributed to the elevated amount of foreclosed real estate properties held by the Company during 2010. Expenses relating to these properties generally include amounts to prepare the properties for resale and, in some cases, impairment charges to write down a property’s book value to its fair value less estimated costs to sell as determined by appraisal. Impairment charges included in net other real estate expenses were $4.1 million for 2010. Three separate real estate developments account for $3.0 million of the total impairment charges.

The increase in deposit insurance expense of $502 thousand was driven mainly by higher assessment rates primarily at two of the Company’s bank subsidiaries that are subject to regulatory agreements. Deposit assessment rates fluctuate as a result of changes to a bank’s Federal Deposit Insurance Corporation’s (“FDIC”) risk category that takes into account its capital levels, supervisory ratings, and other risk measures based on various financial ratios established by the FDIC. The $217 thousand increase in bank franchise taxes correlates to an increase in the base amount subject to the Kentucky Bank Franchise Tax of the Company’s bank subsidiaries. The tax base is made up of a banks’ net capital, as defined, which generally represents the total capital of a bank adjusted for U.S. and Kentucky obligations as defined by Kentucky banking regulations.

below.

●

The increase in salaries and employee benefits was driven by a $996 thousand or 20.5% net increase in benefit expenses, mainly from higher claims related to the Company’s self-funded health insurance plan. Claims for 2013 were unusually high in comparison to recent years. The Company had 519 full time equivalent employees at year-end 2013, virtually unchanged from 518 a year earlier.

●

Data processing and communication expenses mainly decreased due to cost savings related to an agreement the Company announced during the first quarter of 2012 to reduce its debit card processing expenses and to cost reductions associated with the termination of the Company’s depository services contract with the Commonwealth as previously discussed.

●

Amortization of intangible assets declined as a result of actuarial determined reductions related to core deposit and customer relationship intangible assets arising from previous business acquisitions. Intangible assets are scheduled to fully amortize by 2015.

●

Deposit insurance expense decreased during 2013 primarily as a result of the improved risk rating by the FDIC at the Company’s largest bank subsidiary. The better rating reduced the assessment rate used in determining the amount payable for deposit insurance.

●

The increase in other real estate expenses was driven by higher impairment charges of $1.8 million or 46.8%. Total impairment charges for 2013 were $5.5 million, which includes $2.0 million related to a single residential real estate development project that had a carrying value of $2.9 million at year-end 2013.

●

The decrease in legal expenses relates primarily to problem loan activity in the normal course of business. Also, the prior year includes nonrecurring expenses of $122 thousand related to registering the Company’s Series A preferred shares that were sold by the U.S. Treasury to third party investors.

Income Tax

Taxes

Income tax expense was $2.0$4.4 million for 2010 with2013, an increase of $1.5 million or 52.4% compared to $2.9 million for 2012. The effective income tax rates were 24.8% and 19.3% for 2013 and 2012, respectively. The increase in income tax expense and the effective tax rate for 2013 is attributed primarily to a combination of 22.7%. For 2009,lower tax credits and the relative amount of tax-free income to total income. Tax credits that have been utilized by the Company recorded an income tax benefitover a number of $9.2 million that was driven byyears related to Qualified Zone Academy Bonds were fully exhausted during 2012. In addition, the impact of the goodwill impairment charge recorded during the fourth quarter. Ataxable portion of the Company’s previously recorded goodwill was createdtotal revenues has increased more in taxable business combinations and therefore was able to record a tax benefit of $5.9 million attributedproportion to the impairment charge.

nontaxable revenues.

 

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FINANCIAL CONDITION

The size of the Company’s balance sheet decreasedwas relatively unchanged at year-end 20102013, with total assets up .1% compared to year-end 2009.the prior year. The reduction is due primarily to the Company’s broad strategy to realign its balance sheet. The most significant partsoverall financial condition of the strategy has included a more cautiousCompany, however, continued to improve. Total nonperforming assets have declined in five consecutive quarters and measured approach to lending as well as a more focused effortare at the lowest level since the third quarter of 2009. Credit quality metrics and net interest margin improved in 2013, and banking regulators have recognized improvements by removing (during 2013) or reducing the Company’s overall cost of funds. For loans, the approach has been to be more selective, in terms of acceptable credit risk, in the credits that are underwritten. On the funding side, the approach has been to more aggressively reprice higher-rate time deposits downward as they mature or by electing to not renew. The strategy of reducing the overall size of the balance sheet is part(in early 2014) enforcement actions at two of the Company’s plansubsidiary banks. Regulatory capital levels remain significantly above the “well-capitalized” threshold. Quality loan demand, however, remains weak. Absent regulatory approval to improverepay a portion of its net interest margin, nonperforming asset levels, capital ratios, and overall profitability.

Total assets were $1.9 billion at December 31, 2010,preferred shares, preferred dividend payments will increase as a decrease of $236 million or 10.9% from the year-end 2009. The decrease in assets occurred across all major asset groups and mainly is reflectiveresult of the balance sheet realignment strategy summarized above. The most significant decreases were as follows: cash and cash equivalents $36.3 million or 16.6%, investment securities $104 million or 18.9%, loans (net of unearned income and allowance for loan losses) $84.5 million or 6.8%, and company-owned life insurance $7.8 million or 21.4%.

The decrease in cash and cash equivalents and investment securities is attributed primarilyrate resetting from 5% to the overall net funding position of the Company, which was heavily influenced by the plan to lower funding costs and improve net interest margin. The decrease in investment securities has also been impacted by the overall low interest rate environment such that the Company has reinvested more of the amounts it received from maturing or called bonds into shorter term cash equivalents.

The decrease in company-owned life insurance is attributed to the liquidation of $8.6 million at the Parent Company of life insurance at its cash surrender value. The Parent Company took this action9% during the first quarter of 2010 mainly to have additional cash available to inject into certain of its bank subsidiaries to strengthen their capital positions. An additional $2.2 million of company-owned life insurance remains at the Parent Company at year-end 2010 that is expected to be liquidated in the near term.

2014.

Total liabilitiesassets were $1.8 billion at December 31, 2010,2013, representing a .1% increase from year-end 2012. Cash and cash equivalents, OREO, and loans (net of unearned income) decreased $27.6 million or 28.8%, $14.7 million or 28.0%, and $5.1 million or .5%, respectively. Investment securities increased $39.7 million or 6.9%. Deposits and total liabilities were unchanged at $1.4 billion and $1.6 billion, respectively; shareholders’ equity increased $2.0 million or 1.2%.

Temporary Investments

Temporary investments consist of interest bearing deposits in other banks and federal funds sold and securities purchased under agreements to resell. The Company uses these funds in the management of liquidity and interest rate sensitivity or as a short-term holding prior to subsequent movement into other investments with higher yields or for other purposes. At December 31, 2013, temporary investments were $45.3 million, a decrease of $239$23.1 million or 11.8%33.7% compared to December 31, 2009. Net deposits decreased $170$68.4 million at year-end 2012.

Investment Securities

The investment securities portfolio is comprised primarily of residential mortgage-backed securities, tax-exempt securities of states and political subdivisions, and debt securities issued by U.S. government-sponsored agencies. Substantially all of the Company’s investment securities are designated as available for sale. Total investment securities had a carrying amount of $614 million at year-end 2013, an increase of $39.7 million or 10.4% while6.9% compared to $574 million at year-end 2012. Proceeds received from maturing or called investment securities not needed to fund higher-earning loans are either reinvested in similar investments or used to manage liquidity, such as for deposit outflows or other payment obligations. The Company periodically sells investment securities in response to its overall asset/liability management strategy to lock in gains, increase yield, restructure expected future cash flows, and/or enhance its capital position.

The increase in investment securities was driven by net borrowed funds decreased $64.5purchases of $64.8 million, or 17.7%. The netpartially offset by a decrease in depositsthe unrealized gain on available for sale securities in the amount of $20.1 million, which resulted in an overall net unrealized loss of $5.6 million at year-end. Net premium amortization was led by lower interest bearing deposits of $162$5.0 million or 11.4%. As discussed above, the decrease in interest bearing deposit balances is mainly attributed to the Company’s overall balance sheet realignment strategy and goal for reducing overall funding costs. For 2010, the Company’s average rate paid on interest bearing liabilities was 2.1%, a decrease of 55 basis points2013 compared to 2.6%$5.3 million for 2009. The average rate paid on interest bearing deposits was 1.7% for 2010 or 69 basis points lower than the previous year amount of 2.4%. Lowering the cost of funds has led to a reduction of higher-balance time deposits and many of these depositors that are seeking higher yields have withdrawn their balances at maturity in lieu of renewing at lower rates.

2012. The decrease in net borrowed fundsthe value of the available for sale securities portfolio is dueattributed to a $64.7 million or 24.2% lower amount of long-term borrowings outstandinggeneral shift downward in the year to year comparison. Long-term borrowings decreased $50.0 million as a result of scheduled maturities attributed to the Company’s 2007 balance sheet leverage transaction. The remaining decrease is nearly all attributed to scheduled repayments of Federal Home Loan Bank (“FHLB”) borrowings.

Shareholders’ equity increased $2.7 million or 1.8% to $150 million at year-end 2010 compared to $147 million a year earlier. The increase in shareholders’ equity is due mainly to net income of $6.9 millionbond prices, primarily for the year partially offset by dividends on preferred stocklonger term maturity periods. Bond prices fell sharply during the second quarter of $1.5 million2013 and aremained relatively stable during the third quarter, then further falling at year-end. The initial decrease in accumulated other comprehensive income of $3.0 million.

Management of the Company considers it noteworthy to understand the relationship between Farmers Bank and the Commonwealth of Kentucky.  Farmers Bank provides various services to state agencies of the Commonwealth.  As the depository for the Commonwealth, checks are drawn on Farmers Bank by these agencies, which include paychecks and state income tax refunds.  Farmers Bank also processes vouchers of the WIC (Women, Infants and Children) program for the Cabinet for Human Resources. Therefore, reviewing average balances is important to understanding the financial condition of the Company as daily deposit balances can fluctuate significantly as a result of Farmers Bank’s relationship with the Commonwealth.

The Commonwealth seeks qualified financial institutions to meet its banking needs by periodically issuing a request for proposal through a competitive bidding process. In a change from past practices, Farmers Bank partnered with a larger out of state financial institution to better respond to the Commonwealth’s most recent request for proposal for banking services. While the Company and the Commonwealth have had a mutually beneficial relationship in the past, the partnering concept brings greater resources to the business relationship. The Company can provide the Commonwealth with an increased level of service by partnering with the larger financial institution, leveraging off of the Company’s extensive specialized knowledge base, and maintaining local synergies. The bidding process, however, is highly competitive and there can be no assurance about whether Farmers Bank, through its partner, will continue to provide banking services to the Commonwealth in the future. The impact of not retaining the general depository services contract of the Commonwealth would not be expected to have a material impact on the Company’s results of operations, overall liquidity, or net cash flows.

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On an average basis, total assets were $2.1 billion for 2010, a decrease of $160 million or 7.1% from the average for 2009. Average total assets decreased $52.4 million from year-end 2009bond prices occurred primarily as a result of the goodwill impairment charge atmarket’s response to changing perceptions about monetary tightening by the Federal Reserve through its level and timing of bond purchasing activity. The resulting higher interest rates also increased volatility, which further reduced prices. During the fourth quarter, the Federal Reserve announced that it would begin paring back its bond purchasing activity beginning in 2014. This action, combined with a more positive economic outlook, resulted in lower bond prices for the quarter. As market interest rates increase, the value of fixed rate investments decreases.

At year-end 2009 where2013, investment securities include $5.9 million amortized cost amounts of single-issuer trust preferred capital securities of a U.S. based global financial services firm with an estimated fair value of $4.8 million. The investment continues to perform according to contractual terms and is rated as investment grade by major rating agencies. The issuer of the securities announced in the first quarter of 2013 that it had passed stringent regulatory stress testing and received regulatory approval to both increase per share common dividend payments and increase its equity repurchase program. The Company does not intend to sell its investment in these securities, nor does the Company wrote offbelieve 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 entire amount

unrealized loss is primarily attributed to general uncertainties in both international and domestic economies and continuing market volatility. The Company believes that it will collect all amounts due according to the contractual terms of its goodwill. Average earning assets decreased $85.4 millionthese securities and that the fair values of these securities will continue to recover as they approach their maturity dates. 

The Company attributes the unrealized losses in other sectors of the investment securities portfolio to changes in market interest rates and volatility, and thus identifies them as temporary. As discussed further above, market interest rates rose sharply during the last half of 2013, particularly for the longer dated maturity periods. Investment securities with unrealized losses at December 31, 2013 are performing according to their contractual terms, and the Company does not expect to incur a loss on these securities unless they are sold prior to maturity. The Company does not have the intent to sell these securities nor does it believe it is likely that it will be required to sell these securities prior to their anticipated recovery. The Company does not consider any of the securities to be impaired due to reasons of credit quality or 4.3% from year-end 2009. However, as a percentage of total average assets, average earning assets were 90.1% for 2010, an increase of 261 basis points from 87.5% for 2009. Average net loans decreased $70.6 million or 5.4%other factors.All investment securities in the comparison. Deposits averaged $1.5 billion for 2010, a decreaseCompany’s portfolio are currently performing.

Funds made available from sold, matured, or called bonds are redirected to fund higher yielding loan growth, reinvested to purchase additional investment securities, or otherwise employed to improve the composition of $83.2 million or 5.1% from 2009. Average noninterest bearing deposit balances declined $16.3 million or 7.2% in the comparison led by a sharp decrease in amountsbalance sheet and liquidity. The purchase of nontaxable obligations of states and political subdivisions is one of the primary means of managing the Company’s tax position. The impact of the alternative minimum tax related to the CommonwealthCompany’s ability to acquire tax-free obligations at an attractive yield is routinely monitored. 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.

The following table summarizes the carrying values of $33.6 million. All otherinvestment securities on December 31, 2013, 2012, and 2011. The investment securities are divided into available for sale and held to maturity securities. Available for sale securities are carried at estimated fair value and held to maturity securities are carried at amortized cost. Corporate debt securities consist primarily of debt issued by a large global financial services firm. Mutual funds and equity securities are attributed to the Company’s captive insurance subsidiary.

December 31,		2013								2012								2011
(In thousands)		Available for Sale				Held to Maturity				Available for Sale				Held to Maturity				Available for Sale				Held to Maturity
Obligations of U.S. government-sponsored entities		$	93,750			$	-			$	76,095			$	-			$	96,163			$	-
Obligations of states and political subdivisions			131,970				765				118,755				820				84,619				875
Mortgage-backed securities – residential			378,077				-				370,439				-				408,863				-
Mortgage-backed securities – commercial			689				-				-				-				209				-
Corporate debt securities			6,257				-				5,826				-				6,364				-
Mutual funds and equity securities			2,077				-				1,993				-				1,601				-
Total		$	612,820			$	765			$	573,108			$	820			$	597,819			$	875

The following table presents an analysis of the contractual maturity and tax equivalent weighted average noninterest bearing deposits increased $17.4 millioninterest rates of investment securities at December 31, 2013. Available for sale securities are stated at estimated fair value and held to maturity securities are stated at amortized cost. Mortgage-backed securities are included in maturity categories based on their stated maturity dates. Expected maturities may differ from contractual maturities because issuers may have the right to call or 9.1%. Average interest bearing deposits decreased $66.9 million or 4.8% led by lower time deposits of $94.3 million or 10.5%.prepay obligations. Mutual funds and equity securities are attributed to the Company’s captive insurance subsidiary. These investments have no stated maturity date and are not included in the maturity schedule that follows.

Available for Sale

		Within One Year								After One But Within Five Years								After Five But Within Ten Years								After Ten Years
(In thousands)		Amount				Rate				Amount				Rate				Amount				Rate				Amount				Rate
Obligations of U.S. government-sponsored entities		$	-				-	%		$	57,585				1.1	%		$	33,457				1.8	%		$	2,708				2.6	%
Obligations of states and political subdivisions			3,315				2.6				56,623				2.7				63,716				3.4				8,316				5.4
Mortgage-backed securities – residential			-				-				-				-				48,470				1.8				329,607				2.8
Mortgage-backed securities – commercial			-				-				-				-				689				2.3				-				-
Corporate debt securities			52				2.9				1,241				3.3				148				4.3				4,816				2.0
Total		$	3,367				2.6	%		$	115,449				1.8	%		$	146,480				2.5	%		$	345,447				2.9	%

Held to Maturity

		Within One Year								After One But Within Five Years								After Five But Within Ten Years								After Ten Years
(In thousands)		Amount				Rate				Amount				Rate				Amount				Rate				Amount				Rate
Obligations of states and political subdivisions		$	-				-	%		$	-				-	%		$	765				4.4	%		$	-				-	%

The calculation of the weighted average interest rates for each category is based on the weighted average costs of the securities. The weighted average tax rates on exempt state and political subdivisions are computed based on the marginal corporate Federal tax rate of 35%.

Loans

Loans, net of unearned income, were $1.2$1.0 billion at December 31, 2010,2013, a decrease of $79.1$5.1 million or 6.2%.5% compared to year-end 2009.2012. While the Company continues its efforts to strengthen customer relationships and business development initiatives, high quality loan demand remains soft. The Company continues to take a measured and cautious approach to loan originationslending strategy while executing its balance sheet realignment strategy and working throughit reduces high levels of nonperforming assets. 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. Loans secured by farmland and real estate of other commercial enterprises increased $5.6 million or 1.4% at year-end 2010 compared to year-end 2009. All other sectors of the loan portfolio experienced declines. Commercial, financial, and agricultural based lending decreased $5.7 million or 5.0%. Real estate construction and land development lending was down $57.5 million or 27.2% and loans secured by residential real estate decreased $4.4 million or .9% in the annual comparison. Consumer installment loans and commercial leasing decreased $7.7 million or 21.4% and $9.3 million or 38.4%, respectively in the yearly comparison.

an improving, but slow growing economy.

The composition of the loan portfolio, net of unearned income, is summarized in the table below. Adjustments have been made among categoriesthat follows. Loans outstanding were negatively impacted during the fourth quarter of prior2013 by the payoff of four credit relationships totaling $14.1 million in the aggregate secured by similar commercial real estate properties. Based on economic forecasts and other available information, the Company expects minor improvement in the local and regional economy during 2014. An improving economy, particularly where the labor force participation rates increase, could slow the rate of decline experienced in outstanding loan balances in recent years to reclassify certain loans to conform to their current classification. Total loansor result in prior years did not change.

incremental loan growth.

December 31, (In thousands)		2013				%				2012				%				2011				%				2010				%				2009				%
Commercial, financial, and agricultural		$	92,827				9.3	%		$	87,440				8.7	%		$	93,807				8.7	%		$	108,959				9.1	%		$	114,687				9.0	%
Real estate mortgage – construction and land development			101,352				10.1				102,454				10.2				119,989				11.2				154,208				12.9				211,725				16.7
Real estate mortgage – residential			371,582				37.2				368,762				36.7				397,357				37.1				424,995				35.6				435,294				34.2
Real estate mortgage – farmland and other commercial enterprises			418,147				41.8				425,477				42.3				432,438				40.3				461,182				38.7				449,659				35.3
Installment			15,092				1.5				18,247				1.8				21,365				2.0				28,532				2.4				36,280				2.9
Lease financing			883				.1				2,615				.3				7,152				.7				14,964				1.3				24,297				1.9
Total		$	999,883				100.0	%		$	1,004,995				100.0	%		$	1,072,108				100.0	%		$	1,192,840				100.0	%		$	1,271,942				100.0	%

December 31, (In thousands)		2010			%				2009			%				2008			%				2007			%				2006			%
Commercial, financial, and agricultural		$	108,959			9.1	%		$	114,687			9.0	%		$	116,816			8.9	%		$	135,898			10.5	%		$	176,910			14.8	%
Real estate  – construction and land development			154,208			12.9				211,725			16.7				260,434			19.8				254,788			19.7				176,779			14.8
Real estate mortgage – residential			469,273			39.3				473,644			37.2				453,695			34.6				416,477			32.3				393,345			32.8
Real estate mortgage – farmland and other commercial enterprises			416,904			35.0				411,309			32.3				409,909			31.2				403,167			31.2				361,004			30.1
Installment			28,532			2.4				36,280			2.9				44,504			3.4				51,393			4.0				56,344			4.7
Lease financing			14,964			1.3				24,297			1.9				27,222			2.1				30,262			2.3				33,454			2.8
Total		$	1,192,840			100.0	%		$	1,271,942			100.0	%		$	1,312,580			100.0	%		$	1,291,985			100.0	%		$	1,197,836			100.0	%

When

On an average basis, loans represented 60.6% of earning assets for 2013, an increase of 50 basis points compared to 60.1% for 2012. As loan balances decline either as a result of lower demand or due to reasons such as for the Company’s plan to strategically shrink its balance sheet, thechanges, available funds are generally redirected toreallocated between temporary investments or investment securities, which typically involve a decrease in credit risk and produceresult in 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.

On average, loans represented 65.3% of earning assets for 2010, a decrease of 75 basis points compared to 66.0% for 2009. Average loans represent a lower percentage of earning assets due to a lower average outstanding balance that has driven the overall reduction in average total earning assets.

The following table presents the amount of commercial, financial, and agricultural loans and loans secured by real estate outstanding at December 31, 20102013 which, based on remaining scheduled repayments of principal, are due in the periods indicated.

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Loan Maturities

		Within				After One But				After
(In thousands)		One Year				Within Five Years				Five Years				Total
Commercial, financial, and agricultural		$	43,274			$	45,474			$	20,211			$	108,959
Real estate – construction and land development			124,682				23,569				5,957				154,208
Real estate mortgage – residential			69,263				109,260				290,750				469,273
Real estate mortgage – farmland and other commercial enterprises			77,387				189,897				149,620				416,904
Total		$	314,606			$	368,200			$	466,538			$	1,149,344

(In thousands)		Within One Year				After One But Within Five Years				After Five Years				Total
Commercial, financial, and agricultural		$	38,242			$	29,677			$	24,908			$	92,827
Real estate mortgage – construction and land development			56,840				34,982				9,530				101,352
Real estate mortgage – residential			32,022				99,615				239,945				371,582
Real estate mortgage – farmland and other commercial enterprises			76,470				170,669				171,008				418,147
Total		$	203,574			$	334,943			$	445,391			$	983,908

The table below presents the amount of commercial, financial, and agricultural loans and loans secured by real estate outstanding at December 31, 20102013 that are due after one year, classified according to sensitivity to changes in interest rates.

Interest Sensitivity

		Fixed				Variable
(In thousands)		Rate				Rate
Due after one but within five years		$	289,718			$	78,482
Due after five years			59,819				406,719
Total		$	349,537			$	485,201

(In thousands)		Fixed Rate				Variable Rate
Due after one but within five years		$	286,135			$	48,808
Due after five years			78,993				366,398
Total		$	365,128			$	415,206

Asset Quality

The Company’s loan portfolio is subject to varying degrees of credit risk. Credit risk is mitigated by diversification within the portfolio, limiting exposure to any single customer or industry, rigorous lending policies and underwriting criteria, and collateral requirements. The Company maintains policies and procedures to ensure that the granting of credit is done in a sound and consistent manner. This includes policies on a company-wide basis that require certain minimum standards to be maintained.maintained by its subsidiary banks. However, the policies also permit the individual subsidiary companies authority to adopt standards that are no less stringent than those included in the company-wide policies. Credit decisions are made at the subsidiary bank level under guidelines established by policy. The Company’s internal audit department performs loan reviews at each subsidiary bank during the year. This loan review evaluates loan administration, credit quality, documentation, compliance with Company loan standards, and the adequacy of the allowance for loan losses on a consolidated and subsidiary basis.

The provision for loan losses represents charges or credits made to earnings to maintain an allowance for loan losses at ana level considered adequate level based on credit losses specifically identified in the loan portfolio, as well as management’s best estimate ofto provide for probable incurred loancredit losses in the remainder of the 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.

Management

The allowance for loan losses and related provision for loan losses generally fluctuate as the relative level of nonperforming and impaired loans vary, but other factors impact the amount of the allowance. The Company estimates the adequacy of the allowance balance required using a risk-rated methodology. Many factors are considered when estimatingmethodology based on the allowance. These include, but are not limited to,Company’s past loan loss experience, an assessmentknown and inherent risks in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of the financial condition of individual borrowers, a determination of the value and adequacy ofany underlying collateral the condition of the local economy, an analysis of the levels and trendssecuring loans, composition of the loan portfolio, current economic conditions, and a reviewother relevant factors. This evaluation is inherently subjective as it requires significant judgment and the use of delinquent and classified loans. 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.impaired. The general component covers non-classifiednon-impaired loans and is based on historical loss experience adjusted for current risk factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Actual loan losses could differ significantly from the amounts estimated by management.

The Company’s risk-rated methodology includes segregating non-impaired watch list and past due loans from the general portfolio and allocating specific reservesa loss percentage to these loans depending on their status. For example, watch list loans, which may be identified by the internal loan review risk-rating process or by regulatory examiner classification, are assigned a certain loss percentage while loans past due 30 days or more are assigned a different loss percentage. Each of these percentages considers past experience as well as current factors. The remainder of the general loan portfolio is segregated into three componentsportfolio segments having similar risk characteristics identified as follows: real estate loans, commercial loans, consumer loans, and real estateconsumer loans. Each of these componentsportfolio segments is assigned a loss percentage based on their respective rolling twelve quarter historical loss percentage. Additional allocationsrates, adjusted for qualitative risk factors. During the third quarter of 2013, the Company lengthened the look-back period it uses to determine historical loss rates to the previous 16 quarters from 12 quarters. The change in the look-back period is the result of the Company’s ongoing monitoring and evaluation of the adequacy of its allowance may then be made for subjective factors, such as those mentioned above, as determined by senior managers who are knowledgeable about these matters. During 2007,loan losses. The longer look-back period better reflects the Company further identified signs of deteriorationCompany’s loss estimates based on current market conditions. Lengthening the look-back period resulted in certain real estate development loans that have remained present into 2010 and specific allowances related to these loans were recorded.

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While management considersa $320 thousand increase in the allowance for loan losseslosses.

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

●

Delinquency trends

●

Trends in net charge-offs

●

Trends in loan volume

●

Lending philosophy risk

●

Management experience risk

●

Concentration of credit risk

●

Economic conditions risk

A loan is impaired when, based on current information and events, it is probable that the information currently available, additional adjustmentsCompany will be unable to collect all amounts due according to the allowance may be necessary due to changescontractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the factors noted above. Borrowers may experience difficultyborrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Factors considered by management in periods of economic deterioration,determining impairment include payment status, collateral value, and the levelprobability of nonperforming loans, charge-offs,collecting scheduled principal and delinquencies could riseinterest payments when due. Loans that experience insignificant payment delays and require additional increasespayment 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 the provision for loan losses. Regulatory agencies, as an integral part of their examinations, periodically review the allowance for loan losses. These reviews could result in additional adjustmentsrelation to the provision for loan losses based upon their judgments about relevant information available during their examination.principal and interest owed.

In general, allowance for loan losses increases as

Although the level of nonperformingoverall economy continued improving during 2013, recovery from the 2007-2009 recession and impaired loans, as a percentage of net loans outstanding, increases.related financial crisis remains slow. The Company’s allowance for loan loss amount has heavily considered past loan loss experience to estimate current loan losses, but it also considers current trends within the portfolio that may not be indicative of past charge-off levels. Adjustments are made to the allowance for loan losses as needed when such matters are identified.

Although there were signs of improvements during 2010, economic weaknesses remain as a result of one of the most severe economic declines in recent history which began in the latter part of 2007 and early 2008. These economic conditionsdecline from these events resulted in significant stress through deterioration in the Company’s credit quality and collateral values, primarily in the Company’s residential real estate development and commerciallending. While many economic measures have yet to rebound to their pre-recession levels, the overall trend is upward, albeit slow. Foreclosure rates continue to improve throughout much of Kentucky, as are the sales of residential real estate sectorsboth in terms of its lending portfolio. Lower real estate values, increased foreclosures,volume and average sales prices. However, the 8.0% unemployment rate in Kentucky remains higher than the 6.7% national average; although the rate in the Central Kentucky region is generally below the state wide rate. The Kentucky unemployment rate rose to a high levels of 8.5% during 2013, influenced by U.S. federal government sequestration cuts impacting the defense sector and other government related industries. Economic growth remains slow, with current GDP growth forecasts for the U.S. and Kentucky at 2.5% and 2.0%, respectively, for 2014. The national and Kentucky unemployment over a prolonged period have all contributedrates each are forecasted to improve to around 6.5% for 2014.

The overall improvement in the Company’s elevated amountscredit quality of the loan portfolio has resulted in the lowest level of nonperforming assets andsince the third quarter of 2009. Nonperforming loans have decreased $57.4 million or 53.2% since peaking at $108 million for the first quarter of 2010. Over half of the nonperforming loans at year-end 2013 are made up of accruing restructured loans. Despite these improvements, the level of nonperforming assets remains elevated. High levels of nonperforming assets generally result in loan charge-offs. These factors have also resulted in an increase in the allowancecharge-offs, provisions for loan losses, primarily related to real estate development and commercial real estate lending. Real estate markets, both residential and commercial, remain strained and unemployment rates are forecasted to remain high for the foreseeable future. A slowdown in real estate sales activity creates cash flow difficulties for those borrowers in real estate development and related businesses that primarily dependimpairment charges on the sale ofrepossessed real estate. The Company expects the lingering effects of the economic downturnrecent recession to continue to hinderhindering its efforts to improve asset quality in the short term.term, which could result in further deterioration. The impact on asset quality in future periods, however, cannot be predicted with a high degree of certainty. The Company works with its loan customers on an individual case-by-case basis in order to maximize loan repayments on its challenged credits and typically does not have a formal loan modification program.

restructure those that are past due.

Impaired loans are defined as loansthose in which the Company does not expect to receive full payment under the contractual terms. Impaired loans are 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 taking into consideration estimated costs to sell if the loan is collateral dependent. Collateral values are updated in accordance with policy guidelines by obtaining independent third party appraisals and monitoring sales activity of similar properties in our market area.

Following is a tabular presentation of impaired loans at December 31, 2010 that includes the loan type, unpaid principal balance, estimated collateral value, and type of collateral for significant groupings of loans:

(In thousands)   Loan Type		Unpaid Principal				Estimated Collateral Value			Collateral Type
Real estate-construction and land development		$	58,750			$	79,954		Primarily residential real estate developments
Real estate mortgage-residential			33,045				48,286		Residential real estate, including single and multi-family use
Real estate mortgage-farmland and other commercial enterprises			37,674				61,642		Commercial real estate, including farmland and other business enterprises
Other			551				235		Business assets, inventory, accounts receivable, personal autos, and other vehicles
Total		$	130,020			$	190,117

In the aggregate, the estimated collateral value for impaired loans exceeds the unpaid principal amount. In many cases the estimated fair value of the collateral less cost to sell exceeds the loan balance and no impairment reserve is needed. However, the Company has taken a charge to write down certain of these impaired loans to the estimated fair value of the collateral (less estimated costs to sell).

At year-end 2010,2013, the Company had $6.0$4.1 million in specific reserves related to its impaired loans. Of this total, $2.8$1.5 million or 46.3%37.6% is attributed to a group of loans to a single creditor totaling $8.3 million secured by a combination of a real estate constructiondevelopment and land development lending and $2.1 million or 34.0% is attributed to loans secured by residential real estate. Two individualThese collateral dependent loans are classified as performing restructured loans at year-end 2013.

The Company recorded a credit relationships account for $3.3 million or 54.5% ofto the $6.0 million specific reserves. Both of these credits have been restructured and have an aggregate outstanding principal balance of $10.3 million.

The provision for loan losses was $17.2of $2.6 million for 2010,2013, a decrease of $3.5$5.4 million or 17.0% compared to $20.8a charge of $2.8 million for 2009.2012. The decrease in the provision for loan losses for 2010 is attributed mainly due to fewer new nonperformingthe improvement in the credit quality of the loan portfolio and impaired loans requiring specific allocations compared to a year earlier. An overall net decrease in loans outstanding contributed, to a lesser extent, toloan balances outstanding. Historical loss rates, adjusted for current risk factors, have improved as lower recent charge-off activity has replaced the lower provisionhigher levels that had been included in the early part of the Company’s look-back period used in its allowance for loan losses.losses methodology. The Companydecrease in historical loss rates and charge-off activity relate primarily to stabilization in the value of real estate, which serves as collateral for nearly 90% of the Company’s loan portfolio. The rapid declines in real estate values experienced a lower rate of increasebeginning in nonperforming loans during 2010 compared to 2009. Nonperforming loans were $91.0 million at year-end 2010, representing an increase of $14.6 million over2008 and continuing through 2011 have leveled off, and the prior year. For 2009, the increase in nonperforming loans was

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$50.9 million, $31.9 million of which occurred during the fourth quarter. For additional information about nonperforming loans, refer to the caption “Nonperforming Assets” that follows.

allowance for loan losses reflects this improvement.

Net loan charge-offs were $11.8$1.3 million for 2010,2013, a decrease of $2.4$5.3 million or 17.0%80.8% compared to 2012. Net charge-offs have declined in each of the last two years and are well below the $14.2 million forpeak recorded in the early part of the post-recession period of 2009. Charge-offsThe amount of $5.4 million or 45.8% of totalnet charge-offs for 2010 are attributed to four individual credit relationships that2013 represent primarily residential real estate development projects.the lowest point since 2006. Gross charge-offs and recoveries by loan category are detailed in the table that follows. Net charge-offs as a percentage of average loans were .96%.13% for 2010,2013, a decrease of 1351 basis points compared to 1.09%.64% for 2009. Although the provision for loan losses was lower in 2010 compared to the year before, the2012. The allowance for loan losses as a percentage of outstanding loans (net of unearned income) has increased to 2.41%was 2.06% and 2.43% at December 31, 2010 compared to 1.84%year-end 2013 and 2012, respectively. As a percentage of nonperforming loans, the allowance for loan losses was 40.7% and 45.4% at December 31, 2009. year-end 2013 and 2012, respectively.

The relatively low amount of the allowance for loan losses as a percentage of nonperforming loans was 31.6% and 30.6% at year-end 2010 and 2009, respectively.

The relatively low percentageis due mainly to the makeup of the allowance for loan losses to nonperforming loans, is due in part to the composition of nonperforming loans. Restructuredwhere performing restructured loans account for 40.6%52.0% of the total amount of nonperforming loans outstanding at year-end 2010.2013. The allowance attributed to credits that are restructured with lower interest rates generally represents the difference in the present value of future cash flows calculated at the loan’s original effective interest rate and the new lower rate. This generallytypically results in a reserve for loan losses that is less severe than for other loans that are collateral dependent.

In addition to higher restructured loans,

Many of the nonaccrual loans outstanding at year-end 2010 include an aggregate amount2013 have previously been charged-down. These charge-offs have occurred mainly as a result of $19.0 million higher-balance loans representing five credit relationships that had specific reserves of $1.1 million priorthe Company’s ongoing effort to being classified as nonaccrual. The classification ofappropriately value the collateral securing these loans to nonaccrual status had a more limited impact onthrough timely appraisals and evaluating the overall financial condition of the borrower. The allowance for loan losses sinceas a reserve had already been established. Eachpercentage of thesenonaccrual loans were performingwas 86.3% and 89.2% at year-end 2009, but were identified as impaired on that date2013 and specific reserves were recorded. From this group of credits, loans totaling $16.0 million are secured primarily by real estate construction and land development projects and $3.0 million secured mainly by residential real estate properties.

2012, respectively.

The table below summarizes the loan loss experience for the past five years. Reclassifications have been made between categories of charge offs and recoveries in prior years in order to conform to current loan classifications. Total charge offs and recoveries in prior years did not change.

Allowance For Loan Losses

Years Ended December 31, (In thousands)		2013				2012				2011				2010				2009
Balance of allowance for loan losses at beginning of year		$	24,445			$	28,264			$	28,784			$	23,364			$	16,828
Loans charged off:
Commercial, financial, and agricultural			257				216				1,113				869				1,618
Real estate mortgage - construction and land development			251				2,549				6,785				7,599				4,176
Real estate mortgage - residential			908				2,508				4,225				1,521				3,247
Real estate mortgage - farmland and other commercial enterprises			274				1,823				2,768				1,557				2,304
Installment			281				441				452				709				948
Lease financing			-				99				10				135				2,475
Total loans charged off			1,971				7,636				15,353				12,390				14,768
Recoveries of loans previously charged off:
Commercial, financial, and agricultural			143				105				211				181				132
Real estate mortgage - construction and land development			70				102				6				2				-
Real estate mortgage - residential			200				246				192				42				82
Real estate mortgage - farmland and other commercial enterprises			57				318				43				28				34
Installment			221				234				245				286				216
Lease financing			12				40				649				38				72
Total recoveries			703				1,045				1,346				577				536
Net loans charged off			1,268				6,591				14,007				11,813				14,232
Amount (credited) charged to provision for loan losses			(2,600	)			2,772				13,487				17,233				20,768
Balance at end of year		$	20,577			$	24,445			$	28,264			$	28,784			$	23,364
Average loans net of unearned income		$	1,006,662			$	1,035,959			$	1,130,273			$	1,236,202			$	1,306,800
Ratio of net charge-offs during year to average loans, net of unearned income			.13	%			.64	%			1.24	%			.96	%			1.09	%

Years Ended December 31, (In thousands)		2010				2009				2008				2007				2006
Balance of allowance for loan losses at beginning of year		$	23,364			$	16,828			$	14,216			$	11,999			$	11,069
Acquisition of Citizens Jessamine																			1,066
Loans charged off:
Commercial, financial, and agricultural			869				1,618				1,160				618				562
Real estate-construction and land development			7,599				4,176				581				9
Real estate mortgage-residential			1,521				3,247				675				395				66
Real estate mortgage-farmland and other commercial enterprises			1,557				2,304				817				258				134
Installment loans to individuals			709				948				953				822				763
Lease financing			135				2,475				356				52				254
Total loans charged off			12,390				14,768				4,542				2,154				1,779
Recoveries of loans previously charged off:
Commercial, financial, and agricultural			181				132				153				186				307
Real estate-construction and land development			2								8				5
Real estate mortgage-residential			42				82				53				82				43
Real estate mortgage-farmland and other commercial enterprises			28				34				991				153				38
Installment loans to individuals			286				216				256				260				249
Lease financing			38				72				372				47				41
Total recoveries			577				536				1,833				733				678
Net loans charged off			11,813				14,232				2,709				1,421				1,101
Additions to allowance charged to expense			17,233				20,768				5,321				3,638				965
Balance at end of year		$	28,784			$	23,364			$	16,828			$	14,216			$	11,999
Average loans net of unearned income		$	1,236,202			$	1,306,800			$	1,302,394			$	1,250,423			$	1,051,002
Ratio of net charge-offs  during year to average loans, net of unearned income			.96	%			1.09	%			.21	%			.11	%			.10	%

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The following table presents an estimate of the allocation of the allowance for loan losses by type for the datedates indicated. Although specific allocations exist, the entire allowance is available to absorb losses in any particular category. Adjustments have been made between categories of prior years related to classification changes of certain loans to conform to their current presentation. The total allowance for loan losses in previous years did not change.

December 31, (In thousands)		2010								2009								2008								2007								2006
		Amount				% of Respective Loan Category				Amount				% of Respective Loan Category				Amount				% of Respective Loan Category				Amount				% of Respective Loan Category				Amount				% of Respective Loan Category
Commercial, financial, and agricultural		$	2,876				2.6	%		$	3,914				3.41	%		$	1,992				1.71	%		$	2,315				1.70	%		$	2,091				1.18	%
Real estate – construction and land development			10,367				6.7				9,806				4.63				5,065				1.94				3,902				1.53				1,981				1.12
Real estate mortgage – residential			10,017				2.1				4,749				1.00				3,337				.74				3,146				.76				2,989				.76
Real estate mortgage – farmland and other commercial enterprises			4,143				1.0				3,252				.79				3,300				.81				2,347				.58				1,684				.47
Installment loans to individuals			997				3.5				1,005				2.77				2,333				5.24				1,975				3.84				2,291				4.07
Lease financing			384				2.6				638				2.63				801				2.94				531				1.75				963				2.88
Total		$	28,784				2.41	%		$	23,364				1.84	%		$	16,828				1.28	%		$	14,216				1.10	%		$	11,999				1.00	%

December 31, (In thousands)		2013								2012								2011								2010								2009
		Amount				% of Respective Loan Category				Amount				% of Respective Loan Category				Amount				% of Respective Loan Category				Amount				% of Respective Loan Category				Amount				% of Respective Loan Category
Commercial, financial, and agricultural		$	1,389				1.50	%		$	1,475				1.69	%		$	3,268				3.48	%		$	2,876				2.64	%		$	3,914				3.41	%
Real estate mortgage – construction and land development			2,567				2.53				3,498				3.41				6,089				5.07				10,367				6.72				9,806				4.63
Real estate mortgage – residential			6,200				1.67				6,184				1.68				11,111				2.80				10,017				2.36				4,749				1.09
Real estate mortgage – farmland and other commercial enterprises			9,949				2.38				12,572				2.95				6,338				1.47				4,143				.90				3,252				.72
Installment			452				2.99				678				3.72				1,218				5.70				997				3.49				1,005				2.77
Lease financing			20				2.27				38				1.45				240				3.36				384				2.57				638				2.63
Total		$	20,577				2.06	%		$	24,445				2.43	%		$	28,264				2.64	%		$	28,784				2.41	%		$	23,364				1.84	%

In addition to the discussion above relating to lending activities, additionalAdditional information concerning the Company’s asset quality is discussedpresented under the caption“Nonperforming Assets” which follows and“Investment Securities” beginning on page 6490..

Nonperforming Assets

Nonperforming

The Company’s nonperforming assets for the Company includeconsist of nonperforming loans, other real estate owned,OREO, and other foreclosed assets. Nonperforming loans consist ofinclude nonaccrual loans, restructured loans, and loans 90 days or more past due and still accruing interest. In general, theNonaccrual loans are considered to be an indicator of potential future losses. 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. Restructuredcollection.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. For the Company, all of its restructured loans were granted rate concessions at the time of restructuring.

Nonperforming assets were $122 million at December 31, 2010, an increase of $14.0 million or 13.0% compared to $108 million at year-end 2009. Nonperforming assets spiked upward by $67.7 million or 169% in the prior year and have remained elevated mainly as a result of the ongoing weaknesses in the overall economy that continues to strain the Company and many of its customers, particularly those associated with real estate development lending. The increase in nonperforming assets for 2010 compared to 2009 is primarily attributed to higher restructured loans of $19.1 million or 106%.

Nonperforming assets by category are presented in the table below for the dates indicated.

December 31, (In thousands)		2010				2009				2008				2007				2006
Loans accounted for on nonaccrual basis		$	53,971			$	56,630			$	21,545			$	18,073			$	1,462
Loans past due 90 days or more and still accruing			42				1,807				3,913				2,977				2,856
Restructured loans			36,978				17,911
Total nonperforming loans			90,991				76,348				25,458				21,050				4,318
Other real estate owned			30,545				31,232				14,446				6,044				5,031
Other foreclosed assets			34				38				47				66				54
Total nonperforming assets		$	121,570			$	107,618			$	39,951			$	27,160			$	9,403

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Additional details for nonperforming loans were as follows at year-end 2010 and 2009:

Nonperforming Loans

December 31, (In thousands)		2010				2009
Nonaccrual Loans
Commercial, financial, and agriculture		$	658			$	965
Real estate-construction and land development			35,893				35,648
Real estate mortgage-residential			10,728				8,633
Real estate mortgage-farmland and other commercial enterprises			6,528				11,038
Installment			114				241
Lease financing			50				105
Total nonaccrual loans		$	53,971			$	56,630
Restructured Loans
Commercial, financial, and agriculture						$	670
Real estate-construction and land development		$	16,793				11,047
Real estate mortgage-residential			9,147				2,053
Real estate mortgage-farmland and other commercial enterprises			11,038				4,141
Total restructured loans		$	36,978			$	17,911
Past Due 90 Days or More and Still Accruing
Commercial, financial, and agriculture						$	450
Real estate-construction							477
Real estate mortgage-residential		$	28				458
Real estate mortgage-farmland and other commercial enterprises							27
Installment			5				395
Lease financing			9
Total past due 90 days or more and still accruing		$	42			$	1,807
Total nonperforming loans		$	90,991			$	76,348
Ratio of total nonperforming loans to total loans (net of unearned income)			7.6	%			6.0	%

Nonaccrual loans make up the largest component of nonperforming assets. Such loans were $54.0 million at December 31, 2010, a decrease of $2.7 million or 4.7% compared to $56.6 million at year-end 2009. Three of the Company’s four subsidiary banks experienced an overall net decrease in nonaccrual loans of $8.8 million or 23.3% in the annual comparison. This was partially offset by a $6.1 million or 32.3% increase at one of the Company’s subsidiary banks due mainly to the addition of three credit relationships amounting to $7.2 million. Of these three credits, two in the amount of $4.2 million in the aggregate were identified as impaired during 2009 and specific reserves were allocated. A third credit in the amount of $3.0 million, with a specific reserve allocation of $196 thousand, was added during the fourth quarter of 2010.

The $19.1 million net increase in restructured loans at year-end 2010 compared to year-end 2009 was led by a residential real estate development credit in the amount of $9.7 million and three other separate credits totaling $8.1 million. Of the three credits totaling $8.1 million, one relates to a credit relationship with an outstanding total of $3.8 million secured by vacation condo units and the other two represent $4.3 million in the aggregate secured by commercial real estate properties.date. 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 assets were $88.4 million at year-end 2013, a decrease of $18.1 million or 17.0% compared to $106 million at year-end 2012. Nonperforming assets are at the lowest level since peaking at $135 million in the first quarter of 2010. Nonperforming assets increased sharply during 2009 and remain elevated mainly as a result of ongoing weaknesses in the overall economy, which continues to strain the Company and many of its customers.

Nonperforming assets by category are presented in the table below for the dates indicated.

December 31, (In thousands)		2013				2012				2011				2010				2009
Loans accounted for on nonaccrual basis		$	23,838			$	27,408			$	59,755			$	53,971			$	56,630
Loans past due 90 days or more and still accruing			444				103				1				42				1,807
Restructured loans			26,255				26,349				19,125				36,978				17,911
Total nonperforming loans			50,537				53,860				78,881				90,991				76,348
Other real estate owned			37,826				52,562				38,157				30,545				31,232
Other foreclosed assets			-				-				36				34				38
Total nonperforming assets		$	88,363			$	106,422			$	117,074			$	121,570			$	107,618
Ratio of total nonperforming loans to total loans (net of unearned income)			5.1	%			5.4	%			7.4	%			7.6	%			6.0	%
Ratio of total nonperforming assets to total assets			4.9				5.9				6.2				6.3				5.0

Additional details related to nonperforming loans were as follows at year-end 2013 and 2012:

Nonperforming Loans

December 31, (In thousands)		2013				2012
Nonaccrual Loans
Commercial, financial, and agriculture		$	160			$	649
Real estate mortgage - construction and land development			5,821				7,700
Real estate mortgage - residential			5,154				6,025
Real estate mortgage - farmland and other commercial enterprises			12,677				12,878
Installment			4				103
Lease financing			22				53
Total nonaccrual loans		$	23,838			$	27,408
Restructured Loans
Real estate mortgage - construction and land development		$	4,391			$	8,736
Real estate mortgage - residential			4,826				634
Real estate mortgage - farmland and other commercial enterprises			16,987				16,940
Installment			51				39
Total restructured loans		$	26,255			$	26,349
Past Due 90 Days or More and Still Accruing
Real estate mortgage - residential		$	10			$	-
Real estate mortgage - farmland and other commercial enterprises			434				103
Total past due 90 days or more and still accruing		$	444			$	103
Total nonperforming loans		$	50,537			$	53,860

The most significant components of nonperforming loans include nonaccrual and restructured loans. Activity during 2013 related to these two components was as follows:

(In thousands)		Nonaccrual Loans				Restructured Loans
Balance at December 31, 2012		$	27,408			$	26,349
Loans placed on nonaccrual status			10,789				(18	)
Loans restructured			-				936
Principal paydowns			(6,941	)			(1,081	)
Transfers to other real estate owned			(5,507	)			-
Charge-offs			(1,260	)			-
Reclassification between nonperforming categories			(69	)			69
Reclassified to performing status			(582	)			-
Balance at December 31, 2013		$	23,838			$	26,255

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. From time to time the Company’s affiliate banksCompany may modify a customer’s loan, but such modifications may or may not meet the criteria for classification ofas a restructured troubled debt. The primary reasons for such restructurings are:

Modifications that do not meet the criteria of a troubled debt include:

· ●

repricing a loan to a current market rate of interest to a borrower with good credit and adequate collateral value in order to retain the customer,customer;

· ●

changing the payment frequency from monthly to quarterly, semi-annually, or annually where the loan is performing, the borrower has good credit and adequate collateral value and the Company believes valid reasons exist for the change,change; or

· ●

extending the interest only payment period of a performing loan where the borrower has good credit and adequate collateral value in instances where a project may still be in a phase of development or leasing-up, butand where the Company believes completion will occur in the near future, or such extension is otherwise in the Company’s best interest.

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As a modification ismodifications are made, management evaluates whether the modification meets the criteria to be classified as a troubled debt. ThisThese criteria hasinclude two components:

1.

The bank mademakes a concession on the loan terms that it would not otherwise consider, and

2.

The borrower is experiencing financial difficulty.

The Company’s loan policy has been recently updated to provideprovides guidance to lending personnel as a result of the recent increase inregarding restructured loans to ensure those that are troubled debt are properly categorized.identified. Additional attention is being given to restructured loans through the oversight of the recently established position of Chief Credit Officer at the parent companyParent Company to ensure that modifications meeting criteria for restructured loans are identified and properly reported.

The table below sets forth on an aggregate basis at December 31, 2010,2013, the types of non-troubled debt restructurings by loan type, number of loans, average loan balance and modification type:

# of Loans		Loan Type		Average Loan Balance (in thousands)				Range of Loan Balances (in thousands)			Modification Type
1		Commercial, financial and agricultural			$13				N/A		changed repayment frequency
56		Commercial, financial and agricultural			39				$0 - $470		lowered interest rate to market rate to retain loan
26		Installment loan			16				1 - 67		lowered interest rate to market rate to retain loan
2		Installment loan			4				3 - 6		changed repayment frequency
42		Real estate mortgage – farmland and other commercial enterprises			650				0 - 4,530		lowered interest rate to market rate to retain loan
4		Real estate mortgage – farmland and other commercial enterprises			1,412				1 - 2,919		changed repayment frequency or extended interest only period
68		Real estate mortgage - residential			194				7 - 5,135		lowered interest rate to market to retain loan (in one case increased payment frequency)
11		Real estate mortgage - residential			122				74 - 193		changed repayment frequency (in one case modified payment terms for estates of deceased borrower at representative’s request)
15		Real estate – construction and land development			184				13 - 741		lowered interest rate to market rate to retain loan (in two cases extended interest only period)

# of Loans	Loan Type		Average Loan Balance (in thousands)				Range of Loan Balances (in thousands)				Modification Type
1	Real estate mortgage - residential		$	1,441			$		1,441		changed to more frequent repayments
70	Real estate mortgage - residential			209				9	-	4,724	lowered interest rate to market rate to retain loan
1	Real estate mortgage – farmland and other commercial enterprises			1,096					1,096		changed amortization period
31	Real estate mortgage – farmland and other commercial enterprises			616				13	-	2,843	lowered interest rate to market rate to retain loan
7	Commercial			34				1	-	94	lowered interest rate to market rate to retain loan
6	Consumer			21				2	-	59	lowered interest rate to market rate to retain loan

In each of the loan modifications identified in the table, management of the applicable bank determined the loan was not in troubled condition due to the financial status of the borrower and collateral.

The Company’s subsidiary banks have not engaged in loan splitting. Loan splitting is a practice that may occur in work-out situations whereby a loan is divided into two parts – a performing part and a nonperforming part. This benefits a lender by potentially replacing one impaired loan by one smaller good loan and one smaller bad loan. Overall charge-offs and reserve amounts are potentially reduced and the effects of adverse loan classifications may be diminished.

Other real estate owned (“OREO”) was $30.5 million at year-end 2010, a decrease of $687 thousand or 2.2% compared to $31.2 million at year-end 2009. Real estate properties totaling $17.8 million were transferred into OREO during 2010, offset primarily by sales and write-downs of OREO totaling $14.4 million and $4.1 million, respectively. The $17.8 million transferred into OREO during 2010 is made up mostly by real estate securing eight credit relationships totaling $10.2 million, which includes $8.8 million classified as nonaccrual at year-end 2009. Of the $14.4 million sold in 2010, $8.6 million represents the five largest amounts in terms of carrying values, the largest of which relates to a single commercial property of $4.6 million sold during the first quarter.

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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 $127$79.0 million and $105$104 million at year-end 20102013 and year-end 2009,2012, respectively, which were performing but considered potential problem loans and are not included in the nonperforming loan totals in the tabletables above. These loans, however, are considered in establishing an appropriate allowance for loan losses. The balance outstanding for potential problem credits is mainlyismainly a result of ongoing weaknesses in the overall economy that continue to strain the Company and many of its customers, particularly real estate development lending.the Company’s customers. Potential problem loans include a variety of borrowers and are secured primarily by various types of real estate.estate including commercial, construction properties, and residential real estate developments. The $25.0 million or 24.1% decrease since year-end in the level of potential problem loans is attributed primarily to an overall improvement in credit quality similar to that of the overall portfolio. At December 31, 20102013, the five largest potential problem credits were $35.9$16.7 million in the aggregate compared to $31.4$18.2 million at year-end 20092012 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.

Temporary Investments

Temporary investments consist

Other real estate owned includes real estate properties acquired by the Company through, or in lieu 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.actual loan foreclosures. At December 31, 2010, temporary investments were $158year-end 2013, OREO was $37.8 million, a decrease of $24.7$14.7 million or 13.5%28.0% compared to $182$52.6 million at year-end 2009. 2012.

OREO activity for 2013 was as follows:

(In thousands)		Amount
Balance at December 31, 2012		$	52,562
Transfers from loans			6,110
Proceeds from sales			(15,169	)
Loss on sales			(182	)
Write downs and other decreases, net			(5,495	)
Balance at December 31, 2013		$	37,826

The decreasereduction in temporary investmentsOREO was driven by lower interest bearing deposit balances heldproperty sales and impairment charges of $15.4 million and $5.5 million, respectively, which more than offset new repossession activity. Seven larger-balance properties with a carrying value of $7.6 million in other banks of $36.0the aggregate were sold during 2013. This includes four real estate development projects totaling $4.1 million or 20.5%, primarily with the Federal Reserve banking system, partially offset byand three commercial real estate properties totaling $3.5 million. Impairment charges include $2.0 million attributed to a $11.3 million or 172% increase in federal funds sold and securities purchased under agreements to resell.

Temporary investments averaged $134 million forsingle residential real estate development project which ended the year 2010, an increasewith a carrying value of $4.5$2.9 million, or 3.5% compared to $129 million from year-end 2009.which represents the projects appraised value less estimated selling costs. The increase is a result of the Company’s overall net funding position, which reflects a more conservative lending approach as the Company works through its high level of nonperforming assets and a continuing difficult economy. Temporary investments are reallocated to loans or other investments as market conditions and Company resources warrant.

Investment Securities

The investment securities portfolio is comprised primarily of debt securities issued by U.S. government-sponsored agencies, mortgage-backed 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 $445 million on December 31, 2010, a decrease of $104 million or 18.9% compared to $549 millionthree largest OREO properties at year-end 2009. Net amortized cost amounts decreased $97.3 million or 18.1%. Net unrealized gains related to investments in the available for sale portfolio decreased $6.4 million or 64.0%.

The decrease in amortized cost amounts2013 consist of investment securities for 2010 is attributed primarily to net sales activity, alongone residential real estate development project with maturing and called securities that have outpaced purchases. During 2010 the Company sold $311 million of available for sale investment securities at a net gain of $8.9 million. The sale of investment securities was part of an overall strategy to realign the balance sheet and to lock in some of the increase in thecarrying value of securities, strengthen capital,$2.9 million, one commercial real estate development project of $2.9 million, and to help counterbalance the high levelone commercial rental real estate property of provision for loan losses and expenses related to repossessed real estate. The sales were made after careful analysis of multiple reinvestment scenarios to minimize the negative impact on the net interest margin on a go forward basis. The decrease in investment securities was also impacted by the Company’s 2007 balance sheet leverage transaction. During 2010, $50 million of borrowings attributed to the leverage transaction matured and certain maturing bonds were used to fund the payoff of the borrowing rather than being reinvested in investment securities.

The $6.4 million overall decrease in the net unrealized gains for available for sale investment securities is attributed mainly to the volume of securities sold during 2010. As previously discussed, the Company in 2010 sold investment securities to lock in some of their increase in the value to strengthen capital and help counterbalance the high level of provision for loan losses and expenses related to repossessed real estate. A portion of the previously recorded net unrealized gain on investments sold was realized in income at the time of sale.

Included in the sale of investment securities in 2010 were $12.1 million amortized costs amount of corporate debt securities sold during the second quarter at a net loss of $168 thousand. An additional $1.0 million of corporate debt securities matured in the second quarter of 2010. The debt securities sold, although still rated as investment grade, were downgraded during 2009 and sold after a careful analysis of their short and long-term prospects determined they no longer suited the Company’s investment preferences.

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At year-end 2010, the Company holds $5.8 million amortized cost amounts of single-issuer trust preferred capital securities of a global financial services firm with an estimated fair value of $5.0$2.8 million. These securities had an estimated fair value of $4.4 million at year-end 2009. These securities continue to perform according to contractual terms and the issuer of these securities is rated as investment grade by major rating agencies. 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 the decline in the financial markets and market volatility that occurred during 2008 and has not fully stabilized. Gradual improvements in many economic measures have resulted in higher market values of these securities in 2010. 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 recover as they approach their maturity dates.

Gross unrealized losses totaling $5.0 million at December 31, 2010 within the Company’s investment securities portfolio have not been included in income since they are identified as temporary. 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 recover as they approach their maturity dates. The Company does not consider any of the securities to be impaired due to reasons of credit quality or other factors. The Company does not expect to incur a loss on these securities unless they are sold prior to maturity. The Company does not currently have the intent to sell nor does it believe it will be required to sell these securities before anticipated recovery. All investment securities in the Company’s portfolio are currently performing.

Funds made available from sold, maturing or called bonds are redirected to fund higher yielding loan growth, reinvested to purchase additional investment securities, or otherwise employed to improve the composition of the balance sheet. The purchase of nontaxable obligations of states and political subdivisions is one of the primary means of managing the Company’s tax position. The impact of the alternative minimum tax related to the Company’s ability to acquire tax-free obligations at an attractive yield is routinely monitored. 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.

The following table summarizes the carrying values of investment securities on December 31, 2010, 2009, and 2008.  The investment securities are divided into available for sale and held to maturity securities.  Available for sale securities are carried at the estimated fair value and held to maturity securities are carried at amortized cost. Corporate debt securities consist primarily of debt issued by a large global financial services firm. Equity securities are attributed to the Company’s captive insurance subsidiary.Deposits

December 31,		2010								2009								2008
(In thousands)		Available for Sale				Held to Maturity				Available for Sale				Held to Maturity				Available for Sale				Held to Maturity
Obligations of states and political subdivisions		$	74,799			$	930			$	108,958			$	975			$	90,838			$	1,814
Obligations of U.S. government-sponsored entities			41,613								90,752								34,567
Mortgage-backed securities – residential			319,930								325,519								375,327
U.S. Treasury securities			1,044								3,002								10,256
Money market mutual funds			145								910								374
Corporate debt securities			6,606								18,732								13,991
Equity securities			45
Total		$	444,182			$	930			$	547,873			$	975			$	525,353			$	1,814

The following table presents an analysis of the contractual maturity and tax equivalent weighted average interest rates of investment securities at December 31, 2010. Available for sale securities amounts are stated at fair value and held to maturity securities amounts are stated at amortized cost. Equity securities in the available for sale portfolio are attributed to the Company’s captive insurance subsidiary, which have no stated maturity and are not included in the maturity schedule that follows.

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Available for Sale

									After One But							After Five But
		Within One Year							Within Five Years							Within Ten Years							After Ten Years
(In thousands)		Amount			Rate				Amount			Rate				Amount			Rate				Amount			Rate
Obligations of U.S. government-sponsored entities		$	257			2.6	%		$	24,201			1.2	%		$	17,155			2.1	%
Obligations of states and political subdivisions			5,629			2.9				23,540			2.9				29,734			3.5			$	15,895			3.7	%
Mortgage-backed securities – residential										1,828			4.9				2,788			2.6				315,314			3.6	%
U.S. Treasury securities			1,044			.9
Money market mutual funds			145			.2
Corporate debt securities			609			5.9				905			5.8				104			5.5				4,989			2.0
Total		$	7,684			2.8	%		$	50,474			2.2	%		$	49,781			2.9	%		$	336,198			3.6	%

Held to Maturity

After One But

After Five But

Within One Year

Within Five Years

Within Ten Years

After Ten Years

(In thousands)

Amount

Rate

Amount

Rate

Amount

Rate

Amount

Rate

Obligations of states and political subdivisions

$

844

3.6

%

The calculation of the weighted average interest rates for each category is based on the weighted average costs of the securities. The weighted average tax rates on exempt states and political subdivisions are computed based on the marginal corporate Federal tax rate of 35%.

Deposits

The Company’s primary source of funding for its lending and investment activities results from its customer deposits, which consist of noninterest and interest bearing demand, savings, and time deposits. On December 31, 2010 totalA summary of the Company’s deposits were $1.5 billion, a decrease of $170 million or 10.4% from year-end 2009.  Both noninterest bearing and interest bearing deposits declinedis presented in the comparison. Noninterest bearing deposits decreased $7.6 million or 3.6% due to a $12.8 million or 95.2% lower balance from the Commonwealth of Kentucky. All other noninterest deposits increased $5.2 million or 2.6%. Interest bearing deposit balances decreased $162 million or 11.4%, led by lower time deposits outstanding of $191 million or 21.1% partially offset by higher savings account balances of $24.5 million or 9.5%.

On an average basis, total deposits were $1.5 billion for 2010, a decrease of $83.2 million or 5.1% compared to 2009. Average noninterest bearing deposits decreased $16.3 million or 7.2%, led by lower deposits from the Commonwealth of $33.6 million or 96.2%. All other noninterest bearing deposits, on average, increased $17.4 million or 9.1%. Average interest bearing deposits decreased $66.9 million or 4.8% year over year due to lower time deposits of $94.3 million or 10.5% partially offset by an increase of $16.0 million or 6.3% in savings deposit balances and higher interest bearing demand deposits of $11.4 million or 4.6%.

table that follows. The decrease in both the end of period and average balances of the Commonwealthtime deposits is due mainly to a data processing change by the Company during the first quarter of 2010. This change resulted in deposit transmissions from the Commonwealth that are generally received and credited after processing deadlines for same day credit. Although deposits from the Commonwealth can fluctuate significantly from day to day, outstanding balances are expected to remain at lower than recent historical levels as a result of the data processing change.Company’s overall liquidity position and of its strategy to lower

The sharp declines in the end of period and average time deposits for 2010 compared to year-end 2009 is due in part to the maturity structure of the portfolio and the Company’s overall strategy of realigning and reducing the size of its balance sheet. The Company’s liquidity position has enabled it to lower its cost of funds

funding costs, mainly by more aggressively repricingallowing higher-rate maturing certificates of deposit downward in an overall lower interest rate environment or by allowing them to roll off without renewing. Rate offerings on newor reprice at significantly lower interest rates. Many of those balances have been rolled into other types of interest bearing accounts 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 have also had an overall decline due to the low rate environment.or investments from other sources into short-term demand or savings accounts. The Company has not sought out or accepted brokered deposits in the past nor does it have plans to do so in the future.

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A summary of the Company’s deposits is as follows for the dates indicated:

December 31, (In thousands)		2013				2012				Increase (Decrease)
Noninterest Bearing		$	277,294			$	254,912			$	22,382
Interest Bearing
Demand			320,503				296,931				23,572
Savings			340,903				318,302				22,601
Time			471,515				540,665				(69,150	)
Total interest bearing			1,132,921				1,155,898				(22,977	)
Total Deposits		$	1,410,215			$	1,410,810			$	(595	)

A summary of average balances for deposits by type and the related weighted average rates paid areis as follows for the periods presented:

Years Ended December 31,		2010								2009								2008
(In thousands)		Average Balance				Average Rate Paid				Average Balance				Average Rate Paid				Average Balance				Average Rate Paid
Noninterest bearing demand		$	210,367							$	226,648							$	214,372
Interest bearing demand			258,674				.18	%			247,235				.29	%			256,129				.70	%
Savings			272,080				.61				256,063				.77				261,692				1.34
Time			807,730				2.51				902,066				3.38				793,561				4.25
Total Interest Bearing			1,338,484				1.67				1,405,364				2.36				1,311,382				2.98
Total		$	1,548,851				1.44	%		$	1,632,012				2.03	%		$	1,525,754				2.56	%

Years Ended December 31,		2013								2012								2011
(In thousands)		Average Balance				Average Rate Paid				Average Balance				Average Rate Paid				Average Balance				Average Rate Paid
Noninterest bearing demand		$	256,518				-	%		$	238,443				-	%		$	217,357				-	%
Interest bearing demand			306,945				.07				281,076				.09				258,244				.14
Savings			333,457				.19				311,724				.20				293,526				.41
Time			505,738				1.00				588,544				1.42				687,517				1.88
Total Interest Bearing			1,146,140				.52				1,181,344				.78				1,239,287				1.17
Total		$	1,402,658				.42	%		$	1,419,787				.65	%		$	1,456,644				.99	%

Maturities of time deposits of $100,000 or more outstanding at December 31, 20102013 are summarized as follows.

follows:

(In thousands)		Amount
3 months or less		$	29,741
Over 3 through 6 months			20,052
Over 6 through 12 months			39,116
Over 12 months			67,292
Total		$	156,201

(In thousands)		Amount
3 months or less		$	42,396
Over 3 through 6 months			37,200
Over 6 through 12 months			65,075
Over 12 months			96,797
Total		$	241,468

Short-term Borrowings

Short-term borrowings include funding sources with an original maturity of one year or less. The Company’s short-term borrowings consist primarily of federal funds purchased and securities sold under agreements to repurchase, with year-end balances of $47.0 million, $46.9 million, and $73.2 million for 2010, 2009, and 2008, respectively. Such borrowingswhich are generally on an overnight basis. Other short-term borrowings consist of FHLB borrowings totaling $0, $0, and $3.5 million at year-end 2010, 2009, and 2008, respectively, and demand notes issued to the U.S. Treasury under the treasury tax and loan note option account totaling $420 thousand, $274 thousand, and $787 thousand for 2010, 2009, and 2008 respectively. A summary of short-term borrowings is as follows:

(In thousands)		2010				2009				2008
Amount outstanding at year-end		$	47,409			$	47,215			$	77,474
Maximum outstanding at any month-end			76,848				105,844				125,096
Average outstanding			46,483				62,946				81,180
Weighted average rate at year-end			.56	%			.79	%			.74	%
Weighted average rate during the year			. 70				.72				2.20

(In thousands)		2013				2012				2011
Amount outstanding at year-end		$	29,123			$	24,083			$	27,022
Maximum month-end balance during the year			32,885				31,632				72,810
Average outstanding			29,440				26,134				38,043
Weighted average rate during the year			.25	%			.37	%			.50	%
Weighted average rate at year-end			.25				.29				.53

Long-term Borrowings

Long-term borrowings include funding sources with an original maturity greater than one year. The Company’s long-term borrowings consist mainlyare comprised of securities sold under agreements to repurchase, FHLB advances, and subordinated notes payable to unconsolidated trusts. Long-term securities sold under agreements to repurchase primarily represent obligations related to the Company’s 2007 balance sheet leverage transaction.transaction that originated in 2007. In this transaction, the Company borrowed approximatelyCompanyborrowed $200 million through multiple fixed rate repurchase agreements and used the proceeds to purchase a like amount of fixed rate Government National Mortgage Association (“GNMA”) bonds that are pledged as collateral. The Company is required to secure the borrowed funds with GNMA bonds. At December 31, 2010,bonds valued at 106% of the amount outstanding under long-term repurchase agreements was $150principal balance of the borrowings. Principal payments have reduced the outstanding balance of the obligation to $100 million at year-end 2013, with a weighted average interest rate of 3.96%3.95%. Remaining maturities are $50.0 million which is due in November 2012 and the remaining $100 million is due in November 2017. At year-end 2010, $100 million of theThese borrowings are putable quarterly and the remaining $50.0 million is putable quarterly beginningmature in November 2017.

The Company has $754 thousand of other long-term repurchase agreements outstanding at year-end 2013 made in the fourth quarterordinary course of 2012.

business with commercial customers. These borrowings have a weighted average fixed rate of 1.17% with portions maturing during 2015 and 2016.

FHLB advances to the Company’s subsidiary banks are secured by restricted holdings of FHLB stock that participating banks are required to own as well as certain mortgage loans as required by the FHLB. Such advances are made pursuant to several different credit programs which have their own interest rates and range of maturities. Interest rates on FHLB advances are generally fixed and range between 2.60%2.99% and 6.90%, with a weighted average rate of 4.01%4.14%. Remaining maturities of FHLB advances extend up to 10 years,over multiple time periods through 2020, with a weighted average remaining term of 3.6 years at year-end 2010. Long-term fixed rate advances from the FHLB totaling $10.0 million are convertible to a floating interest rate. These advances may convert to a floating interest rate, indexed to the three-month LIBOR, only if LIBOR equals or exceeds 7%. At year-end 2010, the three-month LIBOR was .30%.2.9 years. FHLB advances are generally used to increase the Company’s lending activities and to aid the efforts of asset and liability management by utilizing various repayment options offered by the FHLB. Long-term advances from the FHLB totaled $53.1$27.1 million and $29.3 million at December 31, 2010,2013 and 2012, respectively. This represents a decrease of $14.5$2.2 million or 21.4% compared7.4% and is attributed to $67.6 million at December 31, 2009.

Thescheduled repayment activity.

In 2005 and 2007, the Company has previously completed three private offerings of trust preferred securities through three separate Delaware statutory trusts (the “Trusts”) sponsored by the Company in the aggregate amount of $47.5 million. The combined $25.0 million proceeds from the first

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two trusts (“Trusts I and II”) established in 2005 were used to fund the acquisition of Citizens Bancorp. Proceeds from the third trust (“Trust III”) were used primarily to acquire Company shares through a tender offer during 2007. The Company owns all of the common securities of each of the three Trusts.

The Trusts used the proceeds from the sale of preferred securities, plus capital of $1.5 million contributed by the Company to establish the trusts, to purchase the Company’s subordinated notes in amounts and bearing terms that parallel the amounts and terms of the respective preferred securities. The subordinated notes ofAmounts and general terms related to the Trusts I and II mature in 2035 and bear a floating interest rate at current three-month LIBOR plus 150 basis points on a $10.3 million portion of the total and at current three-month LIBOR plus 165 basis points on a $15.5 million portion. The subordinated notes of Trust IIIyear-end 2013 are summarized in the amount of $23.2 million mature in 2037 and bear a fixed interest rate through 2012 of 6.60% and then convert to floating thereafter at three-month LIBOR plus 132 basis points. Interest on each of the notes is payable quarterly.table below.

(Dollars in thousands)		Trust I				Trust II				Trust III
Subordinated notes payable		$	10,310			$	15,464			$	23,196
Interest rate terms		3-month LIBOR +150 BP				3-month LIBOR +165 BP				3-month LIBOR +132 BP
Interest rate in effect at year-end			1.75	%			1.90	%			1.56	%
Stated maturity date		September 30, 2035				September 30, 2035				November 1, 2037

The subordinated notes of Trusts I and II became redeemable in whole or in part, without penalty, at the Company’s option beginning on September 30,during 2010. The subordinated notes of Trust III arebecame redeemable in whole or in part, without penalty, at the Company’s option on or after November 1,during 2012. The subordinated notes are junior in right of payment of all present and future senior indebtedness of the Company. At December 31, 2010, the aggregate balance of the subordinated notes payable to the Trusts was $49.0 million. The weighted average interest rate in effect as of the last determination date in 20102013 and 2012 was 4.11%1.71% and 1.77%, unchanged compared to a year earlierrespectively.

.

Contractual Obligations

The Company’s contractual obligations to make future payments as of December 31, 20102013 are as follows:

		Payments Due by Period
Contractual Obligations (In thousands)		Total				Less Than One Year				One to Three Years				Three to Five Years				More Than Five Years
Time deposits		$	713,852			$	425,985			$	243,661			$	37,880			$	6,326
Long-term FHLB debt			53,155				12,000				13,512				8,062				19,581
Subordinated notes payable			48,970																48,970
Long-term securities sold under agreements to repurchase			150,000								50,000								100,000
Unfunded postretirement benefit obligations			5,171				398				835				958				2,980
Operating leases			3,904				451				803				725				1,925
Capital lease obligations			84				84
Total		$	975,136			$	438,918			$	308,811			$	47,625			$	179,782

		Payments Due by Period
Contractual Obligations (In thousands)		Total				One Year or Less				One to Three Years				Three to Five Years				More Than Five Years
Time deposits		$	471,515			$	278,513			$	145,929			$	43,089			$	3,984
Long-term FHLB debt			27,126				8,012				-				18,000				1,114
Subordinated notes payable			48,970				-				-				-				48,970
Long-term securities sold under agreements to repurchase			100,754				-				754				100,000				-
Unfunded postretirement benefit obligations			5,331				376				804				955				3,196
Operating leases			1,680				349				557				237				537
Employment agreements			2,748				943				1,417				388				-
Total		$	658,124			$	288,193			$	149,461			$	162,669			$	57,801

Long-term FHLB debt represents FHLB advances pursuant to several different credit programs. Long-term FHLB debt,, subordinated notes payable, and securities sold under agreements to repurchase are more fully described under the caption“Long-TermLong-term Borrowings” above and in Note 98 of the Company’s 20102013 audited consolidated financial statements. Payments for borrowings in the table above do not include interest. Postretirement benefit obligations are actuarially determined and estimated based on various assumptions with payouts projected over the next 10ten years. Estimates can vary significantly each year due to changes in significant assumptions. Capital lease obligations represent amounts relating to the acquisition of data processing hardware and software used in the Company’s operations. Operating leases include standard business equipment used in the Company’s day-to-day business as well as the lease of certain branch sites. Operating lease terms generally range from one to five years, with the ability to extend certain branch site leases at the Company’s option. Payments related to leases are based on actual payments specified in the underlying contracts. Employment agreements represent annual minimum base salary amounts payable by the Company to five employees. One of these agreements is with the Company’s Chief Executive Officer and includes aggregate payments of $385 thousand annually for a remaining term of four years, as amended. The other agreements are with key officers of the Company’s subsidiaries.

Guarantees

During 2007, the Parent Company entered into a guarantee agreement whereby it agreed to become unconditionally and irrevocably the guarantor of the obligations of three of its bank subsidiariessubsidiary banks in connection with the $200 million balance sheet leverage transaction. The amount of borrowings outstanding guaranteedPrincipal payments by the Parent Companybank subsidiaries have reduced the outstanding balance of the obligation to $100 million at December 31, 2010 was $150 million,year-end 2013, with various maturity dates ranging from two to seven years.the remaining portion maturing in 2017. The $150 million outstanding borrowings are required to be secured by GNMA bonds held by the Parent Company’s subsidiary banks valued at 106% of the outstanding borrowings, or $159 million.although the banks typically maintain an amount in excess of the required minimum. Should any of the subsidiary banks default on its borrowings under the agreement, the GNMA bonds securing the borrowings would be liquidated to satisfy amounts due. If the value of the GNMA bonds fall below the obligation under the contract, the Parent Company is obligated to cover any such shortfall in absence of the subsidiary banksbanks’ ability to do so. The Parent Company believes its subsidiary banks are fully capable of fulfilling their obligations under the borrowing arrangement and that the Parent Company will not be required to make any payments under the guarantee agreement.

Effects of Inflation

The majority of the Company’s assets and liabilities are monetary in nature. Therefore, the Company differs greatly from most commercial and industrial companies that have significant investments in nonmonetary assets, such as fixed assets and inventories. However, inflation does have an important impact on the growth of assets in the banking industry and on the resulting need to increase equity capital at higher

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than normal rates in order to maintain an appropriate equity to assets ratio. Inflation also affects other noninterest expense, which tends to rise during periods of general inflation.

Market Risk Management

Market risk is the risk of loss arising from adverse changes in market prices and rates. The Company’s market risk is comprised primarily of interest rate risk created by its core banking activities of extending loans and receiving deposits. The Company’s success is largely dependent upon its ability to manage this risk. Interest rate risk is defined as the exposure of the Company’s net interest income to adverse movements in interest rates. Although the Company manages other risks, such as credit and liquidity risk, management considers interest rate risk to be its most significant risk, which could potentially have the largest and a material effect on the Company’s financial condition and results of operations. A sudden and substantial change in interest rates may adversely impact the Company’s earnings to the extent that the interest rates earned on assets and paid on liabilities do not change at the same speed, to the same extent, or on the same basis. Other events that could have an adverse impact on the Company’s performance include changes in general economic and financial conditions, general movements in market interest rates, and changes in consumer preferences. The Company’s primary purpose in managing interest rate risk is to effectively invest the Company’s capital and to manage and preserve the value created by its core banking business.

Management believes the most significant impact on financial and operating results is the Company’s ability to react to changes in interest rates. Management seeks to maintain an essentially balanced position between interest sensitive assets and liabilities in order to protect against the effects of wide interest rate fluctuations.

The Parent Company and each of its subsidiary banks has a Corporate Asset and Liability Management Committee (“ALCO”). ALCO which monitors the composition of the balance sheet to ensure comprehensive management of interest rate risk and liquidity. The Parent Company ALCO also provides guidance and support to each ALCO of the Company’s subsidiary banks and is responsible for monitoring risks on a company-wide basis. The Parent Company ALCO has established minimum standards in its asset and liability management policy that each subsidiary bank must adopt. However, the subsidiary banks are permitted to deviate from these standards so long as the deviation is no less stringent than that of the Corporate policy.

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 during the next twelve months.over future periods. Forecasting net interest income and its sensitivity to changes in interest rates requires the Company to make assumptions about the volume and characteristics of many attributes, including assumptions relating to the replacement of maturing earning assets and liabilities. Other assumptions include, but are not limited to, projected prepayments, projected new volume, and the predicted relationship between changes in market interest rates and changes in customer account balances. These effects are combined with the Company’s estimate of the most likely rate environment to produce a forecast for the next twelve months. The forecasted results are then compared to the effect of a gradual 200 basis point 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 orand 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 December 31, 2010,2013, the model indicated that if rates were to gradually increase by 200 basis points over the next twelve months, then net interest income (TE) and net income would increase 3.2%.05% and 8.6%.04%, respectively, compared to forecasted results. The model indicated that if rates were to gradually decrease by 200 basis points over the next twelve months, then net interest income (TE) and net income would decrease 1.2%1.24% and 8.5%3.07%, respectively, compared to forecasted results.

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.

LIQUIDITY

Liquidity measures the ability to meet current and future cash flow needs as they become due. For financial institutions, liquidity reflects the abilitycapacity to meet loan demand, to accommodate possible outflows in deposits, and to react and capitalize on interest rate market opportunities. A financial institution’s ability to meet its current financial obligations is dependent upon the structure of its balance sheet, its ability to liquidate assets, and its access to alternative sources of funds. The Company’s goal is to meet its near-term funding needs by maintaining a level of liquid funds through its asset/liability management. 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 ALCOs, both at the bank subsidiary and consolidated level, meet regularly and monitor the composition of the balance sheet to ensure comprehensive management of interest rate risk and liquidity.

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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. Thosebasis. For assets, those sources of funds include liquid assets that are readily marketable or that can be pledged, or which mature in the subsidiary banks' core deposits, consisting of both businessnear future. These assets primarily include cash and nonbusiness deposits;due from banks, federal funds sold, and cash flow generated by the repayment of principal and interest on loans and investment securities;securities. For liabilities, sources of funds primarily include the subsidiary banks' core deposits, FHLB and other borrowings;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 December 31, 2010, the Company had $116 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 uses a liquidity ratio metric to help measure its ability to meet its cash flow needs. This ratio is monitored by ALCO at both the bank and consolidated level. The liquidity ratio is based on current and projected levels of sources and uses of funds. This measure is useful in analyzing cash needs and formulating strategies to achieve desired results. For example, a low liquidity ratio could indicate that the Company’s ability to fund loans might become more difficult. A high liquidity ratio could indicate that the Company may have a disproportionate amount of funds in low yielding assets, which is more likely to occur during periods of sluggish loan demand or economic difficulties. The Company’s liquidity position, as measured by its liquidity ratio, was relatively unchangedhigher at year-end 20102013 compared to year-end 20092012 and is within its ALCO guidelines and considered by management to be at an adequate level.guidelines. The Company’s liquidity ratio remains relatively highelevated mainly as ita result of its overall net funding position and weak, quality loan demand. As loans have paid down, payments have been reinvested more into investments securities or other temporary investments. The Company also continues to take a measured and cautious lending strategy and work throughwhile continuing efforts to reduce its high level of problemnonperforming assets in ana slow growing economic environmentenvironment.

As of December 31, 2013, the Company had $228 million of additional borrowing capacity under various FHLB, federal funds, and other agreements. However, there is no guarantee that remains challenging.

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 $36.2 million or 18.8% since year-end 2012, primarily as a result of additional borrowings available from the FHLB. The additional borrowing capacity is primarily attributed to improving credit metrics at two of the Company’s subsidiary banks. During the third quarter of 2013, the FHLB updated the collateral pledging method at one of these banks 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. All of the Company’s subsidiary banks qualify for the blanket lien pledging method at year-end 2013.

Liquidity at the Parent Company level is primarily affected by the receipt of dividends from its subsidiary banks, (see Note 18 “Regulatory Matters” of the Company’s 2010 audited consolidated financial statements), cash balances maintained, short-term investments, investments in company-owned life insurance, 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, United Bank and 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 recentprior regulatory exams. Capital ratios at each of the Company’s four subsidiary banks exceed regulatory established “well-capitalized” status at December 31, 20102013 under the prompt corrective action regulatory framework; however, Farmers Bank, United Bank,framework. See Note 17“Regulatory Matters” of the Company’s 2013 audited consolidated financial statements for further information regarding the restrictions on dividend payments and Citizens Northern areincreased capital required to maintain capital ratios at higher levelscertain of the Company’s bank subsidiaries as outlined in theirprior 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 payingpayments for general operating expenses. Due to recentan agreement with its regulators, the Parent Company must obtain regulatory agreements,approval prior to making dividend payments on the Parent Company’sits preferred and common and preferred stock and interest payments on its trust preferred borrowings must have regulatory approval before being paid.borrowings. While regulatory agencies have so far granted approval to all of the Company’s requests to make dividend payments on its preferred stock and interest payments on its trust preferred securities, and dividends on its preferred stock, the Company didhas not (based on the assessment by Company management of both the Company’s capital position and the earnings of its subsidiaries) seeksought regulatory approval for the payment ofto pay dividend on its common stock dividends.since the fourth quarter of 2009.  Moreover, the Company will not pay any sucha dividend on its common stock in any subsequentfuture 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. Reference is made to Note 18 17“Regulatory Matters” of the Company’s 20102013 audited consolidated financial statements, Item 1A“Risk Factors” of this Form 10-K, and the heading“Capital Resources” below for additional information on the Company’s restrictions and requirements related to the payment of interest and dividends.

The Parent Company had cash and cash equivalentsbalances of $16.2$36.5 million at December 31, 2010,year-end 2013, an increase of $8.7$11.7 million or 115% from $7.647.2% compared to $24.8 million at year-end 2009.2012. Significant cash receipts of the Parent Company during 20102013 include $8.6 million proceeds from the liquidation of company-owned life insurance at the Parent Company, $5.2 million in dividends from First Citizens Bank,banks subsidiaries in the amount of $14.5 million and management fees from subsidiaries of $3.5 million, $1.5 million in dividends from FFKT Insurance, and $1.2 million return of capital from FCB Services.$3.7 million. Significant cash payments by the Parent Company during 2010for 2013 include $3.4$2.3 million additional capital investment in bank subsidiaries, $2.2 million for the payment of common and preferred dividends, salaries, payroll taxes, and employee benefits, $1.5 million for the payment of $2.4 million,dividends on outstanding preferred stock, and $866 thousand for interest expense on borrowed funds of $2.0 million, and $800 thousand additional capital injected into EKT Properties. The Parent Company may fund any additional external capital requirements of any of its banking subsidiaries from future public or private sales of securities at an appropriate time or from existing resources of the Company, although the Parent Company is currently under no directive by its regulators to raise any additional capital.

trust preferred borrowings.

Liquid assets consist of cash, cash equivalents, and available for sale investment securities. At December 31, 2010,2013, consolidated liquid assets were $626$681 million, a decreasean increase of $140$12.1 million or 18.3%1.8% from year-end 2009.2012. The decreaseincrease in liquid assets is attributed towas driven by a $104$39.7 million or 18.9% decrease6.9% increase in available for sale investment securities, combined withwhich offset a $36.3decrease in cash and cash equivalents of $27.6 million or 16.6% decrease in net cash and equivalents.

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28.8%. Liquid assets while still relatively high, have decreasedremain elevated mainly as a result of the Company��sCompany’s overall net funding position which was heavily influenced by the Company’s balance sheet realignment strategy that included reducing the overall size of the balance sheet.and soft, quality loan demand. 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 $28.1$24.0 million for 2010, an increase2013, a decrease of $3.1$4.4 million or 12.4% compared to $25.015.4% from $28.4 million for 2009.2012. Net cash provided byused in investing activities was $172$53.3 million for 20102013 compared to net cash used of $8.8 million for 2009. The $181 million higher net cash inflow in the comparison is mainly due to $121 million related to investment securities transactions, $44.2 million related to loan activity, $9.6 million attributed to foreclosed real estate sales, and $8.6 million in connection with the conversion to cash of a portion of company-owned life insurance. For investment securities transactions, the Company had a net cash inflow of $104$63.2 million in 2010 resulting from maturitiesfor 2012. The $116 million difference compared to a year ago relates mainly to investment securities and sales activity that exceeded purchases.loan activity. For 2009,investment securities, the Company had net cash outflows of $64.8 million for 2013 compared with net inflows of $21.3 million for 2012. Net cash outflow for investment securities in 2013 was driven by net purchase activity, which correlates to the increase in investment securities in the annual comparison. Since deposit levels were relatively unchanged for the year and quality loan demand remains weak, available funds have generally been reinvested more into investment securities. The Company had net principal collections related to investment securitiesloans of $16.9$5.5 million for 2013, a decrease of $24.3 million or 81.4% compared to 2012. Net principal collections on loans have declined to the lowest level since 2009 as purchases exceeded maturitiesthe balance between new loan originations and sales. repayment activity has narrowed.

Net cash repayments received on loans were $50.1 million for 2010 compared to $5.9 million for 2009 as funding new loans have decreased in the current year. The increase in cash received from foreclosed real estate activity is volume driven. The Company received $8.6 million proceeds during 2010 upon liquidation of part of its investment in company-owned life insurance at its cash surrender value to boost its cash available to inject into certain of its bank subsidiaries to strengthen their capital positions.

Net cash used inprovided by financing activities was $236$1.7 million in 2010for 2013 compared to net cash inflowsoutflow in the prior year of $11.3 million for 2009.$90.0 million. For 2010, net deposits decreased $170 million, outstanding debt decreased $64.5 million, and dividends paid amounted to $2.2 million, all of which resulted in2013, the primary activity was made up by net cash outflows. For 2009, net cash flows from financing activities were increased by higher deposits of $39.3 million and proceeds from the issuanceborrowing activity of preferred stock of $30.0$3.6 million, partially offset by dividend payments of $1.5 million on preferred stock. For 2012, cash outflows were driven by net payments that reduced outstandingprinciple repayments on debt by $49.0of $64.3 million and the paymenta reduction in outstanding deposits of dividends totaling $9.2$24.3 million.

Information relating to off-balance sheet arrangementscommitments to extend credit is disclosed in Note 1514 of the Company’s 20102013 audited consolidated financial statements. These transactions are entered into in the ordinary course of providing traditional banking services and are considered in managing the Company’s liquidity position. 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

Company

Shareholders’ equity was $150$170 million at December 31, 2010, an increase of $2.72013 up $2.0 million or 1.8%1.2% compared to $147$168 million at December 31, 2009. Retained earningsyear-end 2012. Net income increased $5.1shareholders’ equity by $13.4 million, during 2010 due to net income of $6.9 millionbut was partially offset by dividends and accretion on preferred stocka decline in other comprehensive income in the amount of $1.9$10.1 million. There were no dividends declared on common stock in 2010. Other comprehensive income decreased $3.0 million mainly due to an overall net declinedeclined as a result of a decrease in the unrealized gain on available for sale investment securities. The decline in the overall netafter-tax unrealized gain on available for sale investment securities in the amount $13.0 million attributed to an overall increase in market interest rates. This was drivenpartially offset by an improvement of $3.0 million in the after-tax amount related to the Company’s liability for its postretirement medical benefits plan. The improvement was primarily the result of favorable interest rates impacting the year-end actuarial valuation of the plan. Since the discount rate used in determining the obligation under the plan increased to 4.9% from 4.0%, the present value decreased.

On January 9, 2009, the Company issued 30 thousand shares of Series A, no par value cumulative perpetual preferred stock. 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, resetting to 9% during the first quarter of 2014. The Company’s goal is to repay a portion of the preferred shares during 2014, using internally generated cash flows for the potential repurchase. Redemption of the preferred shares is subject to approval by the saleCompany’s banking regulators. The amount of securities inoutstanding preferred shares redeemed, if any, will be determined by the overall progress made under current yearregulatory agreements, the level of funds available, and related gains that were recorded in noninterest income.

Although theboth near and long term projections of liquidity and operating needs. The Parent Company is currently 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. As part of that filing, equity securities of the Company of up to a maximum aggregate offering price of $70 million could be offered for sale in one or more public or private offerings at an appropriate time.  The Company continues to explore potential capital raising scenarios. However, no determination has been made as to if or when a capital raise will be completed. Net proceeds from a potential sale of securities under the registration statement could be used for any corporate purpose determined by the Company’s board of directors.

capital.

At December 31, 20102013 and 2012, the Company’s tangible capital ratio was 7.57% compared to 6.56% at year-end 2009.9.35% and 9.23%, respectively. The tangible capital ratio is defined as tangible equity as a percentage of tangible assets. This ratio excludes amounts related to goodwill and other intangible assets. Tangible common equity to tangible assets, which further excludes outstanding preferred stock, was 6.09%7.70% at December 31, 2010year-end 2013, up 11 basis points compared to 5.25%7.59% at year-end 2009.

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2012.

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 as of December 31, 20102013 and the regulatory minimums were as follows:

		Farmers Capital Bank Corporation				Regulatory Minimum
Tier 1 Risk-based Capital1			18.95	%			4.00	%
Total Risk-based Capital1			20.21				8.00
Tier 1 Leverage Capital2			11.90				4.00

¹Tier 1 Risk-based and Total Risk-based Capital ratios are computed by dividing Tier 1 or Total Capital, as follows.

defined by regulation, by a risk-weighted sum of the 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 Tier 1 Capital by total quarterly average assets, as defined by regulation.

In July 2013, banking regulators issued final rules to bring U.S. banking organization into compliance with the Basel III capital framework effective in 2015. The Company has completed a pro forma analysis of its capital ratios under the new capital framework. This analysis indicates the Company remains well-capitalized under the new rules, including meeting the effective minimum capital

		Farmers Capital Bank Corporation				Regulatory Minimum
Tier 1 Risk-based Capital1			15.35	%			4.00	%
Total Risk-based Capital1			16.61				8.00
Tier 1 Leverage Capital2			9.39				4.00

1

Tier 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%).

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

ratios with a fully phased-in capital conservation buffer. For further information, see discussion in Part I, Item 1 under the caption “Capital” beginning on page 15 of this Form 10-K.

The table below represents an analysis of dividend payout ratios and equity to asset ratios for the previous five years.

Years Ended December 31,		2010				2009				2008				2007				2006
Percentage of common dividends declared to income from continuing operations			N/A				N/M				220.96	%			64.52	%			78.89	%
Percentage of average shareholders’ equity to average total assets1			7.24	%			8.72	%			7.86				9.33				10.04

1Excludes assets of discontinued operations for 2006.

N/A-Not applicable.

Years Ended December 31,		2013				2012				2011				2010				2009
Percentage of common dividends declared to net income			-	%			-	%			-	%			-	%		N/M
Percentage of average shareholders’ equity to average total assets			9.34				8.85				8.05				7.32				8.76	%

N/M-Not meaningful.

In

Primarily due to the summerregulatory actions during 2009 at certain of 2009the Company’s subsidiary banks as discussed further below, the Federal Reserve Bank of St. Louis (“FRB St. Louis”) conducted an examination ofand the Parent Company.  Primarily due to the regulatory actions and capital requirements at three of the Company’s subsidiary banks (as discussed below), the FRB St. Louis and Kentucky Department of Financial Institutions (“KDFI”) proposed the Parent 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 Parent 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 the FRB St. Louis and the KDFI. Representatives of the FRB St. Louis and the 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. 

Additionally, under the Memorandum, the Parent Company agreed to:

· ●

utilize its financial and managerial resources to assist its subsidiary banks in addressing weaknesses identified at their most recent examinations and achieving and maintaining compliance with any regulatory supervisory actions respecting the subsidiary banks;

· ●

not pay any new salaries, bonuses, management fees or make any other payments to insiders without prior approval of the FRB St. Louis and the KDFI;

· ●

not incur additional debt or purchase or redeem any stock without the prior written approval of the FRB St. Louis and the KDFI;

· ●

submit to the FRB St. Louis and the KDFI an acceptable plan detailing the source and timing of funds for meeting the Company’s debt service requirements and other parent company expenses for 2010expenses; and 2011; and

· ●

within thirty days of the end of each calendar quarter submit to the FRB St. Louis and the KDFI parent company financial statements along with a status report on compliance with the provisions of the Memorandum.

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Subsidiary Banks

The Company’s subsidiary banks are subject to capital-based regulatory requirements which place banks in one of five categories based upon their capital levels and other supervisory criteria. These five categories are: (1) well-capitalized, (2) adequately

capitalized, (3) undercapitalized, (4) significantly undercapitalized, and (5) critically undercapitalized. To be well-capitalized, a bank must have a Tier 1 Leverage Capital ratio of at least 5% and a Total Risk-based Capital ratio of at least 10%. As of December 31, 2010,2013, the Company’s four subsidiary banks had the following capital ratios for regulatory purposes:

		Tier 1 Leverage Capital Ratio				Total Risk-based Capital Ratio
Farmers Bank			8.55	%			16.86	%
United Bank			8.24				14.18
First Citizens Bank			8.46				13.50
Citizens Northern			8.04				12.68

Three

		Tier 1 Leverage Capital Ratio				Total Risk-based Capital Ratio
Farmers Bank			9.60	%			18.82	%
United Bank			9.67				16.33
First Citizens			9.03				13.67
Citizens Northern			9.67				14.82

Two of the Company’s subsidiary banks, due to their recent regulatory exams, areagreements, were required at year-end 2013 to maintain capital ratios in excess of the well-capitalized level under the prompt corrective action framework. The capital levels required for these three banks and other requirements for these two banks related to the applicabletheir regulatory examagreement are discussed below.

Farmers Bank. The Memorandum entered into during 2009 between Farmers Bank and its primarily regulator was terminated during the subject of a regularly scheduled examination by the KDFI which was conducted in mid-September 2009.  Asfirst quarter 2013 as a result of this examination,satisfactory compliance.

United Bank.  In November of 2009, the FDIC, 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 December 31, 2010 Farmers Bank had a Tier 1 Leverage ratio of 8.55% and a Total Risk-based Capital ratio of 16.86%.

In addition to the above capital requirements and dividend restrictions, under the Memorandum Farmers Bank agreed to:

·

adopt, implement and adhere to a plan to reduce its risk position in each asset (loan) in excess of $750,000 which is delinquent or classified “Substandard” in its most recent examination, which plan must establish target dollar levels to which Farmers Bank will use best efforts to reduce delinquencies and classified assets at stated intervals and provide for monthly progress reports to the Farmers Bank board of directors;

·

not extend additional credit for any borrower already obligated to the Bank on any extension of credit that has either been (a) charged off (or classified “Loss” by regulators or in a subsequent review by the bank’s consultants or a regulatory body) as long as such credit remains uncollected, or (b) classified as “Substandard” or “Doubtful” and is uncollected, except in cases where the Farmers Bank board of directors approves such extension of credit as in the best interest of Farmers Bank;

·

submit to the FRB St. Louis and KDFI a written three-year strategic plan adopted by the Farmers Bank board of directors addressing mission statement, economic issues of the industries and markets served, strengths and weaknesses, strategies to improve earnings, staff training, financial goals, and identification of new lines of business and new types of lending;

·

address underwriting and credit administration concerns raised by regulators in their most recent examination;

·

address and monitor weaknesses regarding specific construction and development loans identified by regulators in their most recent examination;

·

formulate and implement a written profit plan consistent with Farmers Bank’s loan, investment and funds management policies and including realistic and comprehensive budgets and review processes, which profit plan is submitted to the FRB St. Louis and KDFI for review and comment; and

·

if, at the end of any quarter Farmers Bank’s Tier 1 Leverage ratio is less than 8.0%, within thirty days it must submit to the FRB St. Louis and KDFI a plan for implementation of the capital accounts of Farmers Bank or other measures to bring the ratio to the required 8.0% level.

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Following is a summary of the level of substandard loans that meet the reporting requirements included in the Memorandum.

Substandard Loans

(Dollars in thousands)						Activity Since Exam Date
As of Exam Date						Increases								Decreases												December 31, 2010
Number of Credits		Balance				Additional Credit/New Classifications				Number of Credits				Principal Payments				Charge Off’s				Transfers1				Balance				Number of Credits
20		$	35,103			$	26,112				14			$	6,444			$	3,930			$	8,969			$	41,872				29

1 Of the total, $7.7 million represents repossession activity to other real estate owned and $1.2 million represents amounts that are no longer classified as substandard.

At December 31, 2010 Farmers Bank had 29 credit relationships with an aggregate outstanding balance of $41.9 million that meet the risk identification criteria established in the Memorandum. Farmers Bank’s targeted outstanding balance of assets meeting the risk identification criteria established in response to the Memorandum was $40.5 million for December 31, 2010. The outstanding balance at December 31, 2010 is in excess of the target amount by $1.3 million due mainly to newly classified credits. At September 30, 2010, the outstanding balance in excess of the target amount was $6.2 million. Local economic factors have negatively impacted housing markets which have contributed to the increase in nonperforming loans and assets.

The merger of Lawrenceburg Bank into Farmers Bank during the second quarter of 2010 also contributed to the increase in classified balances by $10.2 million. Included in this total are five credit relationships totaling $5.8 million that were classified substandard from the loan portfolio of Lawrenceburg Bank. In addition, there was $4.4 million in outstanding balances at Lawrenceburg Bank representing six credit relationships that also existed at Farmers Bank prior to the merger whereby the loans were participated between the two banks.

Lawrenceburg Bank. As a result of an examination conducted in March 2009, on May 15, 2009, LawrenceburgUnited Bank entered into a Memorandum with the FRB St. Louis and the KDFI. This Memorandum terminated effective upon Lawrenceburg Bank’s merger into Farmers Bank on May 8, 2010.

United Bank.  As a result of an examination conducted in late July and early August of 2009, the Federal Deposit Insurance Corporation (“FDIC”) proposed United Bank enter into a Cease and Desist Order (“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 requires(“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 to obtain written consent prior to declaring or paying the Parent Company a cash dividend andmust achieve and maintain a Tier 1 Leverage ratio of 8.0% by June 30, 20109.0% and a Total Risk-based Capital ratio of 12% immediately.   Subsequent to the Order, the Parent Company injected $10.5 million from its reserves into United Bank. In April 2010, the Parent Company injected an additional $1.9 million of capital into United Bank to bring its Tier 1 Leverage ratio up to the minimum 7.75% as of13.0% no later than March 31, 2010 as required by the Order.2012.  At June 30, 2010,December 31, 2013, United Bank had a Tier 1 Leverage ratio of 8.06%9.67% and a Total Risk-based Capital ratio of 14.12%16.33%. At December 31, 2010, United Bank had

Subsequent to year-end 2013, the Company received written notification from the FDIC and the KDFI that the formal Consent Order entered into in 2011 was terminated and replaced with a Tier 1 Leverage ratiostepped-down enforcement action in the form of 8.24% and a Total Risk-based Capital ratioan informal Memorandum. While many of 14.18%.

Additionally, the same provisions carried over to the Memorandum, replacing the Consent Order represents important progress for the Company.

The terms of the Memorandum, significantly all of which were included in the prior Consent Order, requires United Bank to:

· ●

continue to retain qualified management, assessed on its ability to comply with the Order, operate United Bank in a safeformulate, adopt and sound manner, comply with applicable laws, rules and regulations, and restore United Bank to a safe and sound condition;

·

not add directors or senior executive officers without prior approval of the FDIC and KDFI;

·

comply with certain disclosure guidelines in connection with selling any securities by United Bank to raise capital.  The Company and United Bank do not currently have plans to sell securities of United Bank to raise capital;

·

charge off any asset (loan) which was classified as a “Loss” by the FDIC and KDFI in their most recent examination;

·

not extend additional credit for any borrower obligated on any extension of credit that has been charged off (or classified as a “Loss” in the most recent examination), so long as the credit remains uncollected;

·

not extend additional credit for any borrower whose loan or other credit has been classified “Substandard” or “Doubtful” (or is listed as “Special Mention” by regulators in the most recent exam), and is uncollected, unless United Bank’s board of directors makes special determinations that extending such credit is in United Bank’s best interest;

·

adopt, implement and adhere to a plan to reduce its risk position in each borrower relationship in excess of $1,000,000 which is more than thirty days delinquent or classified as “Substandard” or “Doubtful” by regulators in the most recent examination.  Such plan is required to be submitted to the FDIC and KDFI and include a prohibition on extending credit to pay interest absent specific board determinations that such is in United Bank’s best interest, establish target levels to which  United Bank shall reduce delinquencies and classified assets within given time permits and provide for monthly reporting to United Bank’s board of directors on progress of the plan;

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·

continue its practice of maintaining a written contingency funding plan which must be submitted to the FDIC and KDFI and on each Friday United Bank must submit to the FDIC and KDFI a liquidity analysis report;

·

not declare or pay dividends to the Parent Company without the prior written consent of the FDIC and KDFI;

·

prior to submission of its quarterly call reports, have its board of directors review its allowance for loan and lease losses (“ALLL”), provide an adequate ALLL and accurately report the ALLL;

·

continue its practice of adopting, implementing and adhering to a written profit plan and comprehensive budget for 2009 and 2010 and each year the Order is in effect, which must be submitted to the FDIC and KDFI for review and comment and include realistic and comprehensive budgets and review processes by both management and United Bank’s board of directors;

·

formulate, adopt and implement a plan to manage concentrations of credit that were identified by regulators in their most recent examination, which must provide for procedures for measurement and monitoring of concentrations of credit and a limit on concentrations commensurate with United Bank’s capital position, safe and sound banking practices and overall risk profile;

·

eliminate and correct all violations of laws, rules and regulations identified by the regulators in their most recent examination;

·

continue its practice of having procedures for managing its sensitivity to interest rate risk, which must implement recommendations of the regulators and be submitted to the FDIC and KDFI; and

·

the board of directors maintain a program to provide for monitoring United Bank’s compliance with the Order and on a quarterly basis United Bank’s directors are required to sign a progress report to be furnished to the FDIC and KDFI detailing actions taken by United Bank to secure compliance with the Order.

Following is a summary of the level of substandard loans that meet the reporting requirements included in the Order.

Substandard Loans

(Dollars in thousands)						Activity Since Exam Date
As of Exam Date						Increases								Decreases												December 31, 2010
Number of Credits		Balance				Additional Credit/New Classifications				Number of Credits				Principal Payments				Charge Off’s				Transfers1				Balance				Number of Credits
15		$	42,870			$	51,509				18			$	16,585			$	7,122			$	13,468			$	57,204				27

1 Represents repossession activity to other real estate owned.

At December 31, 2010 United Bank had 27 credit relationships with an aggregate outstanding balance of $57.2 million that meet the risk identification criteria established in the Order. The aggregate amount of substandard loans outstanding at December 31, 2010 that meet the reporting criteria is below the target level established by United Bank resulting from the Order. 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.

Citizens Northern.  Citizens Northern was the subject of a regularly scheduled examination by the KDFI which was completed in late May 2010.  As a result of this examination, the KDFI and the FDIC on September 8, 2010 entered into a Memorandum with Citizens Northern.  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 the minimum 8.0% as of year-end 2010 as required by the Order.  At December 31, 2010, Citizens Northern had a Tier 1 Leverage ratio of 8.04% and a Total Risk-based Capital ratio of 12.68%.

In addition to the above capital requirements and dividend restrictions, under the Memorandum Citizens Northern agreed to:

·

present to the FDIC and KDFI a plan for the augmentation of the capital accounts of the bank or other measures to bring the Tier 1 Leverage ratio to 8.0% if such ratio is less than 8.0% of the bank’s total assets as of March 31, June 30, September 30, or December 31 while the Memorandum is in effect;

·

formulate, adopt, and submit for review and comment a written plan of action to lessen itsthe bank's risk position in each asset which was classified “Substandard” and “Doubtful” by regulators"Substandard" or "Doubtful" in the most recent or any subsequent examination or visitation, and which aggregated a relationship of $250,000$1,000,000 or more. Such plan shall includeinclude:

a) dollar levels to which it will strive to reduce each relationship within 6 and 12 months from the effective date of the Memorandum

b) provisions for the submission of monthly written progress reports to its board of directors for review and notation in the board of directors’ minutes;

· a)

the dollar levels to which the bank will strive to reduce each line of credit within 6 and 12 months from the effective date of the Memorandum; and

b)

provisions for the submission of monthly written progress reports to the bank's board of directors for review and notation in the board of director's minutes.

●

within 10 days from the date of the Memorandum, the bank shall eliminate from its books, by collection, charge-off or other proper entries, all assets or portions of assets classified "Loss" in the most recent or any subsequent examination that have not been previously charged off or collected.

●

while the Memorandum is in effect, the bank shall not extend, directly or renewindirectly, any additional or existing credit to, or for the benefit of, any borrower who is already obligated in any manner to Citizens Northernthe bank on any extensionextensions of credit (including any portion thereof) that

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a) has been charged off or classified as a “Loss” in the most recent examination or in any subsequent review by its consultants or by a regulatory body, so long as such credit remains uncollected

b) has been classified “Substandard” or “Doubtful” in the most recent examination, on the bank’s internal watch list, or in any subsequent review by its consultants, and is uncollected, unless its board of directors or loan committee has adopted, prior to such extension of credit, a detailed written statement giving the reasons why such extension of credit is in the best interest of the bank. A copy of the statement, including a thorough financial analysis gauging the borrowers financial condition and overall ability to service the existing and new debt, shall be placed in the appropriate loan file and shall be incorporated in the minutes of the applicable loan committee;

·

eliminate from its books, by collection, charge-off or other proper entries, all assets or potions of assets classified “Loss” by the FDIC and KDFI in their most recent examination that have not been previously charged off the books of the bank or collected;

·

take all steps necessary to correct all contraventions of statements of policy and all the violations scheduled on the Violations of Laws and Regulations pagesclassified "Loss" in the most recent examination, and adopt procedures to assure future compliance with all applicable statements of policies, laws, rules and regulations;or any subsequent examination or visitation, so long as such credit remains uncollected.

· ●

adopt, while the Memorandum is in effect, the bank shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower whose loan or other credit has been classified "Substandard", or "Doubtful", or is listed for Special Mention in the most recent examination, or any subsequent examination or visitation, and is uncollected unless the bank's board of directors has adopted, prior to such extension of credit, a detailed written statement giving the reasons why such extension of credit is in the best interest of the bank.

●

while the Memorandum is in effect, the bank shall continue its practice of having procedures for managing the bank's sensitivity to interest rate risk. The procedures shall comply with the Joint Agency Statement of Policy on Interest Rate Risk (June 26, 1996), and the Joint Supervisory Statement on Investment Securities and End-user Derivative Activities (April 23, 1998). The bank shall also implement within 60 days of the Memorandum the recommendations to enhance the bank's interest rate risk management policy and adherepractices set forth in the most recent examination.

●

while the Memorandum remains in effect, the bank shall continue its practice of adopting, implementing, and adhering to a written profit plan and a realistic, comprehensive budget for all categories of income and expense for calendar years 2010 through 2011.year 2014 and each succeeding year. The plan and budgetsplans shall contain formal goals and strategies, consistent with sound banking practices, to reduce discretionary expenses and to improve the bank's overall earnings, and contain a description of the operating assumptions that form the basis for major projected income and expense components. A copy of the plan and budgets shall be submitted to the FDIC and KDFI upon completion. The written profit plan shall address, at a minimum: income forecasts, national and local economic conditions forecasts, funding strategies, the bank’s asset structure, specific growth objectives, operating costs, and the likely effect of competition from other financial institutions in the bank’s market area. Within 30 days from the end of each calendar quarter following the completion of the profit plan(s) and budget(s), the bank’s board of directors shall evaluate the bank’s actual performance in relation to the plan and budget, record the results of the evaluation, and note any actions taken by the bank in the minutes of the board of directors’ meeting at which such evaluation is undertaken;

· a)

an identification of the major areas in, and means by which, the board will seek to improve the bank's operating performance;

b)

realistic and comprehensive budgets;

c)

a budget review process to monitor the income and expenses of the bank to compare actual figures with budgetary projections;

d)

a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components; and

e)

periodic salary review.

		Copies of the plans and budgets required by this provision shall be submitted to the FDIC and the KDFI.
	●	while the Memorandum is in effect, the bank shall maintain Tier 1 Capital and Total Risk-Based Capital at a level equal to or exceeding 9.0% and 13.0% of the bank's total assets, calculated in accordance with Part 325 of the FDIC Rules and Regulations. If such ratio is less than the aforementioned minimums as of each quarter end, while the Memorandum is in effect, the bank shall, within 30 days of such dates, present to the FDIC and the KDFI a plan for the restoration of these capital ratios.

●

while the Memorandum is in effect, the bank shall not declare or pay any dividends without the prior written consent of the FDIC and the KDFI.

●

within 30 days following each calendar quarter after the date of the Memorandum, progress reports covering each of the provisions of the Memorandum shall be submitted to the FDIC and the KDFI, until notification by the supervisory authorities that the reports need no longer be submitted. The board shall review all reports prior to submission and note their considerations in the minutes.

Following is a summary of the activity during 2013 of substandard loans that meet the reporting requirements included in the Consent Order.

Substandard Loans

	(Dollars in thousands)								Activity During 2013
	December 31, 2012								Increases								Decreases																				December 31, 2013
	Balance				Number of Credits				Additional Credit/New Classifications				Number of New Credits				Principal Payments				Charge Offs				Transfersto OREO				Amounts Upgraded and No Longer Classified as Substandard				Other				Balance				Number of Credits
	$	36,417				14			$	1,620				-			$	6,639			$	211			$	1,650			$	791			$	71			$	28,675				10

At December 31, 2013, United Bank had ten credit relationships with an aggregate outstanding balance of $28.7 million that meet the risk identification criteria established in the Consent Order. The aggregate amount of substandard loans meeting the reporting criteria exceeded the target level established by United Bank due to the anticipated sale of collateral and related paydown that did not occur prior to year end. 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.

Citizens Northern.  The FDIC and the KDFI entered into a Memorandum with Citizens Northern on September 8, 2010.  That Memorandum was terminated July 7, 2013 upon the issuance of an updated Memorandum. The updated Memorandum is substantially the same as the replaced Memorandum, including the requirement to obtain regulatory approval prior to declaring or paying a dividend, but raised the required minimum Tier I Leverage to 9.0% from 8.0%. At year-end 2013, Citizens Northern had a Tier I Leverage ratio of 9.67% and a Total Risk-based Capital ratio of 14.82%.

Under the Memorandum, Citizens Northern agreed to:

●

have and retain qualified management, with particular emphasis on its loan administration and collection needs. Every member of management shall have the qualifications and experience commensurate with his or her duties and responsibilities. The qualifications of management shall be assessed on management’s ability to:

a)

Affect reasonable improvements to the condition of the institution, including improvements in asset quality and earnings;

b)

Comply with applicable laws, rules, regulations, and regulatory policies; and

c)

Comply with the requirements of this Memorandum;

●

within 60 days from the date of this Memorandum, to formulate, adopt and submit to the Regional Director and the Commissioner for review and comment a written plan of action to lessen the risk position in each asset which was classified “Substandard” in the most recent examination, and which aggregated $250,000 or more. Such plan shall include:

a)

dollar levels to which it will strive to reduce each line of credit within six and twelve months from the effective date of this Memorandum; and

b)

provisions for the submission of monthly written progress reports to its board of directors for review and notation in the board of director’s minutes;

●

not extend any additional credit to, or for the benefit of, any borrower who is already obligated in any manner on any extension of credit (including any portion thereof) that:

a)

has been charged off or classified “Loss” in the most recent examination or in any subsequent review by consultants or by a regulatory body so long as such credit remains uncollected; or

b)

has been classified “Substandard” or “Doubtful” in the most recent examination, on the bank’s internal watch list, or in any subsequent review by its consultants, and is uncollected, unless the board of directors

or loan committee has adopted, prior to such extension of credit, a detailed written statement giving reasons why such extension of credit is in the best interest of the bank. A copy of the statement, including a thorough financial analysis gauging the borrower’s financial condition and overall ability to service the existing and new debt, shall be placed in the appropriate loan file and shall be incorporated in the minutes of the applicable loan committee;

●

within 60 days from the date of this Memorandum, take all steps necessary to correct the credit underwriting and administration weaknesses listed in the most recent examination. Corrective actions will include a revision of procedures for assessing borrower repayment capacity. The revised procedures will include obtaining and evaluating current financial information; considering delinquent property taxes; and incorporating material changes to the balance sheet accounts such as account receivables, inventories, fixed assets, and accounts payable into cash flow analyses for commercial borrowers;

●

within 30 days from the date of this Memorandum, revise its Allowance for Loan and Lease Losses (“ALLL”) methodology consistent with the comments in the most recent examination. Ensure that when assessing impairment under Accounting Standards Codification Topic 310 using the fair value of collateral method, assessments are based on current valuations of the pledged collateral;

(Company Note: The ALLL methodology is structurally sound. The comments referred to in the most recent examination pertain to documentation exceptions for two impaired credit relationships consisting of eight real estate properties with an aggregate outstanding balance of $1.7 million. Documentation supporting certain of these properties was stale as of the examination date. However, appraisals received subsequent to the examination date confirm that the estimated discount applied to the stale appraisals resulted in an allowance that was adequate. Additional procedures for adhering to and monitoring compliance over the ALLL have been revisited and refined to assure that the ALLL is fully documented and adequately supported in a timely fashion).

●

prior to submission or publication of all Reports of Condition and income required by the FDIC after the effective date of this Memorandum, the board of directors shall review the adequacy of the ALLL, shall provide an adequate allowance, and shall report such allowance on the Reports of Condition and income. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, the amount of increase in the allowance recommended, if any, and the basis for determination of the amount of the allowance provided;

●

within 60 days from the date of this Memorandum, formulate and implement a written Profit Plan. The Profit Plan shall be consistent with the loan, investment and funds management policies. This Plan shall be submitted to the Regional Director and Commissioner for review and comment, and shall address, at a minimum, goals and strategies for improving and sustaining earnings including:

a)

an identification of the major areas in, and means by which, the board will seek to improve the operating performance;

b)     realistic and comprehensive budgets;

c)

a budget review process to monitor the income and expenses to compare actual figures with budgetary projections;

d)

a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components; and

e)     periodic salary review;

●

within 30 days from the date of this Memorandum, take all steps necessary to correct the violations scheduled in the most recent examination. In addition, adopt procedures to assure future compliance with all applicable laws, rules and regulations;

●

while this Memorandum is in effect, maintain Tier I capital at a level equal to or exceeding 9.0% of the total assets which shall be calculated in accordance with Part 325 of the FDIC Rules and Regulations. If such ratio is less than 9.0% as of March 31, June 30, September 30 or December 31 of each calendar year, while this Memorandum is in effect, within 30 days of such dates, present to the Regional Director and Commissioner a plan for the augmentation of the capital accounts or other measures to bring the ratio to 9.0%;

●

while this Memorandum is in effect, written consent of the Regional Director and the Commissioner is required to declare or pay any dividends; and

●

within 30 days following each calendar quarter after the date of this Memorandum, progress reports covering each of the provisions of this Memorandum shall be submitted to the Regional Director and Commissioner until notification by the supervisory authorities that the reports need no longer be submitted. The board of directors shall review all reports prior to submission and note their considerationsconsideration in the minutes.

Following is a summary of the levelactivity during 2013 of substandard loans that meet the reporting requirements included in the Memorandum.

Substandard Loans
(Dollars in thousands)						Activity Since Exam Date
As of Exam Date						Increases								Decreases												December 31, 2010
Number of Credits		Balance				Additional Credit/New Classifications				Number of Credits				Principal Payments				Charge Off’s				Transfers1				Balance				Number of Credits
8		$	11,857			$	3,843				3			$	763			$	751			$	200			$	13,986				10

1 Substandard LoansRepresents repossession activity to other real estate owned.

	(Dollars in thousands)								Activity During 2013
	December 31, 2012								Increases								Decreases												December 31, 2013
	Balance				Number of Credits				Additional Credit/New Classifications				Number of New Credits				Principal Payments				Charge Offs				Amounts Upgraded and No Longer Classified as Substandard				Balance				Number of Credits
	$	8,295				7			$	3,966				4			$	2,157			$	10			$	892			$	9,202				10

At December 31, 20102013, Citizens Northern had 10ten credit relationships with an aggregate outstanding balance of $14.0$9.2 million that meet the risk identification criteria established in the Memorandum. There was no related target level established at year-end 2010.

2013.

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.subject and is in compliance with those agreements as of December 31, 2013. 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 December 31, 2010, with the exception that the level of substandard loans at Farmers Bank exceed the target amount by $1.3 million. 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.

Share Buy Back Program

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 are 84,971 shares that may still be purchased under the various authorizations. The Company’s participation inHowever, as discussed under the Treasury’s CPP in early 2009 restrictscaption“Capital Resources” above, the Company’s ability to purchaseCompany must be granted permission by the FRB St. Louis and the KDFI before it can repurchase or redeem any of its outstanding common stock. Until January 9, 2012 the Company generally must have the Treasury’s approval before it can purchase its outstanding common stock, unless all of the Series Aor preferred stock issued under the CPP has been redeemed by the Company or transferred

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by the Treasury. In addition, the Company is restricted from repurchasing its outstanding common stock as a result of the Memorandum it entered into with the FRB St. Louis and KDFI as discussed under the caption “Capital Resources”its regulatory agreement. which precedes this section.

 

Shareholder Information

As of February 22, 2011,18, 2014, the Company had 3,0382,919 shareholders of record.

record, which includes individual participants in securities positions listings.

Common Stock Price

Farmers Capital Bank Corporation’sThe Company’s common stock is traded on the NASDAQ Stock Market LLC exchange in the Global Select Market tier, with sales prices reported under the symbol: FFKT. The table below lists the common stockhigh and low sales prices and dividends declared for 2010 and 2009.

Common Stock Price

		High				Low				Dividends Declared1
2010
Fourth Quarter		$	5.10			$	4.50
Third Quarter			6.54				4.50
Second Quarter			9.38				4.90
First Quarter			10.52				6.59
2009
Fourth Quarter		$	18.04			$	9.08			$	.10
Third Quarter			26.90				17.10				.25
Second Quarter			27.11				14.62				.25
First Quarter			25.99				11.10				.25

1There were no dividends declared onof the Company’s common stock during 2010.for 2013 and 2012.

		High				Low
2013
Fourth Quarter		$	24.00			$	19.14
Third Quarter			26.98				18.62
Second Quarter			23.00				17.50
First Quarter			19.00				11.80
2012
Fourth Quarter		$	13.50			$	9.76
Third Quarter			10.50				6.46
Second Quarter			7.32				5.63
First Quarter			6.74				4.02

The closing price per share of the Company’s common stock on December 31, 2010,2013, the last trading day of the Company’s fiscal year, was $4.88. Dividends$21.75. There have been no dividends declared peron the Company’s common share were $0 and $.85 for 2010 and 2009, respectively.

Recently Issued Accounting Standards

Please refer to the caption “stock since 2009.

Recently Issued But Not Yet Effective Accounting Standards” in Note 1

In February 2013, The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-04,Liabilities (Topic 405) - Obligations Resulting From Joint and Several Liability Arrangements for Which the Total Amount of the Company’s 2010 auditedObligation Is Fixed at the Reporting Date.ThisASU establishes guidance for the recognition, measurement, and disclosure of obligations arising from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date (for example, debt arrangements, other contractual obligations, settled litigation, and judicial rulings). Under joint and several liability, the total amount of an obligation is enforceable against any and all parties to the arrangement. Each obligor is considered primarily responsible for the entire obligation.

Under the new guidance, the amount to be recognized is equal to the sum of (1) the amount that the entity agreed to pay based on its arrangement with co-obligors, and (2) any additional amount expected to be paid on behalf of the co-obligors using a “best estimate.” In addition, disclosure is required of the nature and amount of each covered obligation, including the nature of any recourse provisions which may allow recovery from other entities. This ASU does not apply to certain obligations where specific accounting guidance already exists under accounting principles generally accepted in the U.S., such as for contingencies, guarantees, compensation-retirement benefits, and income taxes.

The amendments in ASU No. 2013-04 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability arrangements within the ASU's scope that exist at the beginning of an entity’s fiscal year of adoption. The Company does not expect there to be a material impact on its consolidated financial statements.position or results of operations upon adoption.

In January 2014, the FASB issued ASU 2014-04,Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. The ASU clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures about foreclosed residential real estate property are also required.

2009

The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The amendments may be adopted using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. The Company does not expect there to be a material impact on its consolidated financial position or results of operations upon adoption.

2012 Compared to 2008

A one-time, non-cash, $46.5 million after tax goodwill impairment charge led to a2011

The Company reported net loss for 2009income of $44.7$12.1 million or $6.32$1.37 per common share in 2012 compared to net income of $4.4$2.7 million or $.60$.11 per common share for 2008. On a pretax basis, the goodwill impairment charge was $52.42011. This represents an increase of $9.4 million and recorded during the fourth quarter of 2009 and represents the entire amount of goodwill previously reported. The goodwill impairment charge had a negative impact of $6.31or $1.26 per common share. The goodwill impairment chargeincrease in net income for 2012 was primarily the result ofdue to a prolonged declinedecrease in the Company’s stock price, a situation similar to manyprovision for loan losses of its peer banks$10.7 million or 79.4% and other financial institutions at that time.  Lower stock prices were mainly attributed tononinterest expenses of $2.7 million or 4.3%, partially offset by an increase in income tax expense of $3.6 million. Net interest income decreased $715 thousand or 1.3%.

For 2012, the continuing economic weaknesses and increased market concern surrounding the credit risk and capital positions of financial institutions that begandecrease in late 2007.

For 2009, net interest income decreased $4.9of $715 thousand or 1.3% from 2011 was due to a decrease in interest income of $7.1 million or 8.4% compared to 2008 due9.1%, partially offset by lower interest expense of $6.4 million or 26.0%. The decrease in interest income was mainly related to lower interest on earning assets, primarily loans. Interest income on loans were negatively impacted byof $5.8 million or 9.5%, which decreased as a higher levelresult of nonaccrual loanslower average balances outstanding and loans that repriced downward in an overall lowera low interest rate environment. NetThe decrease in interest expense was primarily related to lower interest expense on deposits of $5.2 million or 36.2%, which decreased mainly from the Company’s continuing efforts to reduce higher-rate time deposits. Interest expense also decreased to a lesser extent due to a lower average balance outstanding of long-term debt, resulting from scheduled principal repayments.Net interest margin was 2.85%3.18% for 2009, a decrease2012, an increase of 40nine basis points from 3.25% in 2008.3.09% for 2011. Net interest spread decreased 37was 2.96%, up 12 basis points to 2.61% for 2009 compared to 2.98% for 2008 and was driven mainly by the a 79 basis point decrease in the average rate earned from the loan portfolio.

2.84%.

The provision for loan losses increased $15.4for 2012 was $2.8 million, in 2009 to $20.8a decrease of $10.7 million or 79.4% compared to $5.3$13.5 million for 2008.2011. The increasedecrease in the provision for loan losses was attributed to an overall improvement in the credit quality of the loan portfolio and a decrease in loan balances outstanding. Nonperforming loans, loans past due 30-89 days, and watch list loans all decreased during 2012. Historical loss rates, adjusted for current risk factors, also improved as lower recent charge-off activity replaced the higher levels that spiked upward starting in 2009. The high charge-offs from that period began to a higher levelroll out of nonperformingthe three-year look-back period the Company used when evaluating its allowance for loan losses.

Nonperforming loans primarily nonaccrual and restructured loans which trended upward as the overall economic environment and certain customers’ ability to repay their loans deteriorated.decreased $25.0 million or 31.7% in 2012. The allowance for loan losses was $24.4 million at year-end 2009 was $23.42012 and $28.3 million or 1.84%at year-end 2011. As a percentage of loans net of unearned income. At year-end 2008,income, the allowance for loan losses was $16.8 million or 1.28% of loans net of unearned income.

Significant weaknesses in the general economy, particularly a softer housing market combined with significant credit tightening throughout the financial services industry began in 2007. Overall economic conditions, including widespread illiquidity and extreme volatility in financial markets, higher unemployment rates, and other unprecedented market conditions, continueddecreased 21 basis points to worsen in 2008 and into 2009 before beginning2.43% compared to stabilize toward the end of 2009. Unemployment remained high throughout 2009. These economic conditions resulted in significant stress primarily in the Company’s residential real estate development and commercial real estate sectors of its lending portfolio. As such,

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the Company increased its allowance amounts for real estate development and commercial real estate lending in consideration of these current factors, even though historic net charge-offs had been relatively low.

2.64%.

Noninterest income for 20092012 was $28.2$24.7 million, an increase of $18.4 million$263 thousand or 187%1.1% compared to $9.8$24.4 million for 2008.2011. The increase in noninterest income was duedriven by higher net gains on the sale of mortgage loans of $936 thousand or 95.3% and income from company-owned life insurance of $585 thousand or 62.3%. The increase in net gains on the sale of mortgage loans was attributable to an increase in the volume of loans sold of $43.6 million or 106%. The interest rate environment during 2012 declined beyond the already low levels that existed during 2011, which led to a spike in home refinancing and purchasing activity during 2012. The increase in income from company-owned life insurance was mainly the result of a $529 thousand gain related to the impactdeath benefit proceeds received during 2012. There was no similar transaction in 2011.

The more significant components of an other-than-temporary impairment charge recordednoninterest income that decreased were data processing income by $550 thousand or 69.4% and service charges and fees on deposits by $493 thousand or 5.7%. The decrease in 2008data processing income was driven by a decrease in fees related to the Company’s investment in preferred stockswinding down of the Federal Home Loan Mortgage Companydepository services contract with the Commonwealth. The decrease in service charges and the Federal National Mortgage Association. This non-cash impairment charge reducedfees on deposits was driven by a decline in fees from overdraft/insufficient funds related to lower transaction volume.

Total noninterest income during 2008 by $14.0 million.expenses were $59.8 million for 2012, a decrease of $2.7 million or 4.3% compared to $62.5 million for 2011. The increasedecrease in noninterest income between 2009expenses was made up primarily by a $2.1 million or 28.9% decrease in expenses associated with repossessed real estate, a $514 thousand decrease related to a deposit fraud loss recorded in the prior year (net of a $186 thousand recovery), a $365 thousand or 7.9% decrease in data processing and 2009communications expense, and a $258 thousand or 8.8% decrease in deposit insurance expense. Partially offsetting these noninterest expense decreases was also positively impacted by an increase in net investment securities gainssalaries and employee benefits of $3.7 million.

Noninterest$1.2 million or 4.5%. 

The $2.1 million decrease in expenses were $55.0 million higher in 2009 comparedrelated to 2008. The increase in noninterest expensesrepossessed real estate is mainly due to a $1.7 million or 30.9% decline in impairment charges. The $514 thousand deposit fraud loss relates to a transaction on a deposit account involving one of the $52.4 million goodwill impairment charge mentioned above combinedCompany’s customers that occurred during the first quarter of 2011. Data processing and communications expenses decreased $365 thousand mainly as a result of cost savings related to the winding down of the Company’s contract with the Commonwealth as well as an increaseagreement the Company announced during the first quarter to reduce its debit card processing expenses during 2012 and 2013.

The $258 thousand decrease in deposit insurance expense is mainly attributed to changes in the FDIC’s assessment base and rate structure that went into effect during the second quarter of $2.7 million. The2011. Salaries and employee benefits increased $1.2 million in the comparison mainly as a result of a larger workforce, including additions in credit administration and nonperforming asset management positions in early 2012, higher deposit insurance expense is due in part to the special assessment imposed by the FDIC during 2009 as part of its plan to replenish the Deposit Insurance Fund. The Company was able to offset a portion of its deposit insurance expense in 2008 with a one-time assessment credit it received during 2006. There were no credits remaining after 2008.

postretirement benefits expenses, and modest annual employee pay increases.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is incorporated by reference to Part II, Item 7 under the caption “Market Risk Management” beginning on page 6563 of this Form 10-K.

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Item 8. Financial Statements and Supplementary Data

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING

The management of Farmers Capital Bank Corporation has the responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The statements were prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements include amounts that are based on management’s best estimates and judgments. Management also prepared other information in the annual report and is responsible for its accuracy and consistency with the financial statements.

The Company’s 20102013 consolidated financial statements have been audited by Crowe HorwathBKD, LLP (“BKD”) independent accountants. Management has made available to Crowe Horwath LLPBKD all financial records and related data, as well as the minutes of Boards of Directors’ meetings. Management believes that all representations made to Crowe Horwath LLPBKD during the audit were valid and appropriate.

Lloyd C. Hillard, Jr.	C. Douglas Carpenter
President and Chief Executive Officer	Executive Vice President, Secretary, and Chief Financial Officer
March 8, 20116, 2014

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors

and Shareholders

Stockholders

Farmers Capital Bank Corporation

Frankfort, Kentucky

We have audited Farmers Capital Bank Corporation’s (Company) internal control over financial reporting as of December 31, 2013, based on criteria established inInternal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company and our report dated March 6, 2014, expressed an unqualified opinion thereon.

Louisville, Kentucky

March 6, 2014

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors

   and Stockholders

Farmers Capital Bank Corporation

Frankfort, Kentucky

We have audited the accompanying consolidated balance sheets of Farmers Capital Bank Corporation (Company) as of December 31, 20102013 and 20092012, and the related consolidated statements of operations,income, comprehensive income, changes in shareholders’ equity comprehensive income (loss) and cash flows for each of the three years in the two-year period ended December 31, 2010.2013. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audits included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 6, 2014, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Louisville, Kentucky

March 6, 2014

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Farmers Capital Bank Corporation

Frankfort, Kentucky

We have audited the accompanying consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows of Farmers Capital Bank Corporation for the year ended December 31, 2011. Farmers Capital Bank Corporation’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

audit.

We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provideaudit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above of Farmers Capital Bank Corporation present fairly, in all material respects, the financial position of Farmers Capital Bank Corporation as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the periodyear ended December 31, 2010,2011, in conformity with U.S. generally accepted accounting principles.

	Crowe Horwath LLP

Louisville, Kentucky

March 8, 2011

6, 2012

 

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Consolidated Balance Sheets

December 31, (In thousands, except share data)		2010				2009
Assets
Cash and cash equivalents:
Cash and due from banks		$	24,268			$	35,841
Interest bearing deposits in other banks			139,902				175,926
Federal funds sold and securities purchased under agreements to resell			17,886				6,569
Total cash and cash equivalents			182,056				218,336
Investment securities:
Available for sale, amortized cost of $440,580 (2010) and $537,873 (2009)			444,182				547,873
Held to maturity, fair value of $844 (2010) and $922 (2009)			930				975
Total investment securities			445,112				548,848
Loans, net of unearned income			1,192,840				1,271,942
Allowance for loan losses			(28,784	)			(23,364	)
Loans, net			1,164,056				1,248,578
Premises and equipment, net			39,612				39,121
Company-owned life insurance			28,791				36,626
Other intangible assets, net			3,552				4,989
Other real estate owned			30,545				31,232
Other assets			41,969				43,832
Total assets		$	1,935,693			$	2,171,562
Liabilities
Deposits:
Noninterest bearing		$	206,887			$	214,518
Interest bearing			1,256,685				1,418,915
Total deposits			1,463,572				1,633,433
Federal funds purchased and other short-term borrowings			47,409				47,215
Securities sold under agreements to repurchase and other long-term borrowings			203,239				267,962
Subordinated notes payable to unconsolidated trusts			48,970				48,970
Dividends payable			188				925
Other liabilities			22,419				25,830
Total liabilities			1,785,797				2,024,335
Commitments and contingencies (Notes 15 and 17)
Shareholders’ Equity
Preferred stock, no par value 1,000,000 shares authorized; 30,000 Series A shares issued and outstanding; Liquidation preference of $30,000			28,719				28,348
Common stock, par value $.125 per share; 14,608,000 shares authorized; 7,411,676 and 7,378,605 shares issued and outstanding at December 31, 2010 and 2009, respectively			926				922
Capital surplus			50,675				50,476
Retained earnings			68,678				63,617
Accumulated other comprehensive income			898				3,864
Total shareholders’ equity			149,896				147,227
Total liabilities and shareholders’ equity		$	1,935,693			$	2,171,562

December 31, (In thousands, except share data)		2013				2012
Assets
Cash and cash equivalents:
Cash and due from banks		$	22,925			$	27,448
Interest bearing deposits in other banks			41,749				65,675
Federal funds sold and securities purchased under agreements to resell			3,579				2,732
Total cash and cash equivalents			68,253				95,855
Investment securities:
Available for sale, amortized cost of $618,395 (2013) and $558,630 (2012)			612,820				573,108
Held to maturity, fair value of $827 (2013) and $956 (2012)			765				820
Total investment securities			613,585				573,928
Loans, net of unearned income			999,883				1,004,995
Allowance for loan losses			(20,577	)			(24,445	)
Loans, net			979,306				980,550
Premises and equipment, net			36,273				36,183
Company-owned life insurance			28,899				27,973
Intangible assets, net			854				1,394
Other real estate owned			37,826				52,562
Other assets			44,559				38,787
Total assets		$	1,809,555			$	1,807,232
Liabilities
Deposits:
Noninterest bearing		$	277,294			$	254,912
Interest bearing			1,132,921				1,155,898
Total deposits			1,410,215				1,410,810
Federal funds purchased and other short-term borrowings			29,123				24,083
Securities sold under agreements to repurchase and other long-term borrowings			127,880				129,297
Subordinated notes payable to unconsolidated trusts			48,970				48,970
Dividends payable			188				188
Other liabilities			23,124				25,863
Total liabilities			1,639,500				1,639,211
Commitments and contingencies(Notes 14 and 16)
Shareholders’ Equity
Preferred stock, no par value 1,000,000 shares authorized; 30,000 Series A shares issued and outstanding; Liquidation preference of $30,000			29,988				29,537
Common stock, par value $.125 per share; 14,608,000 shares authorized;7,478,706 and 7,469,813 shares issued and outstanding atDecember 31, 2013 and 2012, respectively			935				934
Capital surplus			51,102				50,934
Retained earnings			91,242				79,747
Accumulated other comprehensive (loss) income			(3,212	)			6,869
Total shareholders’ equity			170,055				168,021
Total liabilities and shareholders’ equity		$	1,809,555			$	1,807,232

See accompanying notes to consolidated financial statements.

 

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Consolidated Statements of Operations

(In thousands, except per share data)
Years Ended December 31,		2010				2009				2008
Interest Income
Interest and fees on loans		$	70,071			$	76,614			$	86,596
Interest on investment securities:
Taxable			16,565				20,424				22,894
Nontaxable			2,835				3,570				3,231
Interest on deposits in other banks			272				278				133
Interest on federal funds sold and securities purchased under agreements to resell			8				24				1,066
Total interest income			89,751				100,910				113,920
Interest Expense
Interest on deposits			22,373				33,197				39,045
Interest on federal funds purchased and other short-term borrowings			324				453				1,785
Interest on subordinated notes payable to unconsolidated trusts			2,035				2,178				2,865
Interest on securities sold under agreements to purchase and other long-term borrowings			10,216				11,237				11,435
Total interest expense			34,948				47,065				55,130
Net interest income			54,803				53,845				58,790
Provision for loan losses			17,233				20,768				5,321
Net interest income after provision for loan losses			37,570				33,077				53,469
Noninterest Income
Service charges and fees on deposits			9,171				9,347				9,847
Allotment processing fees			5,573				5,403				4,791
Other service charges, commissions, and fees			4,566				4,414				4,346
Data processing income			1,328				1,317				1,087
Trust income			1,688				1,763				2,032
Investment securities gains (losses), net			8,889				3,488				(166	)
Other-than-temporary impairment of investment securities											(13,962	)
Gains on sale of mortgage loans, net			1,244				1,034				407
Income from company-owned life insurance			1,300				1,282				1,235
Other			351				121				193
Total noninterest income			34,110				28,169				9,810
Noninterest Expense
Salaries and employee benefits			27,026				29,816				30,174
Occupancy expenses, net			4,849				4,991				4,515
Equipment expenses			2,647				3,075				3,187
Data processing and communications expenses			5,448				5,568				5,423
Bank franchise tax			2,482				2,265				2,158
Correspondent bank fees			618				1,009				1,040
Goodwill impairment							52,408
Amortization of intangibles			1,437				1,952				2,602
Deposit insurance expense			4,279				3,777				1,038
Other real estate expenses, net			6,054				2,074				606
Other			7,871				8,206				9,355
Total noninterest expense			62,711				115,141				60,098
Income (loss) before income taxes			8,969				(53,895	)			3,181
Income tax expense (benefit)			2,037				(9,153	)			(1,214	)
Net income (loss)			6,932				(44,742	)			4,395
Dividends and accretion on preferred shares			(1,871	)			(1,802	)
Net income (loss) available to common shareholders		$	5,061			$	(46,544	)		$	4,395
Per Common Share
Net income (loss) – basic and diluted		$	.68			$	(6.32	)		$	.60
Cash dividends declared			N/A				.85				1.32
Weighted Average Shares Outstanding
Basic and diluted			7,390				7,365				7,357

Consolidated Statements of Income

(In thousands, except per share data)
Years Ended December 31,		2013				2012				2011
Interest Income
Interest and fees on loans		$	53,492			$	55,942			$	61,783
Interest on investment securities:
Taxable			10,575				12,872				14,387
Nontaxable			2,512				2,248				1,938
Interest on deposits in other banks			150				156				237
Interest on federal funds sold and securities purchased under agreements to resell			4				4				4
Total interest income			66,733				71,222				78,349
Interest Expense
Interest on deposits			5,922				9,239				14,488
Interest on federal funds purchased and other short-term borrowings			74				96				191
Interest on securities sold under agreements to repurchase and other long-term borrowings			5,135				7,044				7,965
Interest on subordinated notes payable to unconsolidated trusts			864				1,879				2,026
Total interest expense			11,995				18,258				24,670
Net interest income			54,738				52,964				53,679
Provision for loan losses			(2,600	)			2,772				13,487
Net interest income after provision for loan losses			57,338				50,192				40,192
Noninterest Income
Service charges and fees on deposits			8,196				8,124				8,617
Allotment processing fees			4,922				5,215				5,346
Other service charges, commissions, and fees			4,983				4,478				4,248
Data processing income			102				242				792
Trust income			1,993				1,909				2,085
Investment securities (losses) gains, net			(50	)			1,209				1,355
Gains on sale of mortgage loans, net			1,036				1,918				982
Income from company-owned life insurance			962				1,524				939
Other			(28	)			35				27
Total noninterest income			22,116				24,654				24,391
Noninterest Expense
Salaries and employee benefits			29,681				28,190				26,986
Occupancy expenses, net			4,767				4,757				4,846
Equipment expenses			2,398				2,364				2,503
Data processing and communications expenses			3,946				4,271				4,636
Bank franchise tax			2,354				2,381				2,572
Amortization of intangibles			540				1,014				1,143
Deposit insurance expense			2,265				2,690				2,948
Other real estate expenses, net			6,999				5,232				7,355
Legal expenses			780				1,220				821
Other			7,843				7,668				8,682
Total noninterest expense			61,573				59,787				62,492
Income before income taxes			17,881				15,059				2,091
Income tax expense (benefit)			4,435				2,910				(647	)
Net income			13,446				12,149				2,738
Less preferred stock dividends and discount accretion			1,951				1,922				1,896
Net income available to common shareholders		$	11,495			$	10,227			$	842
Per Common Share
Net income – basic and diluted		$	1.54			$	1.37			$	.11
Cash dividends declared			-				-				-
Weighted Average Common Shares Outstanding
Basic and diluted			7,474				7,457				7,424

See accompanying notes to consolidated financial statements.

 

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Consolidated Statements of Comprehensive (Loss) Income

(In thousands)
Years Ended December 31,		2010				2009				2008
Net income (loss)		$	6,932			$	(44,742	)		$	4,395
Other comprehensive income (loss):
Unrealized holding (loss) gain on available for sale securities arising during the period on securities held at end of period, net of tax of $377, $2,028, and $2,613, respectively			(701	)			3,767				4,853
Reclassification adjustment for prior period unrealized (gain) loss previously reported in other comprehensive income recognized during current period, net of tax of $1,863, $1,187, and $85, respectively			(3,459	)			(2,204	)			(158	)
Change in unfunded portion of postretirement benefit obligations, net of tax of $643, $234, and $613, respectively			1,194				(434	)			1,146
Other comprehensive (loss) income			(2,966	)			1,129				5,841
Comprehensive income (loss)		$	3,966			$	(43,613	)		$	10,236

(In thousands)
Years Ended December 31,		2013				2012				2011
Net income		$	13,446			$	12,149			$	2,738
Other comprehensive (loss) income:
Unrealized holding (loss) gain on available for sale securities arising during the period on securities held at end of period, net of tax of $(6,996), $543, and $3,677, respectively			(12,992	)			1,009				6,829
Reclassification adjustment for prior period unrealized gain previously reported in other comprehensive income recognized during current period, net of tax of $23, $330, and $84, respectively			(42	)			(612	)			(156	)
Change in unfunded portion of postretirement benefit obligations, net of tax of $1,589, $(92), and $(500), respectively			2,953				(171	)			(928	)
Other comprehensive (loss) income			(10,081	)			226				5,745
Comprehensive income		$	3,365			$	12,375			$	8,483

See accompanying notes to consolidated financial statements.

 

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Consolidated Statements of Changes in Shareholders’ Equity

(In thousands, except per share data)																						Accumulated Other				Total
Years Ended		Preferred				Common Stock								Capital				Retained				Comprehensive				Shareholders’
December 31, 2010, 2009, and 2008		Stock				Shares				Amount				Surplus				Earnings				(Loss) Income				Equity
Balance at January 1, 2008							7,385			$	923			$	48,176			$	122,498			$	(3,106	)		$	168,491
Net income																			4,395								4,395
Other comprehensive income																							5,841				5,841
Cash dividends declared, $1.32 per share																			(9,711	)							(9,711	)
Purchase of common stock							(43	)			(5	)			(281	)			(763	)							(1,049	)
Stock options exercised, including related tax benefits							1								30												30
Shares issued pursuant to employee stock purchase plan							14				2				250												252
Expense related to employee stock purchase plan and stock options															47												47
Balance at December 31, 2008							7,357				920				48,222				116,419				2,735				168,296
Issuance of  30,000 shares of Series A     preferred stock		$	28,008																								28,008
Issuance of common stock warrant															1,952												1,952
Net loss																			(44,742	)							(44,742	)
Other comprehensive income																							1,129				1,129
Cash dividends declared-common, $.85 per share																			(6,258	)							(6,258	)
Cash dividends declared-preferred, $48.73 per share																			(1,462	)							(1,462	)
Preferred stock discount accretion			340																(340	)
Shares issued pursuant to employee stock purchase plan							22				2				247												249
Expense related to employee stock purchase plan															55												55
Balance at December 31, 2009			28,348				7,379				922				50,476				63,617				3,864				147,227
Net income																			6,932								6,932
Other comprehensive loss																							(2,966	)			(2,966	)
Cash dividends declared-preferred, $50.00 per share																			(1,500	)							(1,500	)
Preferred stock discount accretion			371																(371	)
Shares issued pursuant to employee stock purchase plan							33				4				153												157
Expense related to employee stock purchase plan															46												46
Balance at December 31, 2010		$	28,719				7,412			$	926			$	50,675			$	68,678			$	898			$	149,896

(In thousands, except per share data)																						Accumulated Other				Total
Years Ended		Preferred				Common Stock								Capital				Retained				Comprehensive				Shareholders’
December 31, 2013, 2012, and 2011		Stock				Shares				Amount				Surplus				Earnings				Income (Loss)				Equity
Balance at January 1, 2011		$	28,719				7,412			$	926			$	50,675			$	68,678			$	898			$	149,896
Net income			-				-				-				-				2,738				-				2,738
Other comprehensive income			-				-				-				-				-				5,745				5,745
Cash dividends declared-preferred, $50.00 per share			-				-				-				-				(1,500	)			-				(1,500	)
Preferred stock discount accretion			396				-				-				-				(396	)			-				-
Shares issued pursuant to employee stock purchase plan			-				34				5				131				-				-				136
Expense related to employee stock purchase plan			-				-				-				42				-				-				42
Balance at December 31, 2011			29,115				7,446				931				50,848				69,520				6,643				157,057
Net income			-				-				-				-				12,149				-				12,149
Other comprehensive income			-				-				-				-				-				226				226
Cash dividends declared-preferred, $50.00 per share			-				-				-				-				(1,500	)			-				(1,500	)
Preferred stock discount accretion			422				-				-				-				(422	)			-				-
Repurchase of common stock warrant			-				-				-				(75	)			-				-				(75	)
Shares issued pursuant to employee stock purchase plan			-				24				3				125				-				-				128
Expense related to employee stock purchase plan			-				-				-				36				-				-				36
Balance at December 31, 2012			29,537				7,470				934				50,934				79,747				6,869				168,021
Net income			-				-				-				-				13,446				-				13,446
Other comprehensive loss			-				-				-				-				-				(10,081	)			(10,081	)
Cash dividends declared-preferred, $50.00 per share			-				-				-				-				(1,500	)			-				(1,500	)
Preferred stock discount accretion			451				-				-				-				(451	)			-				-
Shares issued pursuant to employee stock purchase plan			-				9				1				132				-				-				133
Expense related to employee stock purchase plan			-				-				-				36				-				-				36
Balance at December 31, 2013		$	29,988				7,479			$	935			$	51,102			$	91,242			$	(3,212	)		$	170,055

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Cash Flows

Years Ended December 31, (In thousands)		2013				2012				2011
Cash Flows from Operating Activities
Net income		$	13,446			$	12,149			$	2,738
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			4,114				4,543				4,798
Net premium amortization of available for sale investment securities			5,027				5,312				3,916
Provision for loan losses			(2,600	)			2,772				13,487
Deferred income tax benefit			(473	)			(1,043	)			(2,227	)
Noncash employee stock purchase plan expense			36				36				42
Mortgage loans originated for sale			(52,016	)			(84,496	)			(41,128	)
Proceeds from sale of mortgage loans			50,957				86,563				41,981
Gains on sale of mortgage loans, net			(1,036	)			(1,918	)			(982	)
Loss on disposal and write downs of premises and equipment, net			7				257				3
Net loss on sale and write downs of other real estate			5,702				4,084				5,945
Net loss (gain) on sale of available for sale investment securities			50				(1,209	)			(1,355	)
Increase in cash surrender value of company-owned life insurance			(926	)			(961	)			(918	)
Death benefits in excess of cash surrender value on company-owned life insurance			-				(529	)			-
Decrease in accrued interest receivable			173				545				639
(Increase) decrease in other assets			(241	)			1,296				372
Decrease in accrued interest payable			(233	)			(1,005	)			(1,436	)
Increase in other liabilities			2,036				2,014				2,187
Net cash provided by operating activities			24,023				28,410				28,062
Cash Flows from Investing Activities
Proceeds from maturities and calls of investment securities:
Available for sale			123,231				219,141				191,345
Held to maturity			55				55				55
Proceeds from sale of available for sale investment securities			2,233				135,193				201,093
Purchases of available for sale investment securities			(190,306	)			(333,116	)			(538,370	)
Principal collected on loans originated for investment, net			5,540				29,818				83,463
Proceeds from surrender of company-owned life insurance			-				-				2,248
Proceeds from death benefits of company-owned life insurance			-				1,051				-
Purchases of premises and equipment			(3,525	)			(1,675	)			(2,679	)
Proceeds from sale of other real estate			9,458				12,278				9,834
Proceeds from disposals of equipment			28				429				5
Net cash (used in) provided by investing activities			(53,286	)			63,174				(53,006	)
Cash Flows from Financing Activities
Net decrease in deposits			(595	)			(24,255	)			(28,507	)
Net increase (decrease) in federal funds purchased and other short-term borrowings			5,040				(2,939	)			(20,387	)
Proceeds from securities sold under agreements to repurchase and other long-term borrowings			754				-				-
Repayments of securities sold under agreements to repurchase and other long-term borrowings			(2,171	)			(61,397	)			(12,545	)
Dividends paid, preferred			(1,500	)			(1,500	)			(1,500	)
Repurchase of common stock warrant			-				(75	)			-
Shares issued under employee stock purchase plan			133				128				136
Net cash provided by (used in) financing activities			1,661				(90,038	)			(62,803	)
Net (decrease) increase in cash and cash equivalents			(27,602	)			1,546				(87,747	)
Cash and cash equivalents at beginning of year			95,855				94,309				182,056
Cash and cash equivalents at end of year		$	68,253			$	95,855			$	94,309
Supplemental Disclosures
Cash paid during the year for:
Interest		$	12,228			$	19,263			$	26,106
Income taxes			6,150				3,800				2,900
Transfers from loans to other real estate			6,110				33,913				26,586
Transfers from premises to other real estate			-				212				-
Sale and financing of other real estate			5,711				3,358				3,195

See accompanying notes to consolidated financial statements.

 

Years Ended December 31, (In thousands)		2010				2009				2008
Cash Flows from Operating Activities
Net income (loss)		$	6,932			$	(44,742	)		$	4,395
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			5,359				6,077				6,642
Net premium amortization (discount accretion) of investment securities:
Available for sale			2,232				955				(179	)
Held to maturity							(1	)
Provision for loan losses			17,233				20,768				5,321
Goodwill impairment							52,408
Deferred income tax benefit			(3,392	)			(9,905	)			(2,046	)
Noncash stock option expense and employee stock purchase plan expense			46				55				47
Mortgage loans originated for sale			(50,084	)			(45,806	)			(17,347	)
Proceeds from sale of mortgage loans			50,761				46,994				16,185
Gains on sale of mortgage loans, net			(1,244	)			(1,034	)			(407	)
Loss on disposal of premises and equipment, net			(30	)			183				17
Net loss (gain) on sale and write downs of repossessed real estate			4,878				1,074				(149	)
Net (gain) loss on sale of available for sale investment securities			(8,889	)			(3,488	)			166
Other-than-temporary impairment of investment securities											13,962
Decrease in accrued interest receivable			2,123				2,787				1,169
Income from company-owned life insurance			(1,044	)			(1,230	)			(1,225	)
Death benefits in excess of cash surrender value on company-owned life insurance			(241	)
Decrease (increase) in other assets			5,054				(1,027	)			(5,666	)
Decrease in accrued interest payable			(1,874	)			(1,126	)			(634	)
Increase in other liabilities			320				2,095				432
Net cash provided by operating activities			28,140				25,037				20,683
Cash Flows from Investing Activities
Proceeds from maturities and calls of investment securities:
Available for sale			315,480				239,192				219,724
Held to maturity			45				840				2,030
Proceeds from sale of available for sale investment securities			311,243				183,002				34,055
Purchases of available for sale investment securities			(522,774	)			(439,777	)			(251,687	)
Purchase of restricted stock investments			(368	)			(206	)			(480	)
Loans originated for investment less (greater) than principal collected			50,085				5,920				(36,357	)
Proceeds from liquidation of company-owned life insurance			8,567
Proceeds from death benefits of company-owned life insurance			446
Purchases of premises and equipment			(4,298	)			(2,165	)			(10,640	)
Proceeds from sale of repossessed real estate			13,564				3,978				6,348
Proceeds from disposals of equipment			60				422				2,357
Net cash provided by (used in) investing activities			172,050				(8,794	)			(34,650	)
Cash Flows from Financing Activities
Net (decrease) increase in deposits			(169,861	)			39,318				120,018
Net increase (decrease) in federal funds purchased and other short-term borrowings			194				(30,259	)			(3,281	)
Proceeds from securities sold under agreements to purchase and other long-term debt											27,000
Repayments of securities sold under agreements to purchase and other long-term debt			(64,723	)			(18,729	)			(7,648	)
Proceeds from issuance of preferred stock, net of issue costs							29,961
Dividends paid, common and preferred stock			(2,237	)			(9,222	)			(9,720	)
Purchase of common stock											(1,049	)
Shares issued under Employee Stock Purchase Plan			157				249				252
Stock options exercised and related tax benefits											30
Net cash (used in) provided by financing activities			(236,470	)			11,318				125,602
Net (decrease) increase in cash and cash equivalents			(36,280	)			27,561				111,635
Cash and cash equivalents at beginning of year			218,336				190,775				79,140
Cash and cash equivalents at end of year		$	182,056			$	218,336			$	190,775
Supplemental Disclosures
Cash paid during the year for:
Interest		$	36,822			$	48,191			$	55,764
Income taxes			2,989				2,450				6,600
Transfers from loans to other real estate			17,771				20,332				14,622
Transfers from premises to other real estate							1,506
See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.	Summary of Significant Accounting Policies

1. Summary of Significant Accounting Policies

The accounting and reporting policies of Farmers Capital Bank Corporation and subsidiaries conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and general practices applicable to the banking industry. Significant accounting policies are summarized below.

Principles of Consolidation 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. Banksubsidiaries.Bank subsidiaries include Farmers Bank & Capital Trust Company (“Farmers Bank”) in Frankfort, KY, United Bank & Trust Company (“United Bank”) in Versailles, KY, First Citizens Bank (“First Citizens”) in Elizabethtown, KY, and itsCitizens Bank of Northern Kentucky, Inc. (“Citizens Northern”) in Newport, KY.

Farmers Bank’s significant wholly-owned 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. The Lawrenceburg Bank and Trust Company, which previously was a separate bank subsidiary of the Parent Company, was merged into Farmers Bank during the second quarter of 2010; First Citizens Bank in Elizabethtown, KY; United Bank & Trust Company (“United Bank”) in Versailles, KY which, during 2008, was the surviving company after the merger with two sister companies of Farmers Bank and Trust Company and Citizens Bank of Jessamine County; United Bank hadhas one wholly-owned subsidiary, at year-end 2010, EGT Properties, Inc. EGT Properties, Inc. is involved in real estate management and liquidation for certain repossessed properties of United Bank;Bank. First Citizens has one wholly-owned subsidiary, HBJ Properties, LLC. HBJ Properties, LLC is involved in real estate management and Citizens Bankliquidation for certain repossessed properties of Northern Kentucky, Inc. in Newport, KY (“Citizens Northern”);First Citizens. Citizens Northern hadhas one wholly-owned subsidiary, at year-end 2010, 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 created in 2008formed to manage and liquidate certain real estate properties repossessed by the Company. In addition, theThe Company has three subsidiaries organized as Delaware statutory trusts that are not consolidated into its financial statements. These trusts were formed for the purpose of issuing trust preferred securities. All significant intercompany transactions and balances are eliminated in consolidation.

The Company provides financial services at its 36 locations in 23 communities throughout Central and Northern Kentucky to individual, business, agriculture, government, and educational customers. Its primary deposit products are checking, savings, and term certificate accounts. Its primary lending products are residential mortgage, commercial lending, and consumer installment loans. Substantially all loans and leases are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans and leases are expected to be repaid from cash flow from operations of businesses. Farmers Bank has served as the general depository for the Commonwealth of Kentucky for over 70 years and also provides investment and other services to the Commonwealth. 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.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of AmericaU.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 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.

Reclassifications

Certain amounts in the accompanying consolidated financial statements presented for prior years have been reclassified to conform to the 20102013 presentation. These reclassifications do not affect net income or total shareholders’ equity as previously reported.

Segment Information

The Company provides a broad range of financial services to individuals, corporations, and others through its 36 banking locations throughout Central and Northern Kentucky. These services primarily include the activities of lending, receiving deposits, providing cash management services, safe deposit box rental, and trust activities. Whileactivities.While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating segments are aggregated

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into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable segment.

Cash Flows

For purposes of reporting cash flows, cash and cash equivalents include the following: cash on hand, deposits from other financial institutions that have an initial maturity of less than 90 days when acquired by the Company, federal funds sold, and securities purchased under agreements to resell. Generally, federal funds sold and securities purchased under agreements to resell are purchased and sold for one-day periods. Net cash flows are reported for loan,, deposit, and short-term borrowing transactions.

Investment Securities

Investments in debt and equity securities are classified into three categories. Securities that management has the positive intent and ability to hold until maturity are classified as held to maturity. Securities that are bought and held specifically for the purpose of selling them in the near term are classified as trading securities. The Company had no securities classified as trading during 2010, 2009,2013, 2012, or 2008.2011. All other securities are classified as available for sale. Securities are designated as available for sale if they might be sold before maturity. Securities classified as available for sale are carried at estimated fair value. Unrealized holding gains and losses for available for sale securities are reported net of deferred income taxes in other comprehensive income. Investments classified as held to maturity are carried at amortized cost.

Amortized cost basis for investment securities includes adjustments made to the cost for previous other-than-temporary impairment (“OTTI”) recognized in earnings, amortization, accretion, and collection of cash.

Interest income includes amortization and accretion of purchase premiums or discounts. Premiums and discounts on securities are amortized using the interest method over the expected life of the securities without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Realized gains and losses on the sales of securities are recorded on the trade date and computed on the basis of specific identification of the adjusted cost of each security and are included in noninterest income.

The Company evaluates investment securities for other-than-temporary impairment (“OTTI”)OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. A decline in the market value of investment securities below cost that is deemed other-than-temporary results in a charge to earnings and the establishment of a new cost basis for the security. Substantially all of the Company’s investment securities are debt securities. Insecurities.In estimating OTTI for debt securities, management considers each of the following: (1) the length of time and extent to which fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery in fair value. 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.

Investment securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under Financial Accounting Standard Board (“FASB”) Accounting Standards Codification^TM (“ASC”) 320, “Investments-DebtTopic320, “Investments-Debt and Equity Securities”.Securities.” In determining OTTI under ASC Topic 320 the Company considers many factors, including those enumerated above. When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether the Company intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss.basis. If the Company intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall beis recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that it will be required to sell the security before recovery of its amortized cost basis, less any current-period loss, OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

Federal Home Loan Bank and Federal Reserve BoardBank Stock

Federal Home Loan Bank (“FHLB”) and Federal Reserve BoardBank stock is carried at cost on the consolidated balance sheets under the caption “Other assets”.assets.” These stocks are classified as restricted securities and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. The amountsamount outstanding at December 31, 20102013 and 2009 were $9,515,000 and $9,148,000, respectively.

2012 was $9.5 million.

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. NetLoan origination fees, and incrementalnet of certain direct origination costs, associated with loan origination are deferred and amortized as yield adjustments over the contractual term of the loans.

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New accounting rules effective at year-end 2010 require the

The Company to disaggregatedisaggregates 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. Portfolio segments are further disaggregated into classes for certain required disclosures as follows:

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

New loan

Loan disclosures beginning at year-end 2010 include presenting certain disaggregated information based on recorded investment. The recorded investment in a loan includes its principal amount outstanding adjusted for certain items that include net deferred loan costs or fees, unamortized premiums or discounts, charge offs, and accrued interest. The Company had a total of $856,000$492 thousand and $574 thousand of net deferred loan costs at year-end 20102013 and 2012, respectively, included in the carrying

amount of loans on the balance sheet, which represents .07%.05% and .06% of average loans outstanding for 2010.2013 and 2012. The amount of net deferred loans costs are not material and are omitted from the computation of the recorded investment included in Note 43 that follows. Similarly, accrued interest receivable on loans was $7,258,000$3.4 million and $3.7 million at year-end 20102013 and 2012, respectively, or .6%.3% and .4% of average loans outstanding for 2010 and has also been omitted from certain information presented in Note 4.

3.

The Company’sCompany 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-certifiedstate 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

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 interestInterest accrued but not received for loansa loan 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.until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Company’s policy for placing a loan on nonaccrual status or subsequently returning a loan to accrual status does not differ based on its portfolio class or segment.

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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 impairedimpaired.

.

Loans Held for Sale

The Company’s operations include a limited amount of mortgage banking. Mortgage banking activities include the origination of fixed-rate residential mortgage loans for sale to various third-party investors. Mortgage loans originated and intended for sale in the secondary market, principally under programs with the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and other commercial lending institutions are carried at the lower of cost or estimated fair value determined in the aggregate and included in net loans on the balance sheet until sold.

These loans are sold with the related servicing rights either retained or released by the Company depending on the economic conditions present at the time of origination. Mortgage loans held for sale included in net loans totaled $2,466,000$4.1 million and $1,951,000$2.5 million at December 31, 20102013 and December 31, 2009,2012, respectively. Mortgage banking revenues, including origination fees, servicing fees, net gains or losses on sales of mortgages,mortgage loans, and other fee income were 1.20%1.6%, .97%2.4%, and .44%1.28% of the Company’s total revenue for the years ended December 31, 2010, 2009,2013, 2012, and 20082011, respectively.

.

Provision and Allowance for Loan Losses

The provision for loan losses represents charges or credits made to earnings to maintain an allowance for loan losses at ana level considered adequate level based on credit losses specifically identified in the loan portfolio, as well as management’s best estimate ofto provide for probable incurred loancredit losses in the remainder of the 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.

Management

The Company estimates the adequacy of the allowance balance required using a risk-rated methodology. Many factors are considered when estimatingmethodology which is based on the allowance. These include, but are not limited to,Company’s past loan loss experience, an assessmentknown and inherent risks in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of the financial condition of individual borrowers, a determination of the value and adequacy ofany underlying collateral the condition of the local economy, an analysis of the levels and trendssecuring loans, composition of the loan portfolio, current economic conditions, and a reviewother relevant factors. This evaluation is inherently subjective as it requires significant judgment and the use of delinquent and classified loans. 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.impaired. The general component covers non-classifiednon-impaired loans and is based on historical loss experience adjusted for current risk factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Actual loan losses could differ significantly from the amounts estimated by management.

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, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.

The Company’s risk-rated methodology includes segregating non-impaired watch list and past due loans from the general portfolio and allocating specific amountsa loss percentage to these loans depending on their status. For example, watch list loans, which may be identified by the internal loan review risk-rating process or by regulatory examiner classification, are assigned a certain loss percentage while loans past due 30 days or more are assigned a different loss percentage. Each of these percentages considers past experience as well as current factors. The remainder of the general loan portfolio is segregated into portfolio segments having similar risk characteristics identified as follows: real estate loans, commercial loans, and consumer loans. Each of these portfolio segments is assigned a loss percentage based on their respective rolling twelve quarter historical loss percentage. Additional allocationsrates, adjusted for qualitative risk factors. During the third quarter of 2013, the Company lengthened the look-back period it uses to determine historical loss rates to the previous 16 quarters from 12 quarters. The change in the look-back period is the result of the Company’s ongoing monitoring and evaluation of the adequacy of its allowance may thenfor loan losses. The longer look-back period better reflects the Company’s loss estimates based on current market conditions. Lengthening the look-back period resulted in a $320 thousand increase in the allowance for loan losses.

The qualitative risk factors used in the methodology are consistent with the guidance in the most recent Interagency Policy Statement on the Allowance for Loan Losses issued. Each factor is supported by a detailed analysis performed at each subsidiary bank and is both measureable and supportable. Some factors include a minimum allocation in some instances where loss levels are extremely low and it is determined to be madeprudent from a safety and soundness perspective. Qualitative risk factors that are used in the methodology include the following for subjective factors, such as those mentioned above, as determined by senior managers who are knowledgeable about these matters. During 2007,each loan portfolio segment:

●

Delinquency trends

●

Trends in net charge-offs

●

Trends in loan volume

●

Lending philosophy risk

●

Management experience risk

●

Concentration of credit risk

●

Economic conditions risk

A loan is impaired when, based on current information and events, it is probable that the Company further identified signswill be unable to collect all amounts due according to the contractual terms of deterioration in certain real estate development loans that have remained present into 2010 and specific allowances related to these loansthe loan agreement. Loans for which the terms have been recorded.

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”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. A loan is impaired when full payment under the contractual terms is not expected. Generally, impairedImpaired loans aremay also in nonaccrual status.be classified as nonaccrual. In certainmany circumstances, however, the Company may continuecontinues to accrue interest on an impaired loan. Cash receipts on accruing impaired loans are typically applied to the recorded investment in the loan, including any accrued interest receivable. Cash payments received on nonaccrual impaired loans generally are applied to principal until qualifying for return to accrual status. Loans that are part of a large group of smaller-balance homogeneous loans, such as residential mortgage,, consumer, and smaller-balance commercial loans, are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures.impairment. Troubled debt restructurings are measured at the present value of estimated future cash flows using the loan’s effective interest rate at inception, or at the fair value of collateral. The Company determines the amount of reserve for troubled debt restructurings that subsequently default in accordance with its accounting policy for the allowance for loan losses.

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Mortgage Servicing Rights

Mortgage servicing rights are recognized in other assets on the Company’s consolidated balance sheet at their initial fair value on loans sold.sold with servicing retained. Fair value is based on market priceprices for comparable mortgage servicing contracts.contracts when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. Mortgage servicing rights are subsequently measured using the amortization method in which the mortgage servicing right is expensed in proportion to, and over the period of, the estimated future net servicing revenues.income of the underlying loans. Impairment is evaluated based on the fair value of the rights, using groupings ofgrouping the underlying loans as toby interest rates. Any impairmentImpairment of a grouping is reported as a valuation allowance. Capitalized mortgage servicing rights were $597,000$785 thousand and $463,000$795 thousand at December 31, 20102013 and 2009.2012, respectively. No impairment of the asset was determined to exist on either of these dates.

Mortgage loans serviced for others totaled $200 million and $172 million at December 31, 2013 and 2012, respectively. Mortgage loans serviced for others are not included in the Company’s balance sheets.

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 19.18. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Loan Commitments and Related Financial Instruments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, thatwhich are issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Goodwill and Other

Intangible Assets

Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of net assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually and more frequently if events or circumstances indicate impairment could have taken place. Such events could include, among others, a significant adverse change in the business climate, an adverse action by a regulator, an unanticipated change in the competitive environment, or a decision to change the Company’s operations or disposal of a subsidiary. The Company performs its annual impairment test during the fourth quarter.  Prior to recording an impairment charge for the entire amount during the fourth quarter of 2009, goodwill was the only intangible asset with an indefinite life on the Company’s balance sheet. See Note 22 for further discussion of the Company’s 2009 goodwill impairment analysis.

Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Such intangible assets consist of core deposit and acquired customer relationship intangible assets arising from business acquisitions. TheyIntangible assets are initially measured at fair value and then are amortized on an accelerated method over their estimated

useful lives, which range between seven and 10 years.

Such assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable.

Other Real Estate Owned

Other real estate owned (“OREO”) and held for sale in the accompanying consolidated balance sheets includes properties acquired by the Company through, or in lieu of, actual loan foreclosures. OREO is initially carried at fair value less estimated costs to sell. Fair value of assets is generally based on third party appraisals of the property that includes comparable sales data. If the carrying amount exceeds fair value less estimated costs to sell, an impairment loss is recorded through expense. CostsThese assets are subsequently accounted for at the lower of carrying amount or fair value less estimated costs to sell. Operating costs after acquisition are expensed.

Income Taxes

Income tax expense is the total of current year income tax due or refundable and the change in deferred tax assets and liabilities, except for the deferred tax assets and liabilities related to business combinations or components of other comprehensive income. Deferredincome.Deferred income tax assets and liabilities result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Company files a consolidated federal income tax return with its subsidiaries. Federal income tax expense or benefit has been allocated to subsidiaries on a separate return basis.

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The Company’s policy is to record the accrual of interest and/or penalties relative to income tax matters, if any, in income tax expense.

Premises and Equipment

Premises, equipment, and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation is computed primarily on the straight-line method over the estimated useful lives generally ranging from two to seven years for furniture and equipment and generally ten to 40 years for buildings and related components. Leasehold improvements are amortized over the shorter of the estimated useful lives or terms of the related leases on the straight-line method. Maintenance, repairs, and minor improvements are charged to operating expenses as incurred and major improvements are capitalized. The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in noninterest income. Land is carried at cost.

Company-owned Life Insurance

The Company has purchased life insurance policies on certain key employees with their knowledge and written consent. Company-owned life insurance is recorded on the consolidated balance sheet at its cash surrender value, i.e.which is the amount that can be realized under the insurance contract onat the consolidated balance sheet.sheet date. The related change in cash surrender value and proceeds received under the policies are reported on the consolidated statementstatements of income under the caption “Income from company-owned life insurance”.

insurance.”

Related Party Transactions

In the ordinary course of business, the Company offers loan and deposit products to its directors, executive officers, and principal shareholders-includingshareholders - including affiliated companies of which they are principal owners (“Related Parties”). These products are offered on substantially the same terms as those prevailing at the time for comparable transactions with unrelated parties, and these receivables and deposits are included in loans and deposits in the Company’s consolidated balance sheets. Additional information related to these transactions can be found in Note 3 and Note 7 to these audited consolidated financial statements.6.

The Company makes payments to Related Parties in the normal course of business for various services, primarily related to legal fees. For example, certain directors of the Parent Company and its subsidiary banks are partners in law firms that act as counsel to the Company. The following table represents the amount and type of payments to Related Parties, other than director fees, for the periods indicated:

(In thousands) Years Ended December 31,		2010				2009				2008
Legal fees		$	499			$	532			$	370
Insurance commissions			5
Premises rental											10
Other			16				19				16
Total		$	520			$	551			$	396

(In thousands) Years Ended December 31,		2013				2012				2011
Legal fees		$	169			$	445			$	310
Commissions and fees related to the sale of repossessed commercial real estate and property management			9				140				-
Insurance commissions			8				24				28
Premises rental			-				-				3
Other			6				-				8
Total		$	192			$	609			$	349

Retirement Plans

The Company maintains a 401(k) salary savings plan and records expense based on the amount of its matching contributions of employee deferrals. The Company also has a nonqualified supplemental retirement plan for certain key employees that it acquired in connection with the Citizens Northern acquisition. Supplemental retirement plan expense allocates the benefits over years of service.

Net Income (Loss) Per Common Share

Basic net income (loss) per common share is determined by dividing net income (loss) available to common shareholders by the weighted average total number of common shares issued and outstanding. Net income (loss) available to common shareholders represents net income (loss) 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.

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Net income (loss) per common share computations were as follows atfor the years ended December 31, 2010, 2009,2013, 2012, and 2008:

(In thousands, except per share data) Years Ended December 31,		2010				2009				2008
Net income (loss), basic and diluted		$	6,932			$	(44,742	)		$	4,395
Preferred stock dividends and discount accretion			(1,871	)			(1,802	)
Net income (loss) available to common shareholders, basic and diluted		$	5,061			$	(46,544	)		$	4,395
Average common shares outstanding, basic and diluted			7,390				7,365				7,357
Net income (loss) per common share, basic and diluted		$	.68			$	(6.32	)		$	.60

2011.

(In thousands, except per share data) Years Ended December 31,		2013				2012				2011
Net income, basic and diluted		$	13,446			$	12,149			$	2,738
Less preferred stock dividends and discount accretion			1,951				1,922				1,896
Net income available to common shareholders, basic and diluted		$	11,495			$	10,227			$	842
Average common shares outstanding, basic and diluted			7,474				7,457				7,424
Net income per common share, basic and diluted		$	1.54			$	1.37			$	.11

Stock options for 22,049, 24,049, 57,621, and 59,62124,049 shares of common stock for 2010, 2009, and 2008, respectively, were not included in the determination of dilutive earningsdiluted net income per common share for 2013, 2012, and 2011, respectively, because they were antidilutive. Thereantidilutive.There were 223,992 potential common shares associated with a warrant issued to the U.S. Treasury that were excluded from the computation of earningsdiluted net income per common share for 2010 and 20092011 because they were antidilutive. There were no warrants outstanding prior to 2009.The Company repurchased the warrant from the Treasury during the third quarter of 2012.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. For the Company this includes net income, (loss), the after tax effect of changes in the net unrealized gains and losses on available for sale investment securities, and the after tax changes into the funded status of postretirement benefit plansplans.

.

Dividend Restrictions

Banking regulations require maintaining certain capital levels and currentlywhich limit the amount of dividends paid to the Company by its bank subsidiaries or bysubsidiaries. In addition, the Parent Company and two of its subsidiary banks must obtain regulatory approval to its shareholders.

pay dividends as a result of agreements entered into related to recent examinations. Refer to Note 17 for additional information.

Restrictions on Cash

Included

The Company is required to maintain funds in interest bearing deposits in other bankscash and/or on the consolidated balance sheets are certain amounts that are held atdeposit with the Federal Reserve Bank in accordance with reserve requirements specified by the Federal Reserve Board of Governors. The required reserve requirement was $15,461,000$19.9 million and $12,827,000$17.0 million at December 31, 20102013 and 2009,2012, respectively.

Equity

Outstanding common shares purchased by the Company are retired. When common shares are purchased, the Company allocates a portion of the purchase price of the common shares that are retired to each of the following balance sheet line items: common stock, capital surplus, and retained earnings.

The Company did not purchase any of its outstanding common shares during 2013 or 2012.

Trust Assets

Assets of the Company’s trust departments, other than cash on deposit at our subsidiaries,subsidiary banks, are not included in the accompanying financial statements because they are not assets of the Company.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Long-term Assets

Premises and equipment, core deposit and other intangible assets, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Stock-Based Compensation

The Company recognizes compensation cost for its Employee Stock Purchase Plan (“ESPP”) and for stock options granted based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of ESPP and stock option awards. Compensation cost is recognized over the required service period, generally defined as the vesting period, on a straight-line basis.

There have been no stock options granted by the Company since 2004, and all outstanding options are vested.

The Company’s ESPP was approved by its shareholders at the Company’s 2004 annual meeting.shareholders in 2004. The purpose of the ESPP is to provide a means by which eligible employees may purchase, at a discount, shares of the Company’s common stock of the Company through payroll withholding. The purchase price of the shares is equal to 85% of their fair market value on specified dates as defined in the plan. The ESPP was effective

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beginning July 1, 2004. There were 33,071, 21,243,8,893, 23,368, and 14,49734,769 shares issued under the plan during 2010, 2009,2013, 2012, and 2008,2011, respectively. Compensation expense related to the ESPP included in the accompanying statements of income was $46,000, $55,000,$36 thousand, $36 thousand, and $47,000$42 thousand in 2010, 2009,2013, 2012, and 2008,2011, respectively.

Following are the weighted average assumptions used and estimated fair market value for the ESPP, which is considered a compensatory plan under ASC Topic 718, “Compensation-Stock Compensation”Compensation.”

		ESPP
		2010				2009				2008
Dividend yield			0	%			4.63	%			4.24	%
Expected volatility			66.0				56.8				24.1
Risk-free interest rate			.15				.14				1.85
Expected life (in years)			.25				.25				.25
Fair value		$	1.45			$	3.67			$	4.05

		ESPP
		2013				2012				2011
Expected volatility			45.7	%			53.5	%			65.2	%
Dividend yield			-				-				-
Risk-free interest rate			.06				.07				.06
Expected life (in years)			.25				.25				.25
Fair value		$	4.01			$	1.54			$	1.19

Adoption of New Accounting Standards

ASC Topic 860, “Transfers and Servicing”.Effective January 1, 2010,2013, the Company adopted new accounting guidance under ASC Topic 860 that requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. The guidance eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures about continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The adoption of this accounting guidance did not have a material impact on the Company’s consolidated financial position or results of operations.

ASC Topic 810, “Consolidation”. Effective January 1, 2010, the Company adopted new accounting guidance under ASC Topic 810 that amends prior guidance to change how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. The new guidance requires a number of new disclosures about an entity’s involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will also be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. The adoption of this accounting guidance did not have a material impact on the Company’s consolidated financial position or results of operations.

ASC Topic 820, “Fair Value Measurements and Disclosures”. The FASB issued accounting guidance under Accounting Standards Update (“ASU”) No. 2010-06 that2013-02,Comprehensive Income (Topic 220) –Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires new disclosuresadditional disclosure about the changes in the components of accumulated other comprehensive income, including amounts reclassified and clarifies existing disclosure requirements about fair value measurements as set forthamounts due to current period other comprehensive income. The following table presents changes in ASC Subtopic 820-10. The objectiveaccumulated other comprehensive income by component, net of tax, for the new guidance is to improve these disclosures and increase transparency in financial reporting. Specifically, the new guidance requires:period indicated.

(In thousands) Year Ended December 31, 2013		Unrealized Gains and Losses on Available for Sale Investment Securities				Postretirement Benefit Obligation				Total
Beginning balance		$	9,411			$	(2,542	)		$	6,869
Other comprehensive (loss) income before reclassifications			(12,992	)			2,778				(10,214	)
Amounts reclassified from accumulated other comprehensive income			(42	)			175				133
Net current-period other comprehensive (loss) income			(13,034	)			2,953				(10,081	)
Ending balance		$	(3,623	)		$	411			$	(3,212	)

·

A reporting entity to disclose separately the amounts of significant transfers in and The following table presents amounts reclassified out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and

·

In the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements.

In addition, the guidance clarifies the requirements of the following existing disclosures:

·

For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and

·

A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.

ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, exceptaccumulated other comprehensive income by component for the disclosures about purchases, sales, issuances, and settlementsperiod indicated. Line items in the roll forwardstatement of activity in Level 3 fair value measurements. Those disclosuresincome affected by the reclassification are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The portion that is currently effective did not have a material impact on the Company’s consolidated financial position or results of operations. The portion that is not yet effective is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

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also presented.

(In thousands) Year Ended December 31, 2013		Amount Reclassified from Accumulated Other Comprehensive Income			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available for sale investment securities		$	65		Investment securities gains, net
			(23	)	Income tax expense
		$	42		Net of tax
Amortization related to postretirement benefits
Prior service costs		$	(257	)	Salaries and employee benefits
Actuarial losses			(12	)	Salaries and employee benefits
			(269	)	Total before tax
			94		Income tax benefit
		$	(175	)	Net of tax
Total reclassifications for the period		$	(133	)	Net of tax

ASC Topic 310, “Receivables: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”2.   Investment Securities The FASB issued accounting guidance under ASU No. 2010-20 that requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The objectives of the new guidance are intended to improve transparency regarding credit losses and the credit quality of loan and lease receivables. The new guidance requires the allowance for loan losses to be disclosed by portfolio segment, while credit quality information, impaired loans, and age analysis are to be presented by class. Disclosure of the nature and extent of troubled debt restructurings is also required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance.

The new disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  Additionally, the FASB in December 2010 issued an exposure draft “Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20”.  This proposed guidance, which became effective in January 2011, delays the new disclosure requirements for troubled debt restructurings activity until interim and annual reporting periods ending after June 15, 2011. Refer to Note 3 “Loans” for further information about the Company’s disclosures required by this Topic. Disclosures related to troubled debt restructuring activity that are not yet effective are not expected to have a material impact on the Company’s consolidated financial position or results of operations.

Recently Issued But Not Yet Effective Accounting Standards

Please refer to the caption “Adoption of New Accounting Standards” immediately above for information about certain portions of newly adopted accounting standards that will be effective in 2011.

2.	Investment Securities

The following tables summarize the amortized cost and estimated fair values of the securities portfolio at December 31, 20102013 and 20092012 and the corresponding amounts of gross unrealized gains and losses. The summary is divided into available for sale and held to maturity securities.

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

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
December 31, 2010 (In thousands)		Cost				Gains				Losses				Fair Value
Available For Sale
Obligations of U.S. government-sponsored entities		$	42,103			$	58			$	548			$	41,613
Obligations of states and political subdivisions			75,004				923				1,128				74,799
Mortgage-backed securities – residential			314,799				7,527				2,396				319,930
U.S. Treasury securities			1,043				1								1,044
Money market mutual funds			145												145
Corporate debt securities			7,441								835				6,606
Equity securities			45												45
Total securities – available for sale		$	440,580			$	8,509			$	4,907			$	444,182
Held To Maturity
Obligations of states and political subdivisions		$	930			$	0			$	86			$	844

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
December 31, 2009 (In thousands)		Cost				Gains				Losses				Fair Value
Available For Sale
Obligations of U.S. government-sponsored entities		$	90,889			$	162			$	299			$	90,752
Obligations of states and political subdivisions			107,190				2,423				655				108,958
Mortgage-backed securities – residential			315,546				10,446				473				325,519
U.S. Treasury securities			2,997				5								3,002
Money market mutual funds			910												910
Corporate debt securities			20,341				195				1,804				18,732
Total securities – available for sale		$	537,873			$	13,231			$	3,231			$	547,873
Held To Maturity
Obligations of states and political subdivisions		$	975							$	53			$	922

December 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		$	75,945			$	216			$	66			$	76,095
Obligations of states and political subdivisions			113,986				4,943				174				118,755
Mortgage-backed securities – residential			360,099				10,596				256				370,439
Corporate debt securities			6,638				44				856				5,826
Mutual funds and equity securities			1,962				33				2				1,993
Total securities – available for sale		$	558,630			$	15,832			$	1,354			$	573,108
Held To Maturity
Obligations of states and political subdivisions		$	820			$	136			$	-			$	956

At year-end 20102013 and 2009,2012, the Company held no investment securities of any single issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

The amortized cost and estimated fair value of the securities portfolio at December 31, 2010,2013, 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 borrowersissuers may have the right to call or prepay obligations with or without call or prepayment penalties. EquityMutual funds and equity securities in the available

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for sale portfolio at December 31, 20102013 consist of investments attributed toby the Company’s captive insurance subsidiary. These securities have no stated maturity and are not included in the maturity schedule that follows.

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

		Available For Sale								Held To Maturity
		Amortized				Estimated				Amortized				Estimated
December 31, 2010 (In thousands)		Cost				Fair Value				Cost				Fair Value
Due in one year or less		$	7,634			$	7,684
Due after one year through five years			48,507				48,646
Due after five years through ten years			47,448				46,993
Due after ten years			22,147				20,884			$	930			$	844
Mortgage-backed securities – residential			314,799				319,930
Total		$	440,535			$	444,137			$	930			$	844

		Available For Sale								Held To Maturity
December 31, 2013 (In thousands)		Amortized Cost				Estimated Fair Value				Amortized Cost				Estimated Fair Value
Due in one year or less		$	3,357			$	3,367			$	-			$	-
Due after one year through five years			115,652				115,449				-				-
Due after five years through ten years			100,109				97,321				765				827
Due after ten years			17,209				15,840				-				-
Mortgage-backed securities			379,986				378,766				-				-
Total		$	616,313			$	610,743			$	765			$	827

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

(In thousands)		2010				2009				2008
Gross realized gains		$	9,166			$	3,560			$	713
Gross realized losses			277				72				879
Net realized gain (loss)		$	8,889			$	3,488			$	(166	)
Income tax provision (benefit) related to net realized gains (losses)		$	3,111			$	1,221			$	(58	)
Proceeds from sales and calls of available for sale investment securities		$	548,551			$	314,623			$	94,039

Gross losses for 2008 include $766,000 related to the sale of preferred stock investments in Federal National Mortgage Association and Federal Home Loan Mortgage Corporation.

(In thousands)		2013				2012				2011
Gross realized gains		$	14			$	1,349			$	1,529
Gross realized losses			64				140				174
Net realized (loss) gain		$	(50	)		$	1,209			$	1,355
Income tax (benefit) provision related to net realized (loss) gain		$	(18	)		$	423			$	474

Investment securities with a carrying value of $301,385,000$277 million and $389,001,000$285 million at December 31, 20102013 and 20092012 were pledged to secure public and trust deposits, repurchase agreements, and for other purposes.

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Investment securities with unrealized losses at year-end 20102013 and 20092012 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 table also includes the fair value of the related securities.

		Less than 12 Months								12 Months or More								Total
December 31, 2010 (In thousands)		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Obligations of U.S. government-sponsored entities		$	32,000			$	548											$	32,000			$	548
Obligations of states and political subdivisions			22,517				1,028			$	5,733			$	186				28,250				1,214
Mortgage-backed securities – residential			165,426				2,396												165,426				2,396
Corporate debt securities											4,989				835				4,989				835
Total		$	219,943			$	3,972			$	10,722			$	1,021			$	230,665			$	4,993

		Less than 12 Months								12 Months or More								Total
December 31, 2009 (In thousands)		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Obligations of U.S. government-sponsored entities		$	39,445			$	299											$	39,445			$	299
Obligations of states and political subdivisions			22,795				552			$	3,605			$	156				26,400				708
Mortgage-backed securities – residential			41,120				473												41,120				473
Corporate debt securities											11,710				1,804				11,710				1,804
Total		$	103,360			$	1,324			$	15,315			$	1,960			$	118,675			$	3,284

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

		Less than 12 Months								12 Months or More								Total
December 31, 2012 (In thousands)		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Obligations of U.S. government-sponsored entities		$	26,433			$	66			$	-			$	-			$	26,433			$	66
Obligations of states and political subdivisions			17,199				174				-				-				17,199				174
Mortgage-backed securities – residential			39,659				256				-				-				39,659				256
Corporate debt securities			-				-				4,994				856				4,994				856
Mutual funds and equity securities			299				2				-				-				299				2
Total		$	83,590			$	498			$	4,994			$	856			$	88,584			$	1,354

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 debt security or more likely than not will be required to sell the debt 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 December 31, 2010,2013, the Company’s investment securities portfolio had gross unrealized losses of $5.0 million.$12.9 million, an increase of $11.6 million compared to year-end 2012. Of the total gross unrealized losses $1.0at December 31, 2013, $3.6 million is relatedor 28.0% relates to investments that have been in a continuous loss position for 12 months or more. Unrealized losses on corporate debt securities account for $835 thousandand mortgage-backed securities each make up $1.0 million of the total unrealized loss on investment securities in a continuous loss position of 12 months or more. This represents an improvement of $969 thousand or 53.7% from December 31, 2009. During the second quarter of 2010, the Company sold $12.1 million amortized cost amount of its corporate debt securities for a net loss of $168 thousand and another $1.0 million matured. These debt securities, although still rated as investment grade, were downgraded during 2009 and sold in the second quarter of 2010 after a careful analysis of their short and long-term prospects determined they no longer suited the Company’s investment preferences.

The remaining corporate

Corporate debt securities in the Company’s investment securities portfolio at December 31, 2010 consist primarily of2013 include single-issuer trust preferred capital securities with a carrying value of $4.8 million. These securities were issued by a national and global financial services firm. Each of thesefirm and were purchased by the Company during 2007.The securities isare currently performing and the issuer of these securities continuescontinue to be rated as investment grade by major rating agencies, although downgrades occurred within this groupagencies. The issuer of holdings during 2009.the securities announced in the first quarter of 2013 that it had passed stringent regulatory stress testing and received regulatory approval to both increase per share common dividend payments and increase its equity repurchase program. The Company does not intend to sell these

securities nor does it believe it is likely that it will be required to sell these securities prior to their anticipated recovery. The Company believes these securities are not impared due to reasons of credit quality or other factors, but rather the unrealized loss on corporate debt securities is primarily attributed to continuing uncertainties in both international and domestic economies and market volatility. The Company believes that it will collect all amounts due according to the general decline in financial marketscontractual terms of these securities and illiquidity events that began in 2008 and is not due to adverse changes in the expected cash flowsfair values 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 that, while beginning to improve, has not fully stabilized.

these securities will recover as they approach their maturity dates. 

The Company attributes the unrealized losses in other sectors of its investment securities portfolio to changes in market interest rates. In general, market rates and volatility. Market interest rates rose sharply during the second and fourth quarters of 2013 as measured by the yields on Treasury bonds, particularly for thesethe longer dated maturity periods. Investment securities exceedwith unrealized losses at December 31, 2013 are performing according to their contractual terms, and 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 December 31, 2010 are performing according to their contractual terms. The Company does not have the intent to sell these securities andnor does it believe it is likely that it will not be required to sell these securities beforeprior to their anticipated recovery. The Company does not consider any of the securities to be impaired due to reasons of credit quality or other factors.

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3.

Loans

3.   Loans and Allowance for Loan Losses

Major classifications of loans are summarized in the following tables. Duringtable.

December 31, (In thousands)		2013				2012
Real Estate:
Real estate mortgage – construction and land development		$	101,352			$	102,454
Real estate mortgage – residential			371,582				368,762
Real estate mortgage – farmland and other commercial enterprises			418,147				425,477
Commercial:
Commercial and industrial			47,426				46,812
States and political subdivisions			21,561				21,472
Lease financing			902				2,732
Other			23,840				19,156
Consumer:
Secured			8,579				11,732
Unsecured			6,513				6,515
Total loans			999,902				1,005,112
Less unearned income			19				117
Total loans, net of unearned income		$	999,883			$	1,004,995

Loans with a carrying value of $484 million and $466 million at December 31, 2013 and December 31, 2012, respectively, were pledged to secure borrowings and lines of credit. Such borrowings primarily include FHLB advances and short-term borrowing arrangements with the transition year, the amounts for 2010 and 2009 are presented in separate tables as a result of the expanded disclosures categories required by ASU No. 2010-20.

Federal Reserve.

December 31, (In thousands)		2010
Real Estate:
Real estate – construction and land development		$	154,208
Real estate mortgage – residential			469,273
Real estate mortgage – farmland and other commercial enterprises			416,904
Commercial:
Commercial and industrial			57,029
States and political subdivisions			26,302
Lease financing			16,187
Other			25,628
Consumer:
Secured			22,607
Unsecured			5,925
Total loans			1,194,063
Less unearned income			(1,223	)
Total loans, net of unearned income		$	1,192,840

 

December 31, (In thousands)		2009
Commercial, financial, and agricultural		$	146,530
Real estate – construction			211,744
Real estate mortgage – residential			466,018
Real estate mortgage – farmland and other commercial enterprises			386,626
Installment loans			36,727
Lease financing			26,765
Total loans			1,274,410
Less unearned income			(2,468	)
Total loans, net of unearned income		$	1,271,942

Loans to directors, executive officers, and principal shareholders of the Parent Company and its subsidiaries (including loans to affiliated companies of which they are principal owners) and loans to members of the immediate family of such persons were $23,188,000 and $24,767,000$18.1 million at December 31, 2010 and 2009, respectively.2013. Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers and did not involve more than the normal risk of collectability.collectability. An analysis of the activity with respect to these loans is presented in the table below.

(In thousands)		Amount
Balance, December 31, 2009		$	24,767
New loans			17,200
Repayments			(11,406	)
Loans no longer meeting disclosure requirements, new loans meeting disclosure requirements, and other adjustments, net			(7,373	)
Balance, December 31, 2010		$	23,188

4.	Allowance for Loan Losses

(In thousands)		Amount
Balance at December 31, 2012		$	19,987
New loans			5,170
Repayments			(6,434	)
Loans no longer meeting disclosure requirements, new loans meeting disclosure requirements, and other adjustments, net			(658	)
Balance at December 31, 2013		$	18,065

Activity in the allowance for loan losses by portfolio segment was as follows:

Years Ended December 31, (In thousands)		2010				2009				2008
Balance, beginning of year		$	23,364			$	16,828			$	14,216
Provision for loan losses			17,233				20,768				5,321
Recoveries			577				536				1,833
Loans charged off			(12,390	)			(14,768	)			(4,542	)
Balance, end of year		$	28,784			$	23,364			$	16,828

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Individually impaired loans were as follows for each of the dates indicated:

three years in the period ended December 31, 2013: 

(In thousands)		Real Estate				Commercial				Consumer				Total
2013
Balance at beginning of period		$	22,254			$	1,513			$	678			$	24,445
Provision for loan losses			(2,432	)			(2	)			(166	)			(2,600	)
Recoveries			327				155				221				703
Loans charged off			(1,433	)			(257	)			(281	)			(1,971	)
Balance at end of period		$	18,716			$	1,409			$	452			$	20,577
2012
Balance at beginning of period		$	23,538			$	3,508			$	1,218			$	28,264
Provision for loan losses			4,930				(1,825	)			(333	)			2,772
Recoveries			666				145				234				1,045
Loans charged off			(6,880	)			(315	)			(441	)			(7,636	)
Balance at end of period		$	22,254			$	1,513			$	678			$	24,445
2011
Balance at beginning of period		$	24,527			$	3,260			$	997			$	28,784
Provision for loan losses			12,548				511				428				13,487
Recoveries			241				860				245				1,346
Loans charged off			(13,778	)			(1,123	)			(452	)			(15,353	)
Balance at end of period		$	23,538			$	3,508			$	1,218			$	28,264

December 31, (In thousands)		2010				2009
Year-end loans with no allocated allowance for loan losses		$	58,235			$	47,746
Year-end loans with allocated allowance for loan losses			71,785				60,723
Total		$	130,020			$	108,469
Amount of the allowance for loan losses allocated		$	6,033			$	7,374

 

Years Ended December 31, (In thousands)		2010				2009				2008
Average of individually impaired loans during year		$	119,596			$	70,845			$	34,364
Interest income recognized during impairment			4,022				3,866				1,070
Cash-basis interest income recognized			3,933				3,257				880

The following table presentstables present individually impaired loans by class of loans as of December 31, 2010:for the dates indicated. 

As of and for the Year Ended December 31, 2013 (In thousands)		Unpaid Principal Balance				Recorded Investment With No Allowance				Recorded Investment With Allowance				Total Recorded Investment				Allowance for Loan Losses Allocated				Average				Interest Income Recognized				Cash Basis Interest Recognized
Real Estate
Real estate mortgage – construction and land development		$	17,234			$	9,742			$	4,699			$	14,441			$	930			$	17,314			$	509			$	461
Real estate mortgage – residential			11,595				2,871				8,612				11,483				1,443				12,727				460				445
Real estate mortgage – farmland and other commercial enterprises			32,102				12,262				19,746				32,008				1,443				32,785				1,546				1,519
Commercial
Commercial and industrial			311				24				293				317				200				994				40				40
Consumer
Secured			18				-				18				18				15				19				1				1
Unsecured			71				-				72				72				71				147				9				9
Total		$	61,331			$	24,899			$	33,440			$	58,339			$	4,102			$	63,986			$	2,565			$	2,475

As of and for the Year Ended December 31, 2012 (In thousands)		Unpaid Principal Balance				Recorded Investment With No Allowance				Recorded Investment With Allowance				Total Recorded Investment				Allowance for Loan Losses Allocated				Average				Interest Income Recognized				Cash Basis Interest Recognized
Real Estate
Real estate mortgage – construction and land development		$	26,831			$	12,712			$	11,068			$	23,780			$	2,075			$	34,880			$	871			$	804
Real estate mortgage – residential			7,474				2,215				5,259				7,474				1,069				13,754				333				324
Real estate mortgage – farmland and other commercial enterprises			33,491				13,294				18,803				32,097				1,588				38,077				1,859				1,876
Commercial
Commercial and industrial			210				-				207				207				198				403				17				17
Consumer
Secured			21				-				21				21				17				66				6				6
Unsecured			309				-				310				310				196				271				17				16
Total		$	68,336			$	28,221			$	35,668			$	63,889			$	5,143			$	87,451			$	3,103			$	3,043

Year Ended December 31, 2010 (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		$	27,350			$	27,298
Real estate mortgage – residential			13,103				13,059
Real estate mortgage – farmland and other commercial enterprises			17,895				17,864
Commercial
Commercial and industrial			14				14
Total		$	58,362			$	58,235
Impaired loans with an allowance recorded:
Real Estate
Real estate – construction and land development		$	31,529			$	31,452			$	2,793
Real estate mortgage – residential			20,147				19,986				2,051
Real estate mortgage – farmland and other commercial enterprises			19,897				19,810				824
Commercial
Commercial and industrial			447				444				310
Consumer
Secured			93				93				55
Total		$	72,113			$	71,785			$	6,033

The recorded investment column in the table above excludes immaterial amounts attributed to net deferred loan costs.

Year Ended December 31, 2011 (In thousands)		Average				Interest Income Recognized				Cash Basis Interest Recognized
Real Estate
Real estate mortgage – construction and land development		$	51,226			$	719			$	716
Real estate mortgage – residential			28,732				1,282				1,271
Real estate mortgage – farmland and other commercial enterprises			67,565				2,847				2,768
Commercial
Commercial and industrial			4,174				205				164
Consumer
Secured			66				6				4
Unsecured			9				-				-
Total		$	151,772			$	5,059			$	4,923

The following table presentstables present the balance of the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of December 31, 2010:2013 and 2012. 

December 31, 2013 (In thousands)		Real Estate				Commercial				Consumer				Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	3,816			$	200			$	86			$	4,102
Collectively evaluated for impairment			14,900				1,209				366				16,475
Total ending allowance balance		$	18,716			$	1,409			$	452			$	20,577
Loans
Loans individually evaluated for impairment		$	57,932			$	317			$	90			$	58,339
Loans collectively evaluated for impairment			833,149				93,393				15,002				941,544
Total ending loan balance, net of unearned income		$	891,081			$	93,710			$	15,092			$	999,883

December 31, 2012 (In thousands)		Real Estate				Commercial				Consumer				Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	4,732			$	198			$	213			$	5,143
Collectively evaluated for impairment			17,522				1,315				465				19,302
Total ending allowance balance		$	22,254			$	1,513			$	678			$	24,445
Loans
Loans individually evaluated for impairment		$	63,351			$	207			$	331			$	63,889
Loans collectively evaluated for impairment			833,342				89,848				17,916				941,106
Total ending loan balance, net of unearned income		$	896,693			$	90,055			$	18,247			$	1,004,995

December 31, 2010 (In thousands)		Real Estate				Commercial				Consumer				Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	5,668			$	310			$	55			$	6,033
Collectively evaluated for impairment			18,859				2,950				942				22,751
Total ending allowance balance		$	24,527			$	3,260			$	997			$	28,784
Loans
Loans individually evaluated for impairment		$	129,469			$	458			$	93			$	130,020
Loans collectively evaluated for impairment			910,916				123,465				28,439				1,062,820
Total ending loan balance, net of unearned income		$	1,040,385			$	123,923			$	28,532			$	1,192,840

Loans in the table above exclude immaterial amounts attributed to accrued interest receivable.

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Nonperforming loans were as follows:

December 31, (In thousands)		2010				2009
Nonaccrual loans		$	53,971			$	56,630
Restructured loans			36,978				17,911
Loans past due 90 days or more and still accruing			42				1,807
Total nonperforming loans		$	90,991			$	76,348

The table above excludes immaterial amounts attributed to net deferred loan costs and accrued interest receivable.

The following table presentstables present the recorded investment in nonperforming loans by class of loans as of December 31, 2010:

December 31, 2010 (In thousands)		Nonaccrual				Restructured Loans				Loans Past Due 90 Days or More and Still Accruing
Real Estate:
Real estate – construction and land development		$	35,893			$	16,793
Real estate mortgage – residential			10,728				9,147			$	28
Real estate mortgage – farmland and other commercial enterprises			6,528				11,038
Commercial:
Commercial and industrial			627
Lease financing			50								9
Other			31
Consumer:
Secured			109
Unsecured			5								5
Total		$	53,971			$	36,978			$	42

The table above excludes immaterial amounts attributed to net deferred loan costs2013 and accrued interest receivable.

2012.

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

December 31, 2012 (In thousands)		Nonaccrual				Restructured Loans				Loans Past Due 90 Days or More and Still Accruing
Real Estate:
Real estate mortgage – construction and land development		$	7,700			$	8,736			$	-
Real estate mortgage – residential			6,025				634				-
Real estate mortgage – farmland and other commercial enterprises			12,878				16,940				103
Commercial:
Commercial and industrial			649				-				-
Lease financing			53				-				-
Consumer:
Secured			9				-				-
Unsecured			94				39				-
Total		$	27,408			$	26,349			$	103

The Company has allocated $3,675,000$2.7 million and $2.9 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings and that are in compliance with those terms as of December 31, 2010.2013 and 2012, respectively. The Company has committedhad no commitments to lend additional amounts totaling up to $46,000 to customers with outstanding loans that are classified as troubled debt restructurings at December 31, 2013 and 2012.

During 2013, the Company had eight credits that were modified as troubled debt restructurings.

Seven of these credits with an aggregate recorded investment of $338 thousand represent debt by borrowers discharged under Chapter 7 bankruptcy. The borrower in each case did not reaffirm their debt, and the release of personal liability by the court is deemed a concession. However, each borrower continues to make payments under the original terms of the loan agreement. The remaining restructuring consists of a credit secured by commercial real estate whereby the maturity date was extended 48 months.

During 2012, the Company had three credits that were modified as troubled debt restructurings. One restructuring includes a commercial real estate credit whereby the stated interest rate was reduced to 5.0% from 7.25% and repayment terms that include an initial six month interest only component. One restructuring includes a residential real estate credit 

 

whereby the stated interest rate was reduced to 4.125% from 6.0% and the due date extended by three months. The remaining restructured credit represents a secured consumer loans in which the maturity date was extended.

The following table presents loans by class modified as troubled debt restructurings that occurred during the years ended December 31, 2013 and 2012.

(Dollars in thousands)						Pre-Modification Outstanding				Post-Modification Outstanding
Troubled Debt Restructurings:		Number of Loans				Recorded Investment				Recorded Investment
2013
Real Estate:
Real estate mortgage – residential			3			$	309			$	309
Real estate mortgage – farmland and other commercial enterprises			1				598				598
Commercial:
Commercial and industrial			1				13				13
Consumer:
Secured			3				16				16
Total			8			$	936			$	936
2012
Real Estate:
Real estate mortgage – residential			1			$	72			$	72
Real estate mortgage – farmland and other commercial enterprises			1				8,796				8,717
Consumer:
Unsecured			1				38				38
Total			3			$	8,906			$	8,827

The troubled debt restructurings identified above increased the allowance for loan losses by $37 thousand and $442 thousand for 2013 and 2012, respectively. There were no charge-offs related to loans restructured in 2013 or 2012.

The Company had one restructured credit in 2013 for which there was a payment default within twelve months following the modification. This credit is secured by residential real estate with an outstanding balance of $15 thousand at year-end 2013. No charge-offs have been recorded for this credit.

The Company had one restructured credit in 2012 for which there was a payment default within twelve months following the modification. This credit had an outstanding balance of $72 thousand at December 31, 2012 and is secured by residential real estate. This credit had a specific reserve allocation of $5 thousand at year-end 2012. There were no charge-offs recorded during 2012 related to this credit.

The tabletables below presentspresent an age analysis of past due loans 30 days or more by class of loans as of December 31, 2010.the dates indicated. Past due loans that are also classified as nonaccrual are included in their respective past due category.category.

December 31, 2010 (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		$	394			$	23,418			$	23,812			$	130,396			$	154,208
Real estate mortgage – residential			5,187				7,167				12,354				456,919				469,273
Real estate mortgage – farmland and other commercial enterprises			1,595				6,266				7,861				409,043				416,904
Commercial:
Commercial and industrial			194				538				732				56,297				57,029
States and political subdivisions															26,302				26,302
Lease financing, net			276				59				335				14,629				14,964
Other			114				3				117				25,511				25,628
Consumer:
Secured			145				102				247				22,360				22,607
Unsecured			69				12				81				5,844				5,925
Total		$	7,974			$	37,565			$	45,539			$	1,147,301			$	1,192,840

The table above excludes immaterial amounts attributed to net deferred loan costs and accrued interest receivable.

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

December 31, 2012 (In thousands)		30-89 Days Past Due				90 Days or More Past Due				Total				Current				Total Loans
Real Estate:
Real estate mortgage– construction and land development		$	908			$	1,361			$	2,269			$	100,185			$	102,454
Real estate mortgage – residential			2,303				2,500				4,803				363,959				368,762
Real estate mortgage – farmland and other commercial enterprises			1,990				10,724				12,714				412,763				425,477
Commercial:
Commercial and industrial			108				53				161				46,651				46,812
States and political subdivisions			-				-				-				21,472				21,472
Lease financing, net			1				53				54				2,561				2,615
Other			38				399				437				18,719				19,156
Consumer:
Secured			69				-				69				11,663				11,732
Unsecured			137				-				137				6,378				6,515
Total		$	5,554			$	15,090			$	20,644			$	984,351			$	1,004,995

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

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non-homogeneous loans, such as commercial real estate and certain residential real estate loans. Loan rating grades, as described further below, are assigned based on a continuous process. The amount and adequacy of the allowance for loan loss is determined on a quarterly basis. The Company uses the following definitions for its risk ratings:

Special Mention.Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the borrowers 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.  Asloans, which are considered to have a low risk of December 31, 2010, and basedloss. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:follows for the dates indicated. Each of the following tables excludes immaterial amounts attributed to accrued interest receivable.

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

		Real Estate												Commercial
December 31, 2012 (In thousands)		Real Estate Mortgage -Construction and Land Development				Real Estate Mortgage-Residential				Real Estate Mortgage-Farmland and Other Commercial Enterprises				Commercial and Industrial				States and Political Subdivisions				Lease Financing				Other
Credit risk profile by internally assigned rating grades:
Pass		$	68,721			$	328,214			$	348,918			$	41,527			$	21,472			$	2,615			$	18,592
Special Mention			7,562				18,485				35,027				4,201				-				-				559
Substandard			26,171				21,984				41,532				1,008				-				-				5
Doubtful			-				79				-				76				-				-				-
Total		$	102,454			$	368,762			$	425,477			$	46,812			$	21,472			$	2,615			$	19,156

		Real Estate												Commercial
December 31, 2010 (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		$	79,535			$	407,317			$	341,684			$	52,961			$	26,302			$	14,905			$	24,360
Special Mention			14,180				18,858				31,747				2,531												1,199
Substandard			57,477				41,704				37,938				1,255								59				69
Doubtful			3,016				1,394				5,535				282
Total		$	154,208			$	469,273			$	416,904			$	57,029			$	26,302			$	14,964			$	25,628

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 December 31, 2010:

		Consumer
December 31, 2010 (In thousands)		Secured				Unsecured
Credit risk profile based on payment activity:
Performing		$	22,498			$	5,915
Nonperforming			109				10
Total		$	22,607			$	5,925

Each of the two preceding tables exclude immaterial amounts attributed to accrued interest receivable.

5.	Other Real Estate Owned

2013 and 2012.

		December 31, 2013								December 31, 2012
		Consumer								Consumer
(In thousands)		Secured				Unsecured				Secured				Unsecured
Credit risk profile based on payment activity:
Performing		$	8,576			$	6,461			$	11,723			$	6,382
Nonperforming			3				52				9				133
Total		$	8,579			$	6,513			$	11,732			$	6,515

4. Other Real Estate Owned

OREO was as follows as of the date indicated:

December 31, 2010 (In thousands)		2010				2009
Construction and land development		$	18,016			$	17,909
Residential real estate			3,203				3,041
Farmland and other commercial enterprises			9,326				10,282
Total		$	30,545			$	31,232

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OREO activity for 2010 and 2009 was as follows:

(In thousands)		2010				2009
Beginning balance		$	31,232			$	14,446
Transfers from loans			17,771				20,332
Transfers from premises							1,506
Proceeds from sales			(13,564	)			(3,978	)
Loss on sales			(799	)			(366	)
Write downs and other decreases, net			(4,096	)			(708	)
Ending balance		$	30,544			$	31,232

6.	Premises and Equipment

December 31, (In thousands)		2013				2012
Construction and land development		$	23,504			$	32,360
Residential real estate			2,695				4,605
Farmland and other commercial enterprises			11,627				15,597
Total		$	37,826			$	52,562

OREO activity for 2013 and 2012 was as follows: 

(In thousands)		2013				2012
Beginning balance		$	52,562			$	38,157
Transfers from loans			6,110				33,913
Transfers from premises			-				212
Proceeds from sales, net			(15,169	)			(15,636	)
Loss on sales			(182	)			(324	)
Write downs and other decreases, net			(5,495	)			(3,760	)
Ending balance		$	37,826			$	52,562

5. Premises and Equipment

Premises and equipment consist of the following.

December 31, (In thousands)		2010				2009
Land, buildings, and leasehold improvements		$	56,744			$	53,324
Furniture and equipment			19,935				20,406
Total premises and equipment			76,679				73,730
Less accumulated depreciation and amortization			(37,067	)			(34,609	)
Premises and equipment, net		$	39,612			$	39,121

December 31, (In thousands)		2013				2012
Land, buildings, and leasehold improvements		$	58,770			$	57,772
Furniture and equipment			18,561				17,501
Total premises and equipment			77,331				75,273
Less accumulated depreciation and amortization			41,058				39,090
Premises and equipment, net		$	36,273			$	36,183

Depreciation and amortization of premises and equipment was $3,777,000, $3,979,000,$3.4 million, $3.4 million, and $3,883,000 in 2010, 2009,$3.5 million for 2013, 2012, and 2008,2011, respectively.

7.	Deposit Liabilities

6. Deposit Liabilities

Major classifications of deposits are summarized as follows for the dates indicated:

December 31, (In thousands)		2013				2012
Noninterest Bearing		$	277,294			$	254,912
Interest Bearing
Demand			320,503				296,931
Savings			340,903				318,302
Time			471,515				540,665
Total interest bearing			1,132,921				1,155,898
Total Deposits		$	1,410,215			$	1,410,810

At December 31, 20102013, the scheduled maturities of time deposits were as follows.

(In thousands)		Amount
2011		$	425,985
2012			177,770
2013			65,891
2014			28,980
2015			8,900
Thereafter			6,326
Total		$	713,852

follows:

(In thousands)		Amount
2014		$	278,513
2015			87,786
2016			58,143
2017			34,419
2018			8,670
Thereafter			3,984
Total		$	471,515

Time deposits of $100,000$100 thousand or more at December 31, 20102013 and 20092012 were $241,468,000$156 million and $326,832,000,$181 million, respectively. Interest expense on time deposits of $100,000$100 thousand or more was $7,111,000, $11,159,000,$1.8 million, $2.9 million, and $11,575,000$4.5 million for 2010, 2009,2013, 2012, and 2008,2011, respectively.

Effective in the third quarter

During 2010, the Federal Deposit Insurance Corporation (“FDIC”) permanently raised its standard maximum insurance amount per depositor from $100,000$100 thousand to $250,000.$250 thousand. At December 31, 2010,2013 and 2012, the Company had $44,831,000$30.4 million and $32.2 million, respectively, of time deposits outstanding in amounts of $250,000$250 thousand or more.

Deposits from directors, executive officers, and principal shareholders of the Parent Company and its subsidiaries (including deposits from affiliated companies of which they are principal owners) and deposits from members of the immediate family of such persons were $19,217,000$19.0 million and $30,025,000$19.1 million at December 31, 20102013 and 2009,2012, respectively. Such deposits were accepted in the normal course of business on substantially the same terms as those prevailing at the time for comparable transactions with other customers.

8.	Federal Funds Purchased and Other Short-term Borrowings

7. Federal Funds Purchased and Other Short-term Borrowings

Federal funds purchased and other short-term borrowings represent borrowings with an original maturity of less than one year. Substantially allAll of the totalCompany’s short-term borrowings are made up of federal funds purchased and securities sold under agreements to repurchase,, which representsrepresent borrowings that generally mature one business day following the date of the transaction. Information on federal funds purchased and other short-term borrowings is as follows:

December 31, (Dollars in thousands)		2013				2012
Federal funds purchased and securities sold under agreement to repurchase		$	29,123			$	24,083
Total short-term		$	29,123			$	24,083
Average balance during the year		$	29,440			$	26,134
Maximum month-end balance during the year			32,885				31,632
Average interest rate during the year			.25	%			.37	%
Average interest rate at year-end			.25				.29

8. Securities Sold Under Agreements to Repurchase and Other Long-term Borrowings

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December 31, (Dollars in thousands)		2010				2009
Federal funds purchased and securities sold under agreement to repurchase		$	46,989			$	46,941
Other			420				274
Total short-term		$	47,409			$	47,215
Average balance during the year		$	46,483			$	62,946
Maximum month-end balance during the year			76,848				105,844
Average interest rate during the year			.70	%			.72	%
Average interest rate at year-end			.56				.79

9.	Securities Sold Under Agreements to Repurchase and Other Long-term Borrowings

Long-term securities sold under agreements to repurchase and other borrowings represent borrowings with an original maturity of one year or more. The table below displays a summary of the ending balance and average rate for borrowed funds on the dates indicated.

						Average								Average
December 31,  (Dollars in thousands)		2010				Rate				2009				Rate
Federal Home Loan Bank advances		$	53,155				4.01	%		$	67,630				3.98	%
Subordinated notes payable			48,970				4.11				48,970				4.11
Securities sold under agreements to repurchase			150,000				3.96				200,000				3.95
Other			84				2.32				332				2.32
Total long-term		$	252,209				4.00	%		$	316,932				3.98	%

December 31, (Dollars in thousands)		2013				Average Rate				2012				Average Rate
Federal Home Loan Bank advances		$	27,126				4.14	%		$	29,297				4.04	%
Subordinated notes payable			48,970				1.71				48,970				1.77
Securities sold under agreements to repurchase			100,754				3.92				100,000				3.95
Total long-term borrowings		$	176,850				3.34	%		$	178,267				3.36	%

Long-term Federal Home Loan Bank (“FHLB”)FHLB advances are made pursuant to several different credit programs, which have their own interest rates and range of maturities. InterestAt December 31, 2013, interest rates on all FHLB advances totaling $53,155,000 are fixed and range between 2.60%2.99% and 6.90%, averaging 4.01%4.14%, over a remaining maturity period of up to 10 years as ofseven years. At December 31, 2010.2012, interest rates on FHLB advances ranged between 2.60% and 6.90%, averaging 4.04%, over a remaining maturity period of up to eight years. Long-term FHLB borrowings totaling $35,000,000of $26.0 million and $28.0 million at year-end 2010 are2013 and 2012, respectively, were putable quarterly. Long-termNone of the long-term FHLB advances of $10,000,000 are convertible to a floating interest rate. These advances may convert, at FHLB’s option, to a floating interest rate indexed to the three-month LIBOR only if LIBOR equals or exceeds 7%. At year-end 2010, three-month LIBOR was at .30%.

For FHLB advances, the subsidiary banks pledge FHLB stock and fully disbursed, otherwise unencumbered, 1-4 family first mortgage loans as collateral for these advances as required by the FHLB. Based on this collateral and the Company’s holdings of FHLB stock, the Company is eligible to borrow up to an additional $46,784,000$101 million from the FHLB at year-end 2010.2013.

During 2005, the Company completed two private offerings of trust preferred securities through two separate Delaware statutory trusts sponsored by the Company. Farmers Capital Bank Trust I (“Trust I”) sold $10,000,000$10.0 million of preferred securities and Farmers Capital Bank Trust II (“Trust II”) sold $15,000,000$15.0 million of preferred securities. The proceeds from the offerings were used to fund the cash portion of the acquisition of Citizens Bancorp, Inc., the former parent company of Citizens Northern.

The trust preferred securities mature September 30, 2035 and can now be redeemed at any time by the Trust at par.

Farmers Capital Bank Trust III (“Trust III”), a Delaware statutory trust sponsored by the Company, was formed during 2007 for the purpose of financing the cost of acquiring Company shares under a share repurchase program. Trust III sold $22,500,000$22.5 million of trust preferred securities to the public with an initial fixed rate of 6.60% (fixed through NovemberOctober 2012, thereafter

at a variable rate of interest, reset quarterly, equal to the 3-month LIBOR plus a predetermined spread of 132 basis points) trust preferred securities to the public.. The trust preferred securities which pay interest quarterly, mature on November 1, 2037 mayand can now be redeemed at any time by the Trust at par any time on or after November 1, 2012.par. Trust I, Trust II, and Trust III are hereafter collectively referred to as the “Trusts”.

“Trusts.”

The Trusts used the proceeds from the sale of preferred securities, plus capital contributed to establish the trusts, to purchase the Company’s subordinated notes in amounts and bearing terms that parallel the amounts and terms of the respective preferred securities. The subordinated notes to Trust I and Trust II mature in 2035 and in 2037 for Trust III, and bear a floating interest rate (current three-month LIBOR plus 150 basis points in the case of the notes held by Trust I, current three-month LIBOR plus 165 basis points in the case of the notes held by Trust II, and current three-month LIBOR plus 132 basis points in the case of the notes held by Trust III). Interest on the notes is payable quarterly. Interest payments to the Trusts and distributions to preferred shareholders by the Trusts may be deferred for 20 consecutive quarterly periods.

The subordinated notes are redeemable in whole or in part, without penalty, at the Company’s option on or after September 30, 2010 and mature on September 30, 2035 with respect to Trust I and Trust II.  For Trust III, the subordinated notes are redeemable in whole or in part, without penalty, at the Company’s option on or after November 1, 2012.option. The notes are junior in right of payment of all present and future senior indebtedness. At December 31, 20102013 and 20092012 the balance of the subordinated notes payable to Trust I, Trust II, and Trust III was $10,310,000, $15,464,000,$10.3 million, $15.5 million, and $23,196,000,$23.2 million, respectively. The interest rates in effect as of the last determination date in 2010for 2013 were 1.79%1.75%,

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1.94% 1.90%, and 6.60%1.56% for Trust I, Trust II, and Trust III, respectively. For 20092012 these rates were 1.78%1.81%, 1.93%1.96%, and 6.60%1.63% for Trust I Trust II, and Trust III, respectively.

The Company is not considered the primary beneficiary of the Trusts; therefore the Trusts are not consolidated into its financial statements. Accordingly, the Company does not report the securities issued by the Trusts as liabilities, but instead reports as liabilities the subordinated notes issued by the Company and held by the Trusts. The Company, which owns all of the common securities of the Trusts, accounts for its investment in each of the Trusts as other assets. The Company records interest expense on the corresponding notes issued to the Trusts on its statementstatements of income.

The subordinated notes, net of the Company’s investment in the Trusts, may be included in Tier 1 capital (with certain limitations applicable) under current regulatory capital guidelines and interpretations. The net amount of subordinated notes in excess of the limit may be included in Tier 2 capital, subject to restrictions.

At year-end 2013 and 2012, the Company’s Tier 1 capital included $47.5 million, which represents the full amount of the subordinated notes net of the Company’s investment in the Trusts.

During 2007, the Company entered into a balance sheet leverage transaction whereby it borrowed $200,000,000$200 million in multiple fixed rate term repurchase agreements with an initial weighted average cost of 3.95% and invested the proceeds in Government National Mortgage Association (“GNMA”) bonds, which were pledged as collateral. The Company is required to secure the borrowed funds by GNMA bonds valued at 106% of the outstanding principal balance. The borrowings have an outstanding balance of $150,000,000$100 million at December 31, 2010 with remaining maturities as follows: $50,000,000 due November 2012 and the remaining $100,000,000 due November 2017. At December 31, 2010 $100,000,000 of the borrowings2013, are putable on a quarterly basis, and the remaining $50,000,000 are putable quarterly beginningmature in the fourth quarter of 2012.November 2017. The repurchase agreements are held by each of the Company’s three subsidiary banks that are participating in the transaction and are guaranteed by the Parent Company.

The Company has $754 thousand of other long-term repurchase agreements outstanding at December 31, 2013 made in the ordinary course of business with commercial customers. The average interest rate on these fixed rate borrowings is 1.17%.

Maturities of long-term borrowings at December 31, 20102013 are as follows:

(In thousands)		Amount
2014		$	8,012
2015			251
2016			503
2017			115,000
2018			3,000
Thereafter			50,084
Total		$	176,850

(In thousands)		Amount
2011		$	12,084
2012			61,512
2013			2,000
2014			8,062
2015
Thereafter			168,551
Total		$	252,209

10.	Income Taxes

9. Income Taxes

The components of income tax expense are as follows:

December 31, (In thousands)		2010				2009				2008
Currently payable		$	5,429			$	752			$	832
Deferred			(3,392	)			(9,905	)			(2,046	)
Total applicable to operations			2,037				(9,153	)			(1,214	)
Deferred tax charged (credited) to components of shareholders’ equity:
Unfunded status of postretirement benefits			643				(234	)			617
Net unrealized securities gains			(2,239	)			841				2,528
Total income taxes		$	441			$	(8,546	)		$	1,931

December 31, (In thousands)		2013				2012				2011
Currently payable		$	4,908			$	3,953			$	1,580
Deferred			(473	)			(1,043	)			(2,227	)
Total applicable to operations			4,435				2,910				(647	)
Deferred tax charged (credited) to components of shareholders’ equity:
Unfunded status of postretirement benefits			1,589				(92	)			(500	)
Net unrealized securities (losses) gains			(7,019	)			214				3,593
Total income taxes		$	(995	)		$	3,032			$	2,446

An analysis of the difference between the effective income tax rates and the statutory federal income tax rate follows.

December 31,		2010				2009				2008
Federal statutory rate			35.0	%			35.0	%			35.0	%
Changes from statutory rates resulting from:
Tax-exempt interest			(15.3	)			3.0				(48.1	)
Nondeductible interest to carry tax-exempt obligations			1.3				(.3	)			5.7
Goodwill impairment							(22.7	)
Tax credits			(2.5	)			.8				(14.6	)
Premium income not subject to tax			(3.9	)			.6				(9.2	)
Company-owned life insurance			8.2				.8				(13.5	)
Dividend exclusion											(4.8	)
Other, net			(.1	)			(.2	)			11.3
Effective tax rate on pretax income			22.7	%			17.0	%			(38.2	)%

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December 31,		2013				2012				2011
Federal statutory rate			35.0	%			35.0	%			35.0	%
Changes from statutory rates resulting from:
Tax-exempt interest			(6.3	)			(7.6	)			(51.5	)
Nondeductible interest to carry tax-exempt obligations			.3				.4				3.6
Nondeductible legal expense			-				.5				-
Tax credits			-				(1.8	)			(13.0	)
Premium income not subject to tax			(1.3	)			(2.5	)			(5.5	)
Company-owned life insurance			(1.8	)			(3.5	)			(15.2	)
Uncertain tax position			(.5	)			(.9	)			14.3
Other, net			(.6	)			(.3	)			1.4
Effective tax rate on pretax income			24.8	%			19.3	%			(30.9	)%

The tax effects of the significant temporary differences that comprise deferred tax assets and liabilities at December 31, 20102013 and 2009 follows.

2012 are as follows:

December 31, (In thousands)		2013				2012
Assets
Allowance for loan losses		$	7,217			$	8,571
Deferred directors’ fees			285				281
Postretirement benefit obligations			4,459				5,633
Other real estate owned			3,568				2,398
Partnership investments			1,508			��	1,444
Self-funded insurance			213				164
Paid time off			701				705
Depreciation			798				676
Intangibles			3,179				3,526
Unrealized losses on available for sale investment securities, net			1,951				-
Other			232				44
Total deferred tax assets			24,111				23,442
Liabilities
Unrealized gains on available for sale investment securities, net			-				5,066
Prepaid expenses			596				505
Federal Home Loan Bank stock dividends			1,097				1,087
Deferred loan fees			772				811
Lease financing operations			136				366
Total deferred tax liabilities			2,601				7,835
Net deferred tax asset		$	21,510			$	15,607

December 31, (In thousands)		2010				2009
Assets
Allowance for loan losses		$	10,089			$	8,192
Deferred directors’ fees			280				269
Postretirement benefit obligations			4,159				4,419
Other real estate owned			1,150				307
Partnership investments			470				337
Self-funded insurance			172				167
Paid time off			651				712
Alternative minimum tax credits							814
Low income housing credits							38
Intangibles			3,919				4,002
Other			60				63
Total deferred tax assets			20,950				19,320
Liabilities
Depreciation							360
Unrealized gains on available for sale investment securities, net			1,261				3,500
Prepaid expenses			647				616
Discount on investment securities			1,078				1,098
Deferred loan fees			1,041				1,187
Lease financing operations			1,372				1,996
Total deferred tax liabilities			5,399				8,757
Net deferred tax asset		$	15,551			$	10,563

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences at December 31, 2010.

The Company had no unrecognized tax benefits as of December 31, 2010, 2009, and 2008 and did not recognize any increase in unrecognized benefits during 2010 relative to any tax positions taken in 2010. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company’s policy to record such accruals in its income tax expense accounts; no such accruals existed as of December 31, 2010, 2009, or 2008. Except as discussed in Note 24 “Subsequent Event”, the Company does not expect any significant changes in its unrecognized tax benefits over the next twelve months. The Company files U.S. federal and various state income tax returns. The Company is no longer subject to income tax examinations by taxing authorities for the years before 2007.

11.	Retirement Plans

The Company maintains a salary savings plan that covers substantially all of its employees. Beginning in 2010, the Company matched voluntary tax deferred employee contributions at 50% of eligible deferrals up to a maximum of 6% of the participants’ compensation. During 2009, the Company matched all eligible voluntary tax deferred employee contributions up to 6% of the participant’s compensation. The Company may, at the discretion of its Board, contribute an additional amount based upon a percentage of covered employees’ salaries. The Company did not make a discretionary contribution during 2010, 2009, or 2008. Discretionary contributions are allocated among participants in the ratio that each participant’s compensation bears to all participants’ compensation. Eligible employees are presented with various investment alternatives related to the salary savings plan. Those alternatives include various stock and bond mutual funds that vary from traditional growth funds to more stable income funds as well as an option to invest in bank certificates of deposits. Company shares are not an available investment alternative in the salary savings plan. The total retirement plan expense for 2010, 2009, and 2008 was $514,000, $1,100,000, and $1,107,000, respectively.

In connection with the acquisition of Citizens Northern, the Company acquired nonqualified supplemental retirement plans for certain key employees. Benefits provided under these plans are unfunded, and payments to plan participants are made by the Company.

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The following schedules set forth a reconciliation of the changes in the supplemental retirement plans’ benefit obligation and funded status for the years ended December 31, 2010 and 2009.

(In thousands)		2010				2009
Change in Benefit Obligation
Obligation at beginning of year		$	565			$	498
Service cost			35				34
Interest cost			33				30
Actuarial loss			29				8
Benefit payments			(16	)			(5	)
Obligation at end of year		$	646			$	565

The following table provides disclosure of the net periodic benefit cost as of December 31 for the years indicated.

(In thousands)		2010				2009
Service cost		$	35			$	34
Interest cost			33				30
Recognized net actuarial loss			4				6
Net periodic benefit cost		$	72			$	70
Major assumptions:
Discount rate used to determine net period benefit cost			6.00	%			6.00	%
Discount rate used to determine benefit obligation at year end			5.55				6.00

The following table presents estimated future benefit payments in the period indicated.

(In thousands)		Supplemental Retirement Plan
2011		$	27
2012			27
2013			27
2014			27
2015			27
2016-2020			165
Total		$	300

Amounts recognized in accumulated other comprehensive income as of December 31, 2010 and 2009 are as follows:

(In thousands)		2010				2009
Unrecognized net actuarial loss		$	125			$	100
Total		$	125			$	100

The estimated cost that will be amortized from accumulated other comprehensive income into net periodic cost over the next fiscal year is as follows:

(In thousands)		Supplemental Retirement Plan
Unrecognized net actuarial loss		$	2
Total		$	2

12.	Common Stock Options

During 1997 the Company’s Board of Directors approved a nonqualified stock option plan (the “Plan”), subsequently approved by the Company’s shareholders, that has provided for the granting of stock options to key employees and officers of the Company.  All stock options are awarded at a price equal to the fair market value of the Company’s common stock at the date options are granted and expire ten years from the grant date. Total options granted were 450,000, 54,000, and 40,049 in the years 1997, 2000, and 2004, respectively.

The Plan provides for the granting of options to purchase up to 450,000 shares of the Company’s common stock at a price equal to the fair market value of the Company’s common stock on the date the option is granted. The term of the options expires after ten years from the date

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on which the options are granted. Options granted under the Plan vest ratably over various time periods ranging from three to seven years. All options granted must be held for a minimum of one year before they can be exercised. Forfeited options are available for the granting of additional stock options under the Plan. Options forfeited from the initial grant in 1997 were used to grant options during 2000 and 2004. All outstanding options granted under the Plan are vested. At December 31, 2010 there were 52,172 options available for future grants under the Plan.

A summary of the activity in the Company’s Plan for 2010 is presented below.

		2010
						Weighted
						Average
		Shares				Price
Outstanding at January 1			57,621			$	32.56
Expired			(25,572	)			29.75
Forfeited			(8,000	)			34.80
Outstanding at December 31			24,049			$	34.80
Options exercisable at year-end			24,049			$	34.80

Options outstanding at year-end 2010 were as follows:

		Outstanding												Exercisable
						Weighted Average
						Remaining Contractual				Weighted Average								Weighted Average
Exercise Price		Number				Life (Years)				Exercise Price				Number				Exercise Price
$34.80			24,049				3.83			$	34.80				24,049			$	34.80

The aggregate intrinsic value for options outstanding and options exercisable at December 31, 2010 was zero since the exercise price of options outstanding was in excess of the market price of the Company’s stock.

The following table presents further information regarding the Company’s stock option Plan during each of the years indicated.

(In thousands)		2010				2009				2008
Tax benefit realized from options exercised		$	0			$	0			$	0
Total intrinsic value of options exercised			0				0				1
Cash received from options exercised			0				0				30

There were no modifications or cash paid to settle stock option awards during 2010, 2009, or 2008. There were no options granted in 2010, 2009, or 2008.

13.	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.

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The following schedules set forth a reconciliation of the changes in the plans benefit obligation and funded status for the years ended December 31, 2010 and 2009.

(In thousands)		2010				2009
Change in Benefit Obligation
Obligation at beginning of year		$	12,524			$	10,550
Service cost			396				454
Interest cost			607				695
Actuarial (gain) loss			(1,523	)			1,104
Participant contributions			76				71
Benefit payments			(320	)			(350	)
Obligation at end of year		$	11,760			$	12,524

The following table provides disclosure of the net periodic benefit cost as of December 31 for the years indicated.

(In thousands)		2010				2009
Service cost		$	397			$	454
Interest cost			607				695
Amortization of transition obligation			101				101
Recognized prior service cost			257				257
Recognized net actuarial loss							81
Net periodic benefit cost		$	1,362			$	1,588
Major assumptions:
Discount rate used to determine net periodic benefit cost			6.00	%			6.00	%
Discount rate used to determine benefit obligation as of year end			5.55				6.00
Retiree participation rate (Plan 1)			100.00				100.00
Retiree participation rate (Plan 2)			72.00				72.00

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. For measurement purposes, the rate of increase in pre-Medicare medical care claims costs was 9%, 8%, and 7% in 2011, 2012, and 2013, respectively, then grading down by .5% annually to 5% for 2017 and thereafter. For dental claims cost, it was 5% for 2011 and thereafter. A 1% change in the assumed health care cost trend rates would have the following incremental effects:

(In thousands)		1% Increase				1% Decrease
Effect on total of service and interest cost components of net periodic postretirement health care benefit cost		$	238			$	(183	)
Effect on accumulated postretirement benefit obligation			2,225				(1,766	)

The following table presents estimated future benefit payments in the period indicated.

(In thousands)		Postretirement Medical Benefits
2011		$	371
2012			375
2013			406
2014			447
2015			457
2016-2020			2,815
Total		$	4,871

Amounts recognized in accumulated other comprehensive income as of December 31, 2010 and 2009 are as follows:

(In thousands)		2010				2009
Unrecognized net actuarial loss		$	719			$	2,242
Unrecognized transition obligation			203				305
Unrecognized prior service cost			1,153				1,410
Total		$	2,075			$	3,957

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The estimated costs that will be amortized from accumulated other comprehensive income into net periodic cost over the next fiscal year are as follows.

(In thousands)		Postretirement Medical Benefits
Transition obligation		$	101
Unrecognized prior service cost			257
Total		$	358

14.

Leases

The Company leases certain branch sites and banking equipment under various operating leases. Branch site leases have renewal options of varying lengths and terms. In addition, the Company leases certain data processing equipment that meets the capitalization criteria of ASC Topic 840, “Leases”, and has been recorded as an asset in premises and equipment and a liability in other long-term debt on the balance sheet. The following table presents estimated future minimum rental commitments under these leases for the period indicated.

(In thousands)		Operating Leases				Capital Lease
2011		$	451			$	84
2012			413
2013			390
2014			382
2015			343
Thereafter			1,925
Total		$	3,904				84
Less: amount representing interest							1
Long-term obligation under capital lease						$	83

Rent expense was $568,000, $772,000, and $748,000 for 2010, 2009, and 2008, respectively.

15.	Financial Instruments With Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. The financial instruments include commitments to extend credit and standby letters of credit.

These financial instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Total commitments to extend credit were $126,764,000 and $139,538,000 at December 31, 2010 and 2009, respectively. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit, if deemed necessary by the Company, is based on management’s credit evaluation of the counter-party. Collateral held varies, but may include accounts receivable, marketable securities, inventory, premises and equipment, residential real estate, and income producing commercial properties.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that received when extending credit to customers. The fair value of these instruments is not considered material for disclosure. The Company had $18,068,000 and $18,121,000 in irrevocable letters of credit outstanding at December 31, 2010 and 2009, respectively.

The contractual amount of financial instruments with off-balance sheet risk was as follows at year-end.

December 31,		2010								2009
(In thousands)		Fixed Rate				Variable Rate				Fixed Rate				Variable Rate
Commitments to extend credit, including unused lines of credit		$	45,695			$	81,069			$	35,646			$	103,892
Standby letters of credit			3,893				14,175				3,812				14,309
Total		$	49,588			$	95,244			$	39,458			$	118,201

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16.	Concentration of Credit Risk

The Company’s bank subsidiaries actively engage in lending, primarily in their home counties around central and northern Kentucky and adjacent areas. Collateral is received to support these loans as deemed necessary. The more significant categories of collateral include cash on deposit with the Company’s banks, marketable securities, income producing properties, commercial real estate, home mortgages, and consumer durables. Loans outstanding, commitments to make loans, and letters of credit range across a large number of industries and individuals. The obligations are significantly diverse and reflect no material concentration in one or more areas, other than most of the Company’s loans are in Kentucky and secured by real estate and thus significantly affected by changes in the Kentucky economy.

17.	Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. As of December 31, 2010, 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.

18.	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.

Quantitative measures established by regulation to ensure capital adequacy require the Company and its subsidiary banks to maintain minimum amounts and ratios (set forth in the tables below) of Tier 1 and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). As of December 31, 2010, the most recent notification from the FDIC categorized the banks as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the banks must maintain minimum Tier 1 Risk-based, Total Risk-based, and Tier 1 Leverage ratios as set forth in the tables. There are no conditions or events since that notification that management believes have changed the institutions’ category. As noted below under the caption “Summary of Regulatory Agreements”, three of the Company’s subsidiary banks are required to maintain certain capital ratios that exceed the regulatory established well-capitalized status.

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The regulatory capital amounts and ratios of the consolidated Company and its subsidiary banks are presented in the following tables for the dates indicated. The capital amounts and ratios for Farmers Bank as of December 31, 2009 have been revised to reflect its merger with Lawrenceburg Bank that closed during the second quarter of 2010. Lawrenceburg Bank was a wholly-owned subsidiary of the Parent Company until it merged with Farmers Bank.

																		To Be Well-Capitalized
										For Capital								Under Prompt Corrective
		Actual								Adequacy Purposes								Action Provisions
December 31, 2010 (Dollars in thousands)		Amount				Ratio				Amount				Ratio				Amount				Ratio
Tier 1 Risk-based Capital1
Consolidated		$	187,237				15.35	%		$	48,794				4.00	%			N/A				N/A
Farmers Bank & Capital Trust Company			66,013				15.59				16,935				4.00			$	25,402				6.00	%
First Citizens Bank			25,969				12.76				8,143				4.00				12,214				6.00
United Bank & Trust Company			51,347				12.91				15,908				4.00				23,863				6.00
Citizens Bank of Northern Kentucky, Inc.			20,552				11.42				7,196				4.00				10,795				6.00
Total Risk-based Capital 1
Consolidated		$	202,652				16.61	%		$	97,588				8.00	%			N/A				N/A
Farmers Bank & Capital Trust Company			71,386				16.86				33,870				8.00			$	42,337				10.00	%
First Citizens Bank			27,481				13.50				16,286				8.00				20,357				10.00
United Bank & Trust Company			56,408				14.18				31,817				8.00				39,771				10.00
Citizens Bank of Northern Kentucky, Inc.			22,812				12.68				14,393				8.00				17,991				10.00
Tier 1 Leverage Capital 2
Consolidated		$	187,237				9.39	%		$	79,761				4.00	%			N/A				N/A
Farmers Bank & Capital Trust Company			66,013				8.55				30,868				4.00			$	38,586				5.00	%
First Citizens Bank			25,969				8.46				12,285				4.00				15,356				5.00
United Bank & Trust Company			51,347				8.24				24,935				4.00				31,168				5.00
Citizens Bank of Northern Kentucky, Inc.			20,552				8.04				10,227				4.00				12,784				5.00

1

Tier 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%).

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

																		To Be Well-Capitalized
										For Capital								Under Prompt Corrective
		Actual								Adequacy Purposes								Action Provisions
December 31, 2009 (Dollars in thousands)		Amount				Ratio				Amount				Ratio				Amount				Ratio
Tier 1 Risk-based Capital1
Consolidated		$	185,874				13.95	%		$	53,310				4.00	%			N/A				N/A
Farmers Bank & Capital Trust Co.			61,767				13.22				18,691				4.00			$	28,037				6.00	%
First Citizens Bank			24,295				12.02				8,082				4.00				12,124				6.00
United Bank & Trust Co.			56,376				12.49				18,051				4.00				27,077				6.00
Citizens Bank of Northern Kentucky			18,443				9.70				7,606				4.00				11,049				6.00
Total Risk-based Capital 1
Consolidated		$	202,616				15.20	%		$	106,620				8.00	%			N/A				N/A
Farmers Bank & Capital Trust Co.			67,664				14.48				37,382				8.00			$	46,728				10.00	%
First Citizens Bank			25,787				12.76				16,165				8.00				20,206				10.00
United Bank & Trust Co.			62,051				13.75				36,103				8.00				45,128				10.00
Citizens Bank of Northern Kentucky			20,829				10.95				15,213				8.00				19,016				10.00
Tier 1 Leverage Capital 2
Consolidated		$	185,874				8.15	%		$	91,186				4.00	%			N/A				N/A
Farmers Bank & Capital Trust Co.			61,767				7.05				35,049				4.00			$	43,811				5.00	%
First Citizens Bank			24,295				7.96				12,214				4.00				15,268				5.00
United Bank & Trust Co.			56,376				7.35				30,673				4.00				38,342				5.00
Citizens Bank of Northern Kentucky			18,443				6.23				11,839				4.00				14,799				5.00

1

Tier 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%).

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

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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. Generally, capital distributions are limited to undistributed net income for the current and prior two years, subject to the capital requirements as summarized above. At December 31, 2010, three of the Company’s subsidiary banks are required to obtain regulatory approval before declaring or paying a dividend to the Parent Company as a result of agreements that were entered into with their primary regulator. The payment of dividends by the Parent Company to its shareholders is also subject to approval as a result of regulatory agreement. The regulatory agreements, which are summarized below, also require three of the Company’s subsidiary banks to maintain capital ratios that exceed the regulatory established well-capitalized status.

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 Result of Operations” part of this Form 10-K.

Parent Company

In the summer of 2009 the Federal Reserve Bank of St. Louis (“FRB St. Louis”) conducted an examination of the Parent Company.  Primarily due to the regulatory actions and capital requirements at three of the Company’s subsidiary banks (as discussed below), the 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.  Farmers Bank was the subject of a regularly scheduled examination by the KDFI which was conducted in mid-September 2009.  As a result of this examination, 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 December 31, 2010 Farmers Bank had a Tier 1 Leverage ratio of 8.55% and a Total Risk-based Capital ratio of 16.86%.

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.

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Lawrenceburg Bank. As a result of an examination conducted in March 2009, on May 15, 2009, Lawrenceburg Bank entered into a Memorandum with the FRB St. Louis and the KDFI. This Memorandum terminated effective upon Lawrenceburg Bank’s merger into Farmers Bank on May 8, 2010.

United Bank.  As a result of an examination conducted in late July and early August of 2009, the Federal Deposit Insurance Corporation (“FDIC”) proposed United Bank enter into a Cease and Desist Order (“Order”) primarily as a result of its level of nonperforming assets.  The Order requires United Bank to obtain written consent prior to declaring or paying the Parent Company a cash dividend and achieve and maintain a Tier 1 Leverage ratio of 8.0% by June 30, 2010 and a Total Risk-based Capital ratio of 12% immediately.   Subsequent to the Order, the Parent Company injected $10.5 million from its reserves into United Bank. In April 2010, the Parent Company injected an additional $1.9 million of capital into United Bank to bring its Tier 1 Leverage ratio up to the minimum 7.75% as of March 31, 2010 as required by the Order.  At June 30, 2010, United Bank had a Tier 1 Leverage ratio of 8.06% and a Total Risk-based Capital ratio of 14.12%. At December 31, 2010, United Bank had a Tier 1 Leverage ratio of 8.24% and a Total Risk-based Capital ratio of 14.18%.

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.

Citizens Northern.  Citizens Northern was the subject of a regularly scheduled examination by the KDFI which was completed in late May 2010.  As a result of this examination, the KDFI and the FDIC on September 8, 2010 entered into a Memorandum with Citizens Northern.  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 the minimum 8.0% as of year-end 2010 as required by the Order.  At December 31, 2010, Citizens Northern had a Tier 1 Leverage ratio of 8.04% and a Total Risk-based Capital ratio of 12.68%.

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.

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 have been met. The Company and its subsidiary banks are in compliance with the requirements identified in the regulatory agreements as of December 31, 2010, with the exception that the level of substandard loans at Farmers Bank exceed the target amount by $1.3 million. 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.

19.	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.

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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 about the assumptions that market participants would use in pricing the asset or liability.

Following is a description of the valuation method used for 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:

·

U.S. Treasury securities are priced using dealer quotes from active market makers and real-time trading systems.

·

Marketable equity securities are priced utilizing real-time data feeds from active market exchanges for identical securities.

·

Government-sponsored agency debt securities, obligations of states and political subdivisions, 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.

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 December 31, 2010 and 2009 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)
December 31, 2010
U.S. Treasury securities		$	1,044			$	1,044
Obligations of U.S. government-sponsored entities			41,613							$	41,613
Obligations of states and political subdivisions			74,799								74,799
Mortgage-backed securities – residential			319,930								319,930
Money market mutual funds			145				145
Corporate debt securities			6,606								6,606
Equity securities			45				45
Total		$	444,182			$	1,234			$	442,948			$	0
December 31, 2009
U.S. Treasury securities		$	3,002			$	3,002
Obligations of U.S. government-sponsored entities			90,752							$	90,752
Obligations of states and political subdivisions			108,958								108,958
Mortgage-backed securities – residential			325,519								325,519
Money market mutual funds			910				910
Corporate debt securities			18,732								18,732
Total		$	547,873			$	3,912			$	543,961			$	0

The Company is required to measure and disclose certain other assets and liabilities at fair value on a nonrecurring basis to comply with GAAP, The Company’s disclosure about assets and liabilities measured at fair value on a nonrecurring basis consists of impaired loans and OREO.

Impaired loans were $130 million and $108 million at year-end 2010 and 2009, respectively. Impaired loans at December 31, 2010 include $17.7 million that were written down to their estimated fair value of $16.7 million, resulting in an impairment charge of $943 thousand included in the provision for loan losses and the allowance for loan losses. At December 31, 2009, impaired loans included $60.7 million that were written down to their estimated fair value of $55.0 million, resulting in an impairment charge of $5.8 million included in the provision

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and allowance for loan losses. 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 are usually 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 is generally based on third party appraisals of the property that includes comparable sales data and is considered as Level 3 inputs. If the carrying amount of the OREO exceeds fair value less estimated costs to sell, an impairment loss is recorded through expense. At December 31, 2010 and December 31, 2009 OREO was $30.5 million and $31.2 million, respectively. OREO at year-end 2010 includes $19.7 million that was written down to its estimated fair value of $15.8 million, resulting in an impairment charge of $3.9 million included in earnings. For year-end 2009, OREO includes $12.0 million that was written down to its estimated fair value of $11.1 million, resulting in an impairment charge of $877 thousand included in earnings. In addition to impairment charges, net losses included in earnings from the sale of OREO were $799 thousand and $366 thousand for 2010 and 2009, respectively.

The following table represents the carrying amount of assets measured at fair value on a nonrecurring basis for the dates indicated and the related impairment charges recorded in earnings.

					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)				Impairment  Charge
December 31, 2010
Impaired Loans
Real estate-construction and land development		$	12,573					$	12,573			$	52
Real estate mortgage-residential			10,376						10,376				359
Real estate mortgage-farmland and other commercial enterprises			9,331						9,331				505
Commercial and industrial			133						133				27
Consumer-secured			38						38
Total-Impaired Loans		$	32,451					$	32,451			$	943
OREO
Real estate-construction and land development		$	12,381					$	12,381			$	3,144
Real estate mortgage-residential			630						630				294
Real estate mortgage-farmland and other commercial enterprises			2,810						2,810				428
Total-OREO		$	15,821					$	15,821			$	3,866
December 31, 2009
Impaired loans		$	54,961					$	54,961			$	5,762
OREO			11,140						11,140				877
Total		$	66,101					$	66,101			$	6,639

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.

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The following methods and assumptions were used to estimate the fair value of each class of financial instruments not presented elsewhere for which it is practicable to estimate that value.

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

The carrying amount is a reasonable estimate of fair value.

Investment Securities Held to Maturity

Fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

FHLB and Similar Stock

Due to restrictions placed on its transferability, it is not practicable to determine fair value.

Loans

The fair value of loans is estimated by discounting the 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.

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 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 that 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 based on rates currently available for debt with similar terms and remaining maturities.

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.

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The carrying amounts and estimated fair values of the Company’s financial instruments are as follows for the dates indicated.

December 31,		2010								2009
(In thousands)		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Assets
Cash and cash equivalents		$	182,056			$	182,056			$	218,336			$	218,336
Investment securities:
Available for sale			444,182				444,182				547,873				547,873
Held to maturity			930				844				975				922
FHLB and similar stock			9,515				N/A				9,148				N/A
Loans, net			1,164,056				1,157,606				1,248,578				1,246,151
Accrued interest receivable			7,258				7,258				9,381				9,381
Liabilities
Deposits			1,463,572				1,470,277				1,633,433				1,640,933
Federal funds purchased and other short-term borrowings			47,409				47,409				47,215				47,215
Securities sold under agreements to repurchase and other long-term borrowings			203,239				219,709				267,962				285,093
Subordinated notes payable to unconsolidated trusts			48,970				27,234				48,970				28,528
Accrued interest payable			2,811				2,811				4,685				4,685

20.  Parent Company Financial Statements

Condensed Balance Sheets

December 31, (In thousands)		2010				2009
Assets
Cash and cash equivalents		$	16,249			$	7,554
Investment in subsidiaries			183,158				180,367
Other assets			3,752				11,392
Total assets		$	203,159			$	199,313
Liabilities
Dividends payable		$	188			$	925
Subordinated notes payable to unconsolidated trusts			48,970				48,970
Other liabilities			4,105				2,191
Total liabilities			53,263				52,086
Shareholders’ Equity
Preferred stock			28,719				28,348
Common stock			926				922
Capital surplus			50,675				50,476
Retained earnings			68,678				63,617
Accumulated other comprehensive income			898				3,864
Total shareholders’ equity			149,896				147,227
Total liabilities and shareholders’ equity		$	203,159			$	199,313

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Condensed Statements of Operations

Years Ended December 31, (In thousands)		2010				2009				2008
Income
Dividends from subsidiaries		$	6,627			$	7,465			$	9,566
Interest			12				53				60
Other noninterest income			3,637				3,457				3,217
Total income			10,276				10,975				12,843
Expense
Interest expense-subordinated notes payable to unconsolidated trusts			2,035				2,178				2,865
Interest expense on other borrowed funds			2
Noninterest expense			3,689				4,097				3,986
Total expense			5,726				6,275				6,851
Income before income tax expense (benefit) and equity in undistributed income of subsidiaries			4,550				4,700				5,992
Income tax expense (benefit)			411				(949	)			(1,189	)
Income before equity in undistributed income of subsidiaries			4,139				5,649				7,181
Equity in undistributed income (loss) of subsidiaries			2,793				(50,391	)			(2,786	)
Net income (loss)		$	6,932			$	(44,742	)		$	4,395

Condensed Statements of Cash Flows 

Years Ended December 31, (In thousands)		2010				2009				2008
Cash Flows From Operating Activities
Net income (loss)		$	6,932			$	(44,742	)		$	4,395
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Equity in undistributed (income) loss of subsidiaries			(2,793	)			50,391				2,786
Noncash stock option expense and employee stock purchase plan expense			2				5				5
Change in other assets and liabilities, net			1,917				(1,043	)			(891	)
Deferred income tax (benefit) expense			(850	)			253				(67	)
Net cash provided by operating activities			5,208				4,864				6,228
Cash Flows From Investing Activities
Proceeds from sale of available for sale investment securities											1,000
Purchase of available for sale investment securities											(1,000	)
Return of equity from nonbank subsidiary			1,150
Investment in nonbank subsidiaries			(800	)			(100	)			(4,051	)
Investment in bank subsidiaries			(3,350	)			(22,500	)			(2,362	)
Proceeds from liquidation of company-owned life insurance			8,567
Net cash provided by (used in) investing activities			5,567				(22,600	)			(6,413	)
Cash Flows From Financing Activities
Proceeds from issuance of preferred stock, net of issue costs							29,961
Dividends paid, common and preferred stock			(2,237	)			(9,222	)			(9,720	)
Purchase of common stock											(1,049	)
Shares issued under Employee Stock Purchase Plan			157				249				252
Stock options exercised											30
Net cash (used in) provided by financing activities			(2,080	)			20,988				(10,487	)
Net increase (decrease) in cash and cash equivalents			8,695				3,252				(10,672	)
Cash and cash equivalents at beginning of year			7,554				4,302				14,974
Cash and cash equivalents at end of year		$	16,249			$	7,554			$	4,302

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21.	Quarterly Financial Data (Unaudited)

(In thousands, except per share data)
Quarters Ended 2010		March 31				June 30				Sept. 30				Dec. 31
Interest income		$	23,382			$	23,475			$	22,105			$	20,789
Interest expense			9,932				9,198				8,478				7,340
Net interest income			13,450				14,277				13,627				13,449
Provision for loan losses			1,926				5,490				6,244				3,573
Net interest income after provision for loan losses			11,524				8,787				7,383				9,876
Noninterest income			7,490				9,869				10,324				6,427
Noninterest expense			16,497				15,205				15,927				15,082
Income before income taxes			2,517				3,451				1,780				1,221
Income tax expense			572				610				525				330
Net income			1,945				2,841				1,255				891
Dividends and accretion on preferred shares			(466	)			(466	)			(469	)			(470	)
Net income available to common shareholders		$	1,479			$	2,375			$	786			$	421
Net income per common share, basic and diluted		$	.20			$	.32			$	.11			$	.06
Weighted average shares outstanding, basic and diluted			7,379				7,384				7,393				7,402

(In thousands, except per share data)
Quarters Ended 2009		March 31				June 30				Sept. 30				Dec. 31
Interest income		$	26,329			$	25,479			$	25,381			$	23,721
Interest expense			12,090				12,076				11,879				11,020
Net interest income			14,239				13,403				13,502				12,701
Provision for loan losses			1,676				5,940				6,653				6,499
Net interest income after provision for loan losses			12,563				7,463				6,849				6,202
Noninterest income			6,725				7,825				6,528				7,091
Noninterest expense1			15,112				16,163				15,299				68,567
Income (loss) before income taxes			4,176				(875	)			(1,922	)			(55,274	)
Income tax expense (benefit)			871				(74	)			(1,748	)			(8,202	)
Net income (loss)2			3,305				(801	)			(174	)			(47,072	)
Dividends and accretion on preferred shares			(414	)			(462	)			(462	)			(464	)
Net income (loss) available to common shareholders		$	2,891			$	(1,263	)		$	(636	)		$	(47,536	)
Net income (loss) per common share, basic and diluted		$	.39			$	(.17	)		$	(.09	)		$	(6.45	)
Weighted average shares outstanding, basic and diluted			7,357				7,363				7,367				7,371

1	Noninterest expense for the quarter ended December 31, 2009 includes a one-time, non-cash goodwill impairment charge of $52,408.

2	The net loss for the quarters ended June 30, 2009 and September 30, 2009 is due mainly to an increase in the provision for loans losses which is attributable to higher levels of nonperforming assets, primarily nonaccrual loans secured by real estate developments.

22.  Goodwill and Intangible Assets

Goodwill

The change in the balance of goodwill is presented in the table below. The Company wrote off the entire amount of its previously existing goodwill amount during the fourth quarter of 2009 after determining that it was impaired.

(In thousands)		2010				2009				2008
Beginning of year		$	0			$	52,408			$	52,408
Impairment losses							(52,408	)
End of year		$	0			$	0			$	52,408

The Company’s last goodwill impairment evaluation was performed during the fourth quarter of 2009. Goodwill impairment exists when a Company’s reporting unit’s carrying value of goodwill exceeds its fair value. The Company uses a two-step impairment test whereby Step 1 is to determine if potential impairment exists by comparing the estimated fair value of the Company’s single reporting unit to its carrying value, including goodwill. The second step of the impairment test is necessary only if the carrying value of the reporting unit exceeds its estimated fair value. Step 2 measures the amount of any impairment loss. This step compares the implied fair value of the Company’s goodwill with its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recorded in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill.

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The Company’s common share price declined $14.20 or 58.1% on December 31, 2009 compared to December 31, 2008. The decrease was $8.75 or 35.8% during the first quarter before rebounding to $25.17 at the end of the second quarter, an increase of $9.50 or 60.6% for the quarter. The share price further declined to $17.88 and $10.22 at the end of the third and fourth quarters of 2009, respectively. The stock price and market capitalization of the Company as well as other peer banks and financial institutions suffered during that time as a result of continuing economic weaknesses and heightened market concern surrounding the credit risk and market capital positions of the overall financial institutions’ industry. The Company concluded during the fourth quarter of 2009 that these events would more likely than not reduce the fair value of its single reporting unit below the carrying value.

		December 31, 2009				September 30,  2009				June 30,  2009				March 31,  2009				December 31, 2008
Stock price at end of period		$	10.22			$	17.88			$	25.17			$	15.67			$	24.42
Weighted average closing stock price for quarter			11.64				20.23				21.36				17.80				22.07
Book value per common share			16.11				23.13				22.60				23.08				22.87

The Company engaged an independent third party to assist with its goodwill impairment analysis. After performing Step 2 of its impairment analyses the Company determined that the implied value of its goodwill was significantly less than the carrying value resulting in a one-time, non-cash pretax impairment charge of $52,408,000 or 100% of its previous carrying value. The impairment charge was recorded in noninterest expense and did not negatively impact the Company’s or its subsidiary banks’ regulatory or tangible capital ratios.

The implied fair value of goodwill under Step 2 of the impairment analysis is determined in the same manner as the amount of goodwill recognized in a business combination. Goodwill recognized in a business combination represents the excess of the fair value of a business acquired over the amounts assigned to all of the assets acquired (including intangible assets such as for core deposits and customer lists) and liabilities assumed. The fair value of assets and liabilities reflect assumptions as to market conditions at the date of impairment testing and significant judgment is applied. Changes to these assumptions could have a material impact on the determination of the implied fair value of goodwill at the date of impairment testing.

In determining the fair value of its single reporting unit, the Company uses a combination of valuation methods including various market approaches using price multiples as well as an income approach utilizing a discounted cash flow analysis. The Company evaluates the results obtained under each valuation methodology to identify and understand the key components and to determine that the results are reasonable and appropriate under the circumstances.

Under Step 1, the Company used four methods to determine the estimated fair value of its single reporting unit. The four different methods include an income approach and three market approaches. The income approach was based on discounted cash flows that required consideration of the cost of capital, residual value, and operating forecasts. An internal five-year forecast of the Company’s balance sheet and income statement activity was developed by considering key business drivers such as anticipated loan and deposit growth. The estimated cash flows over the five-year forecast period were discounted based on the Capital Asset Pricing Model (“CAPM”). The inputs used in the CAPM include a risk-free interest rate, market risk premium, beta value, and a Company-specific risk factor. The Company’s residual value at the end of the five-year discrete forecast period was calculated using the formula for a growing, perpetual annuity.

For the market approach, the Company used three different methods: 1) the Guideline Public Company Method 2) the Mergers and Acquisitions Method and 3) the Company’s Stock Price Method. Under the Guideline Public Company Method, two groups of comparable peer companies were selected: Kentucky banks and regional banks. A book value multiple representing the lower quartile of the comparable companies was used in this analysis with a control premium of 24% added. The Mergers and Acquisitions Method consisted of examining transactions occurring between January 1, 2005 and November 30, 2009 involving commercial banks incorporated in Kentucky. Since there were no merger transactions meeting the criteria (commercial banks incorporated in Kentucky) between November 2008 and November 2009, the valuation under this approach used a price to book multiple representing data from the lower quartile of the transactions examined. The Company Stock Price Method estimates the Company’s market capitalization based on the closing stock price of the Company’s common stock on the valuation date. The number of outstanding common shares multiplied by the closing stock price on the valuation date plus an added control premium of 24% resulted in the total estimated market capitalization of the Company.

The results of the income and market valuation approaches were weighted as follows to arrive at the final calculation of fair value: Guideline Public Company Method 60%; Company Stock Price Method 20%; and income approach (discounted cash flows) 20%. There was no weight given to the Mergers and Acquisitions Method because the most recent comparable transaction was approximately one year old and the mergers and actual acquisition multiples would likely be much lower due to the recent banking crisis. The final calculation of fair value by Step 1 indicated that the carrying value of the Company exceeded its fair value.

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Since the carrying value of the Company exceeded its fair value, Step 2 of impairment testing was completed. To determine the implied fair value of goodwill, the fair value determined under Step 1 was allocated to all assets and liabilities of the single reporting unit including any recognized or unrecognized intangible assets. The allocation was done as if the Company was acquired in a business combination and the fair value of the Company was the price paid to acquire the Company. This allocation process is only performed for purposes of testing goodwill for impairment. The carrying values of recognized assets and liabilities (other than goodwill) were not adjusted nor were any new intangible assets recorded. Key valuations in Step 2 were the assessment of core deposit intangibles, the Commonwealth of Kentucky Relationship, the fair value of the loan portfolio, and the fair value of outstanding time deposits and long-term borrowings.

Core deposits were valued using the Cost Savings Method, which is a form of the Income approach and Cost approach, using a 15% discount rate. The Company’s relationship with the Commonwealth of Kentucky was valued using an excess earnings method. The excess earnings method includes the determination of the earnings expected to be generated, estimated attrition rate, and risk associated with the future earnings stream among other assumptions. The Company concluded through this evaluation that its existing core deposit intangible asset was not impaired.

The valuation of the loan portfolio included a discounted cash flow analysis. This analysis first included separating the portfolio into multiple tranches based on risk characteristics and repayment methods. The average time to maturity of the portfolio by tranche was determined and the respective estimated cash flows were discounted using current market interest rates.

Time deposits were valued using a discounted cash flow analysis that considered the estimated remaining time to maturity, the most likely distribution of cash payments, and applying a current market interest rate to the cash flows based on the estimated maturity structure. Long-term borrowings were also valued using a discounted cash flow analysis. This analysis considered the estimated remaining time to maturity, interest rate risk, the amount and timing of estimated cash flows, current market rates, and the presence of any call or put features.

The computations included in the impairment analysis require the Company to make significant estimates and assumptions. Critical assumptions that are used as part of these evaluations include developing cash flow projections and future earnings, selecting appropriate discount rates, systemic and nonsystemic risk factors, selecting relevant market comparables, incorporating general economic and market conditions, repayment assumptions, selecting an appropriate control premium, and projecting market growth.

Acquired Intangible Assets

Acquired core deposit and customer relationship intangible assets were as follows as of December 31 for the years indicated.

		2010								2009
Amortized Intangible Assets (In thousands)		Gross Carrying Amount				Accumulated Amortization				Gross Carrying  Amount				Accumulated Amortization
Core deposit intangibles		$	12,765			$	10,050			$	12,765			$	8,916
Other customer relationship intangibles			3,689				2,852				3,689				2,549
Total		$	16,454			$	12,902			$	16,454			$	11,465

Aggregate amortization expense of core deposit and customer relationship intangible assets was $1,437,000, $1,952,000, and $2,602,000 for 2010, 2009, and 2008, respectively. Estimated amortization expense for each of the next five years is as follows:

(In thousands)		Amount
2011		$	1,143
2012			1,014
2013			540
2014			405
2015			450

23.  Preferred Stock and Warrant

On January 9, 2009, as part of the U.S. Department of Treasury’s (“Treasury”) Capital Purchase Program (“CPP”), 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 pursuant to a Letter Agreement and Securities Purchase Agreement that was previously disclosed by the Company. 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 warrant can be exercised immediately and has a term of 10 years.

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The non-voting Series A preferred shares issued, with a liquidation preference of $1 thousand per share, pay a cumulative cash dividend quarterly at 5% per annum during the first five years the preferred shares are outstanding, resetting to 9% thereafter if not redeemed. The ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of its common stock will be subject to restrictions, including a restriction against increasing dividends from the last quarterly cash dividend per share ($.33) declared on the common stock prior to October 14, 2008.  The redemption, purchase or other acquisition of trust preferred securities of the Company or its affiliates also will be restricted.  These restrictions will terminate on the earlier of (a) the third anniversary of the date of issuance of the preferred stock and (b) the date on which the preferred stock has been redeemed in whole or the Treasury has transferred all of the preferred stock to third parties, except that, after the third anniversary of the date of issuance of the preferred stock, if the preferred stock remains outstanding at such time, the Company may not increase its common dividends per share without obtaining consent of the Treasury. If the Company defers dividend payments on its Series A preferred shares for an aggregate of six quarterly dividend periods, the authorized number of directors of the Company will increase by two and the holders of the Series A preferred shares will have the right to elect directors to fill such director positions at the Company’s next annual meeting of stockholders or special meeting called for that purpose.

The Company is also subject to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (“EESA”). In this connection, as a condition to the closing of the preferred stock transaction, the Company’s senior executive officers (as defined in the Purchase Agreement) (the “Senior Executive Officers”), (i) voluntarily waived any claim against the Treasury or the Company for any changes to such officer’s compensation or benefits that are required to comply with the regulation issued by the Treasury under the CPP and acknowledged that the regulation may require modification of the compensation, bonus, incentive and other benefit plans, arrangements and policies and agreements as they relate to the period the Treasury owns the preferred stock of the Company; and (ii) entered into a letter agreement with the Company amending the benefit plans with respect to such Senior Executive Officers as may be necessary, during the period that the Treasury owns the preferred stock of the Company, as necessary to comply with Section 111(b) of EESA.

The Company allocated the proceeds received from the Treasury, net of transaction costs, on a pro rata basis to the Series A preferred stock and the warrant based on their relative fair values. The Company used the Black-Scholes model to estimate the fair value of the warrant. The fair value of the Series A preferred stock was estimated using a discounted cash flow methodology and a discount rate of 13%. The Company assigned $2.0 million and $28.0 million to the warrant and the Series A preferred stock, respectively. The resulting discount on the Series A preferred stock is being accreted up to the $30.0 million liquidation amount over the five year expected life of the Series A preferred stock. The discount accretion is being recorded as additional preferred stock dividends, resulting in an effective dividend yield of 6.56%.

24.  Subsequent Event

2013.

The Internal Revenue Code grants preferential treatment to the interest income derived from debt issued by states and political subdivisions in that it is not subject to Federal taxation. As a financial institution, the Company is not allowed a tax deduction for a pro rata portion of the interest expense incurred to purchase debt with tax-free attributes. The amount of disallowed interest expense is determined by the total amount of debt issued during the calendar year by the issuer and dependent upon the issuer being considered a qualified small issuer. Debt purchased by a financial institution that meets the requirements to be designated a “qualified tax exempt obligation” has a lower interest expense disallowance than debt that does not meet the “qualified tax exempt obligation” designation. As part of the normal due diligence for a loan with tax-free attributes, the Company relies on the attestation of the borrower, legal counsel for the borrower, and the legal counsel for the Company concerning the representations of the borrower for their debt.  During the fourth quarter of 2010, the Company became aware that the qualified status of the debt issued by a customer was being reviewed by the Internal Revenue Service (“IRS”). The customer had previously made representations that their debt was qualified.

During the first quarter of 2011, the Company became aware that this customer had received verbal notification of the IRS’s intent to issue an adverse ruling regarding the qualified status of the financing.  TheAt that time, the Company hashad a potential accumulated tax liability of $402,000$402 thousand at risk related to the determination for the tax years 2007 through 2010.   Under ASC Topic 740, “Income“Income Taxes,”, the Company is required to recognize a tax position when it is more likely than not that the position would be sustained in a tax examination, with the tax examination being presumed to have occurred.occur.  Additionally, ASC Topic 740 indicates that a subsequent change in facts and circumstances should be recognized in the period in which the change occurs.   As such, the Company will recordrecorded an accrual of $449 thousand including the accrual$402 thousand accumulated tax liability and interest of $47 thousand in the first quarter of 2011.

The amount of this tax liability has been reduced by $371 thousand since the initial recording of the liability due to the statute of limitations expiring on a portion of the potential tax payment.

The original 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.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

(In thousands)		2013				2012
Balance at beginning of year		$	154			$	266
Reductions to tax positions of prior years			(88	)			(112	)
Balance at end of year		$	66			$	154

The $66 thousand at year-end 2013 represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods.  The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. 

The Company’s policy is to record the accrual of interest or penalties relative to unrecognized tax benefits, if any, in its income tax expense accounts. The total amount of interest recorded in the income tax expense (benefit) line item of the income statement for the year ended December 31, 2011 was $32 thousand. This interest amount was reduced by $9 thousand during 2012 and $11 thousand during 2013 due to the statute of limitations expiring on a portion of the potential

tax payment. The amount accrued for interest at December 31, 2013 and 2012 was $12 thousand and $23 thousand, respectively. No penalties were accrued or recorded during any year in the three years ended December 31, 2013.

The Company files U.S. federal and various state income tax returns. The Company is no longer subject to income tax examinations by taxing authorities for the years before 2010.

10. Retirement Plans

The Company maintains a salary savings plan that covers substantially all of its employees. The Company matches voluntary tax deferred employee contributions at 50% of eligible deferrals up to a maximum of 6% of the participants’ compensation. The Company may, at the discretion of its Board, contribute an additional amount based upon a percentage of covered employees’ salaries. The Company did not make a discretionary contribution during 2013, 2012, or 2011. Discretionary contributions are allocated among participants in the ratio that each participant’s compensation bears to all participants’ compensation. Eligible employees are presented with various investment alternatives related to the salary savings plan. Those alternatives include various stock and bond mutual funds ranging from traditional growth funds to more stable income funds as well as an option to invest in bank certificates of deposits. Company shares are not an available investment alternative in the salary savings plan. The total retirement plan expense for 2013, 2012, and 2011 was $528 thousand, $485 thousand, and $470 thousand, respectively.

In connection with its acquisition of Citizens Northern, the Company acquired nonqualified supplemental retirement plans for certain key employees. Benefits provided under these plans are unfunded, and payments to plan participants are made by the Company.

The following schedules set forth a reconciliation of the changes in the supplemental retirement plans’ benefit obligation and funded status for the years ended December 31, 2013 and 2012.

(In thousands)		2013				2012
Change in Benefit Obligation
Obligation at beginning of year		$	741			$	706
Service cost			28				26
Interest cost			29				29
Actuarial loss			3				8
Benefit payments			(27	)			(28	)
Obligation at end of year		$	774			$	741

The following table provides disclosure of the net periodic benefit cost as of December 31 for the years indicated.

(In thousands)		2013				2012
Service cost		$	28			$	26
Interest cost			29				29
Recognized net actuarial loss			12				8
Net periodic benefit cost		$	69			$	63
Major assumptions:
Discount rate used to determine net period benefit cost			4.03	%			4.39	%
Discount rate used to determine benefit obligation at year end			4.06				4.03

 

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The following table presents estimated future benefit payments in the period indicated.

(In thousands)		Supplemental Retirement Plan
2014		$	36
2015			36
2016			36
2017			36
2018			36
2019-2023			287
Total		$	467

Amounts recognized in accumulated other comprehensive income as of December 31, 2013 and 2012 are as follows:

(In thousands)		2013				2012
Unrecognized net actuarial loss		$	148			$	157
Total		$	148			$	157

The estimated cost that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is as follows:

(In thousands)		Supplemental Retirement Plan
Unrecognized net actuarial gain		$	(4	)
Total		$	(4	)

11. Common Stock Options

During 1997, the Company’s Board of Directors approved a nonqualified stock option plan (the “Plan”), subsequently approved by the Company’s shareholders, that has provided for the granting of stock options to key employees and officers of the Company. The Plan provides for the granting of options to purchase up to 450,000 shares of the Company’s common stock at a price equal to the fair value of the Company’s common stock on the date the option is granted. The options expire after ten years from the grant date and must be held for a minimum of one year before they can be exercised. Forfeited options are available for the granting of additional stock options under the Plan. Options forfeited from the initial grant in 1997 were used to grant options during 2000 and 2004. Total options granted were 450,000, 54,000, and 40,049 in the years 1997, 2000, and 2004, respectively. Unexercised options granted during 1997 and 2000 have expired. All outstanding options granted under the Plan are vested. At December 31, 2013, there were 54,172 options available for future grants under the Plan.

A summary of the activity in the Company’s Plan for 2013 is presented below.

		2013
		Shares				Weighted Average Exercise Price
Options outstanding at beginning of year			24,049			$	34.80
Forfeited			(2,000	)			34.80
Options outstanding at year-end			22,049			$	34.80
Options exercisable at year-end			22,049			$	34.80

Options outstanding at year-end 2013 have a remaining contractual life of .83 years. Aggregate options outstanding and exercisable at December 31, 2013 had no intrinsic value since the exercise price was in excess of the market price of the

 

Company’s stock. There were no options exercised or granted in any year in the three-year periods ending December 31, 2013, nor were there any modifications or cash paid to settle stock option awards during those periods.

12. 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 schedules set forth a reconciliation of the changes to the benefit obligation and funded status of the plans for the years ended December 31, 2013 and 2012.

(In thousands)		2013				2012
Change in Benefit Obligation
Obligation at beginning of year		$	15,935			$	14,294
Service cost			630				617
Interest cost			551				608
Actuarial (gain) loss			(4,277	)			674
Participant contributions			97				85
Benefit payments			(348	)			(343	)
Obligation at end of year		$	12,588			$	15,935

The following table provides disclosure of the net periodic benefit cost as of December 31 for the years indicated.

(In thousands)		2013				2012
Service cost		$	630			$	617
Interest cost			551				608
Amortization of transition obligation			-				102
Recognized prior service cost			257				257
Amortization of net actuarial loss			-				56
Net periodic benefit cost		$	1,438			$	1,640
Major assumptions:
Discount rate used to determine net periodic benefit cost			4.03	%			4.39	%
Discount rate used to determine benefit obligation as of year end			4.93				4.03
Retiree participation rate (Plan 1)			100.00				100.00
Retiree participation rate (Plan 2)			72.00				72.00

 

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. For measurement purposes, the rate of increase in pre-Medicare medical care claims costs was 8% and 7% for 2014 and 2015, respectively, then grading down by .5% annually to 5% for 2019 and thereafter. For dental claims cost, it was 5% for 2014 and thereafter. A 1% change in the assumed health care cost trend rates would have the following incremental effects:

(In thousands)		1% Increase				1% Decrease
Effect on total of service and interest cost components of net periodic postretirement health care benefit cost		$	252			$	(194	)
Effect on accumulated postretirement benefit obligation			2,444				(1,934	)

The following table presents estimated future benefit payments in the period indicated.

(In thousands)		Postretirement Medical Benefits
2014		$	340
2015			355
2016			377
2017			422
2018			461
2019-2023			2,909
Total		$	4,864

Amounts recognized in accumulated other comprehensive income as of December 31, 2013 and 2012 are as follows:

(In thousands)		2013				2012
Unrecognized net actuarial (gain) loss		$	(1,190	)		$	3,087
Unrecognized prior service cost			383				639
Total		$	(807	)		$	3,726

The estimated costs that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are as follows:

(In thousands)		Postretirement Medical Benefits
Unrecognized prior service cost		$	207
Unrecognized net actuarial gain			(63	)
Total		$	144

13. Leases

The Company leases certain branch sites and banking equipment under various operating leases. Branch site leases have renewal options of varying lengths and terms. The following table presents estimated future minimum rental commitments under these leases for the period indicated.

(In thousands)		Operating Leases
2014		$	349
2015			313
2016			244
2017			124
2018			113
Thereafter			537
Total		$	1,680

Rent expense was $399 thousand, $424 thousand, and $451 thousand for 2013, 2012, and 2011, respectively.

14.Financial Instruments With Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. The financial instruments include commitments to extend credit in the form of unused lines of credit and standby letters of credit.

These financial instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Total commitments to extend credit were $140 million and $129 million at December 31, 2013 and 2012, respectively. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit, if deemed necessary by the Company, is based on management’s credit evaluation of the counter-party. Collateral held varies, but may include accounts receivable, marketable securities, inventory, premises and equipment, residential real estate, and income producing commercial properties.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that received when extending credit to customers. The fair value of these instruments is not considered material for disclosure. The Company had $23.4 million and $24.4 million in irrevocable letters of credit outstanding at December 31, 2013 and 2012, respectively.

The contractual amount of financial instruments with off-balance sheet risk was as follows at year-end:

December 31,		2013								2012
(In thousands)		Fixed Rate				Variable Rate				Fixed Rate				Variable Rate
Commitments to extend credit, including unused lines of credit		$	56,884			$	82,934			$	51,447			$	77,176
Standby letters of credit			2,578				20,816				2,647				21,740
Total		$	59,462			$	103,750			$	54,094			$	98,916

15. Concentration of Credit Risk

The Company’s bank subsidiaries actively engage in lending, primarily in their home counties around Central and Northern Kentucky and adjacent areas. Collateral is received to support these loans as deemed necessary. The more significant categories of collateral include cash on deposit with the Company’s banks, marketable securities, income producing properties, commercial real estate, home mortgages, and consumer durables. Loans outstanding, commitments to make loans, and letters of credit range across a large number of industries and individuals. The obligations are significantly diverse and reflect no material concentration in one or more areas, other than most of the Company’s loans are in Kentucky and secured by real estate and thus significantly affected by changes in the Kentucky economy.

16.Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. As of December 31, 2013, there were various pending legal actions and proceedings against the Company arising from the normal course of business and in which claims for damages are asserted. It is the opinion of management, after discussion with legal counsel, that the disposition or ultimate resolution of such claims and legal actions will not have a material effect upon the consolidated financial statements of the Company.

17.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.

Quantitative measures established by regulation to ensure capital adequacy require the Company and its subsidiary banks to maintain minimum amounts and ratios (set forth in the tables below) of Tier 1 and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). As of December 31, 2013, the most recent notification from the FDIC categorized the banks as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the banks must maintain minimum Tier 1 Risk-based, Total Risk-based, and Tier 1 Leverage ratios as set forth in the tables. There are no conditions or events since that notification that management believes have changed the institutions’ category. As noted below under the caption “Summary of Regulatory Agreements,” two of the Company’s subsidiary banks are required to maintain certain capital ratios that exceed the regulatory established well-capitalized status.

The regulatory capital amounts and ratios of the consolidated Company and its subsidiary banks are presented in the following tables for the dates indicated.

(Dollars in thousands)		Actual								For Capital Adequacy Purposes								To Be Well-Capitalized Under Prompt Corrective Action Provisions
December 31, 2013		Amount				Ratio				Amount				Ratio				Amount				Ratio
Tier 1 Risk-based Capital1
Consolidated		$	216,162				18.95	%		$	45,623				4.00	%		N/A				N/A
Farmers Bank			67,409				17.56				15,351				4.00			$	23,026				6.00	%
United Bank2			51,336				15.06				13,634				4.00				20,450				6.00
First Citizens			28,814				12.92				8,917				4.00				13,376				6.00
Citizens Northern2			24,455				13.57				7,208				4.00				10,812				6.00
Total Risk-based Capital 1
Consolidated		$	230,497				20.21	%		$	91,245				8.00	%		N/A				N/A
Farmers Bank			72,231				18.82				30,702				8.00			$	38,377				10.00	%
United Bank2			55,664				16.33				27,267				8.00				34,084				10.00
First Citizens			30,485				13.67				17,835				8.00				22,294				10.00
Citizens Northern2			26,708				14.82				14,415				8.00				18,019				10.00
Tier 1 Leverage Capital 3
Consolidated		$	216,162				11.90	%		$	72,677				4.00	%		N/A				N/A
Farmers Bank			67,409				9.60				28,077				4.00			$	35,096				5.00	%
United Bank2			51,336				9.67				21,233				4.00				26,542				5.00
First Citizens			28,814				9.03				12,768				4.00				15,960				5.00
Citizens Northern2			24,455				9.67				10,113				4.00				12,641				5.00
December 31, 2012
Tier 1 Risk-based Capital1
Consolidated		$	206,470				18.27	%		$	45,215				4.00	%		N/A				N/A
Farmers Bank2			69,582				17.94				15,515				4.00			$	23,273				6.00	%
United Bank2			51,695				15.41				13,420				4.00				20,130				6.00
First Citizens			29,017				13.57				8,552				4.00				12,828				6.00
Citizens Northern2			23,553				12.97				7,264				4.00				10,896				6.00
Total Risk-based Capital 1
Consolidated		$	220,741				19.53	%		$	90,431				8.00	%		N/A				N/A
Farmers Bank2			74,475				19.20				31,030				8.00			$	38,788				10.00	%
United Bank2			55,980				16.69				26,839				8.00				33,549				10.00
First Citizens			30,908				14.46				17,104				8.00				21,380				10.00
Citizens Northern2			25,826				14.22				14,528				8.00				18,159				10.00
Tier 1 Leverage Capital 3
Consolidated		$	206,470				11.24	%		$	73,479				4.00	%		N/A				N/A
Farmers Bank2			69,582				9.68				28,768				4.00			$	35,960				5.00	%
United Bank2			51,695				9.45				21,878				4.00				27,347				5.00
First Citizens			29,017				9.42				12,327				4.00				15,409				5.00
Citizens Northern2			23,553				9.36				10,063				4.00				12,579				5.00

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%).

²See discussion below under the caption“Summary of Regulatory Agreements” for minimum capital ratios required as part of the bank’s regulatory agreement.

³Tier 1 Leverage ratio is computed by dividing a bank’s Tier 1 Capital by its total quarterly average assets, as defined by regulation.

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. Generally, capital distributions are limited to undistributed net income for the current and prior two years, subject to the capital requirements as summarized above. Furthermore, at December 31, 2013, two of the Company’s subsidiary banks are required to obtain regulatory approval before declaring or paying a dividend to the Parent Company as a result of agreements entered into with their primary regulator. The payment of dividends by the Parent Company to its shareholders is also subject to approval as a result of its regulatory agreement.

Summary of Regulatory Agreements

Below is a summary of the regulatory agreements that the Parent Company and two of its subsidiary banks have entered into with their primary regulators. The agreement entered into during 2009 between Farmers Bank and its primary regulator was terminated in January 2013 as a result of satisfactory compliance.

Parent Company

Primarily due to regulatory actions during 2009 at certain of the Company’s subsidiary banks (further discussed below), the Federal Reserve Bank of St. Louis (“FRB St. Louis”) and the 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 the KDFI. Representatives of the FRB St. Louis and the 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.

United Bank

In November of 2009, the FDIC and the KDFI entered into a Cease and Desist Order (“C&D”) with United Bank primarily as a result of its level of nonperforming assets.  The C&D was terminated in December 2011 coincident with the issuance of a Consent Order (“Consent Order”) entered into between the parties. The Consent Order is substantially the same as the C&D, with the primary exception being that United Bank must achieve and maintain a Tier 1 Leverage ratio of 9.0% and a Total Risk-based Capital ratio of 13.0% no later than March 31, 2012. 

Other components in the regulatory order include stricter oversight and reporting to its regulators in terms of complying with the Consent 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.

During January 2014, the Company received written notification from the FDIC and KDFI that the formal Consent Order entered into during 2011 with United Bank had been terminated and replaced with a stepped-down enforcement action in 

the form of an informal Memorandum. The informal Memorandum includes substantially the same provisions covered by the Consent Order.

Citizens Northern

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

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 believes that it and its subsidiary banks are in compliance with the requirements identified in the regulatory agreements as of December 31, 2013.

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.

18. 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 for substantially the full term of the assets or liabilities.

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 instruments measured at fair value on a recurring basis. For this disclosure, the Company only has available for sale investment securities that meet the requirement.

Available for sale investment securities

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

●

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

●

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

Available for sale investment securities are the Company’s only balance sheet item that meets the disclosure requirements for instruments measured at fair value on a recurring basis. Disclosures as of December 31, 2013 and 2012 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)
December 31, 2013
Obligations of U.S. government-sponsored entities		$	93,750			$	-			$	93,750			$	-
Obligations of states and political subdivisions			131,970				-				131,970				-
Mortgage-backed securities – residential			378,077				-				378,077				-
Mortgage-backed securities – commercial			689				-				689				-
Corporate debt securities			6,257				-				6,257				-
Mutual funds and equity securities			2,077				2,077				-				-
Total		$	612,820			$	2,077			$	610,743			$	-
December 31, 2012
Obligations of U.S. government-sponsored entities		$	76,095			$	-			$	76,095			$	-
Obligations of states and political subdivisions			118,755				-				118,755				-
Mortgage-backed securities – residential			370,439				-				370,439				-
Corporate debt securities			5,826				-				5,826				-
Mutual funds and equity securities			1,993				1,993				-				-
Total		$	573,108			$	1,993			$	571,115			$	-

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

Impairment charges on collateral-dependent loans are recorded by either an increase to the provision for loan losses and related allowance or by direct loan charge-offs. The fair value of collateral-dependent impaired loans with specific allocations of the allowance for loan losses is measured based on recent appraisals of the underlying collateral. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the

income approach. Appraisers take absorption rates into consideration and adjustments are routinely made in the appraisal process to identify differences between the comparable sales and income data available. Such adjustments consist mainly of estimated costs to sell that are not included in certain appraisals or to update appraised collateral values as a result of market declines of similar properties for which a newer appraisal is available. These adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value.

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

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

						Fair Value Measurements Using
(In thousands) Description		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
December 31, 2013
Collateral-dependent Impaired Loans
Real estate mortgage - construction and land development		$	334			$	-			$	-			$	334
Real estate mortgage - residential			2,085				-				-				2,085
Real estate mortgage - farmland and other commercial enterprises			3,152				-				-				3,152
Commercial and industrial			88				-				-				88
Total		$	5,659			$	-			$	-			$	5,659
OREO
Construction and land development		$	14,465			$	-			$	-			$	14,465
Residential real estate			1,116				-				-				1,116
Farmland and other commercial enterprises			9,152				-				-				9,152
Total		$	24,733			$	-			$	-			$	24,733

						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, 2012
Collateral-dependent Impaired Loans
Real estate mortgage - construction and land development		$	17,921			$	-			$	-			$	17,921
Real estate mortgage - residential			2,273				-				-				2,273
Real estate mortgage - farmland and other commercial enterprises			3,523				-				-				3,523
Commercial and industrial			9				-				-				9
Consumer - secured			4				-				-				4
Consumer - unsecured			113				-				-				113
Total		$	23,843			$	-			$	-			$	23,843
OREO
Construction and land development		$	15,873			$	-			$	-			$	15,873
Residential real estate			1,483				-				-				1,483
Farmland and other commercial enterprises			3,826				-				-				3,826
Total		$	21,182			$	-			$	-			$	21,182

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

(In thousands) Years Ended December 31,		2013				2012
Impairment charges:
Collateral-dependent impaired loans		$	787			$	4,755
OREO			4,689				3,120
Total		$	5,476			$	7,875

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 December 31, 2013			Valuation Technique	Unobservable Inputs		Range				Weighted Average
Collateral-dependent impaired loans		$	5,659		Discounted appraisals	Marketability discount		0%	-	6.3%			1.6	%
OREO		$	24,733		Discounted appraisals	Marketability discount		.8%	-	67.5%			11.3	%

As previously discussed, the fair value of real estate securing collateral-dependent impaired loans and OREO are based on current third party appraisals. It is often necessary, however, for the Company to discount the appraisal amounts supporting its impaired loans and OREO. These discounts relate primarily to marketing and other holding costs that are not included in certain appraisals or to update values as a result of market declines of similar properties for which newer appraisals are available. Discounts also result from contracts to sell properties entered into during the period. The range of discounts is presented in the table above for 2013. The upper end of the range identified in the table above related to OREO is the result of a few outlier transactions of small dollar properties written down to the contracted sales price, which magnified the percentage. The weighted average column is more of an indicator of the discounts applied to the appraisals.

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 Topic 825,“Financial Instruments.” ASC Topic 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 Topic 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 class of financial instruments not presented elsewhere for which it is practicable to estimate that value.

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 orwith available market information through processes using benchmark yields, matrix pricing, prepayment speeds, cash flows, live trading data, and market spreads sourced from new issues, dealer quotes, and trade prices, among others sources.

Loans

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

Federal Home Loan Bank and Federal Reserve Bank Stock

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

Deposit Liabilities

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

Federal Funds Purchased and Other Short-term Borrowings

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

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

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

Commitments to Extend Credit and Standby Letters of Credit

Pricing of these financial instruments is based on the credit quality and relationship, fees, interest rates, probability of funding, compensating balance, and other covenants or requirements. Loan commitments generally

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

The following table presents the estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2013 and 2012. 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)
December 31, 2013
Assets
Cash and cash equivalents		$	68,253			$	68,253			$	68,253			$	-			$	-
Held to maturity investment securities			765				827				-				827				-
Loans, net			979,306				977,846				-				-				977,846
Accrued interest receivable			5,901				5,901				-				5,901				-
Federal Home Loan Bank and Federal Reserve Bank Stock			9,516			N/A					-				-				-
Liabilities
Deposits			1,410,215				1,412,572				938,700				-				473,872
Federal funds purchased and other short-term borrowings			29,123				29,123				-				29,123				-
Securities sold under agreements to repurchase and other long-term borrowings			127,880				139,375				-				139,375				-
Subordinated notes payable to unconsolidated trusts			48,970				26,070				-				-				26,070
Accrued interest payable			1,137				1,137				-				1,137				-
December 31, 2012
Assets
Cash and cash equivalents		$	95,855			$	95,855			$	95,855			$	-			$	-
Held to maturity investment securities			820				956				-				956				-
Loans, net			980,550				979,301				-				-				979,301
Accrued interest receivable			6,074				6,074				-				6,074				-
Federal Home Loan Bank and Federal Reserve Bank Stock			9,516			N/A					-				-				-
Liabilities
Deposits			1,410,810				1,414,395				870,145				-				544,250
Federal funds purchased and other short-term borrowings			24,083				24,083				-				24,083				-
Securities sold under agreements to repurchase and other long-term borrowings			129,297				148,680				-				148,680				-
Subordinated notes payable to unconsolidated trusts			48,970				21,015				-				-				21,015
Accrued interest payable			1,370				1,370				-				1,370				-

19. Parent Company Financial Statements

Condensed Balance Sheets

December 31, (In thousands)		2013				2012
Assets
Cash and cash equivalents		$	36,471			$	24,776
Investment in subsidiaries			185,668				196,406
Other assets			851				862
Total assets		$	222,990			$	222,044
Liabilities
Dividends payable		$	188			$	188
Subordinated notes payable to unconsolidated trusts			48,970				48,970
Other liabilities			3,777				4,865
Total liabilities			52,935				54,023
Shareholders’ Equity
Preferred stock			29,988				29,537
Common stock			935				934
Capital surplus			51,102				50,934
Retained earnings			91,242				79,747
Accumulated other comprehensive (loss) income			(3,212	)			6,869
Total shareholders’ equity			170,055				168,021
Total liabilities and shareholders’ equity		$	222,990			$	222,044

Condensed Statements of Income and Comprehensive Income

Years Ended December 31, (In thousands)		2013				2012				2011
Income
Dividends from subsidiaries		$	14,566			$	12,012			$	4,511
Interest			29				19				16
Other noninterest income			3,740				3,476				3,369
Total income			18,335				15,507				7,896
Expense
Interest expense- subordinated notes payable to unconsolidated trusts			864				1,879				2,026
Interest expense on other borrowed funds			-				-				2
Noninterest expense			3,980				3,875				3,484
Total expense			4,844				5,754				5,512
Income before income tax benefit and equity in undistributed income of subsidiaries			13,491				9,753				2,384
Income tax benefit			(428	)			(759	)			(854	)
Income before equity in undistributed income of subsidiaries			13,919				10,512				3,238
Equity in undistributed (loss) income of subsidiaries			(473	)			1,637				(500	)
Net income			13,446				12,149				2,738
Other comprehensive (loss) income			(10,081	)			226				5,745
Comprehensive income		$	3,365			$	12,375			$	8,483

Condensed Statements of Cash Flows

Years Ended December 31, (In thousands)		2013				2012				2011
Cash Flows From Operating Activities
Net income		$	13,446			$	12,149			$	2,738
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed loss (income) of subsidiaries			473				(1,637	)			500
Noncash employee stock purchase plan expense			4				3				3
Change in other assets and liabilities, net			(799	)			(590	)			1,253
Deferred income tax (benefit) expense			(62	)			(64	)			735
Net cash provided by operating activities			13,062				9,861				5,229
Cash Flows From Investing Activities
Return of equity from nonbank subsidiary			-				500				-
Investment in bank subsidiaries			-				(2,500	)			(4,000	)
Proceeds from liquidation of company-owned life insurance			-				-				2,248
Net cash used in investing activities			-				(2,000	)			(1,752	)
Cash Flows From Financing Activities
Dividends paid, preferred			(1,500	)			(1,500	)			(1,500	)
Repurchase of common stock warrant			-				(75	)			-
Shares issued under employee stock purchase plan			133				128				136
Net cash used in financing activities			(1,367	)			(1,447	)			(1,364	)
Net increase in cash and cash equivalents			11,695				6,414				2,113
Cash and cash equivalents at beginning of year			24,776				18,362				16,249
Cash and cash equivalents at end of year		$	36,471			$	24,776			$	18,362

20.Quarterly Financial Data (Unaudited)

(In thousands, except per share data)
Quarters Ended 2013		March 31				June 30				Sept. 30				Dec. 31
Interest income		$	16,742			$	16,631			$	16,563			$	16,797
Interest expense			3,166				3,038				2,953				2,838
Net interest income			13,576				13,593				13,610				13,959
Provision for loan losses			(632	)			(362	)			(586	)			(1,020	)
Net interest income after provision for loan losses			14,208				13,955				14,196				14,979
Noninterest income			5,411				5,441				5,678				5,586
Noninterest expense			14,509				14,722				15,984				16,358
Income before income taxes			5,110				4,674				3,890				4,207
Income tax expense			1,318				1,127				855				1,135
Net income			3,792				3,547				3,035				3,072
Less preferred stock dividends and discount accretion			485				487				489				490
Net income available to common shareholders		$	3,307			$	3,060			$	2,546			$	2,582
Net income per common share, basic and diluted		$	.44			$	.41			$	.34			$	.35
Weighted average common shares outstanding, basic and diluted			7,470				7,473				7,475				7,477

(In thousands, except per share data)
Quarters Ended 2012		March 31				June 30				Sept. 30				Dec. 31
Interest income		$	18,410			$	18,087			$	17,578			$	17,147
Interest expense			5,203				4,720				4,511				3,824
Net interest income			13,207				13,367				13,067				13,323
Provision for loan losses			977				1,341				(256	)			710
Net interest income after provision for loan losses			12,230				12,026				13,323				12,613
Noninterest income			6,028				6,412				6,166				6,048
Noninterest expense			14,593				14,401				15,347				15,446
Income before income taxes			3,665				4,037				4,142				3,215
Income tax expense			356				890				1,051				613
Net income			3,309				3,147				3,091				2,602
Less preferred stock dividends and discount accretion			478				480				481				483
Net income available to common shareholders		$	2,831			$	2,667			$	2,610			$	2,119
Net income per common share, basic and diluted		$	.38			$	.36			$	.35			$	.28
Weighted average common shares outstanding, basic and diluted			7,447				7,454				7,461				7,466

21. Intangible Assets

Acquired core deposit and customer relationship intangible assets were as follows as of December 31 for the years indicated.

		2013												2012
Amortized Intangible Assets (In thousands)		Gross Carrying Amount				Accumulated Amortization				Net				Gross Carrying Amount				Accumulated Amortization				Net
Core deposit intangibles		$	4,524			$	3,910			$	614			$	6,398			$	5,444			$	954
Other customer relationship intangibles			2,414				2,174				240				3,689				3,249				440
Total		$	6,938			$	6,084			$	854			$	10,087			$	8,693			$	1,394

Aggregate amortization expense of core deposit and customer relationship intangible assets was $540 thousand, $1.0 million, and $1.1 million for 2013, 2012, and 2011, respectively. Core deposit intangibles and customer relationship intangibles in the amount of $1.9 million and $1.3 million, respectively, recorded in connection with a prior business acquisition during 2006 have been removed from the gross carrying amount and accumulated amortization for 2013 due to being fully amortized. Core deposit and customer relationship intangible assets are scheduled to be fully amortized by 2015. Estimated expense over the remaining amortization period is as follows:

(In thousands)		Amount
2014		$	405
2015			449

22. Preferred Stock and Warrant

On January 9, 2009, as part of the U.S. Department of Treasury’s (“Treasury”) Capital Purchase Program (“CPP”), the Company issued 30 thousand shares of Series A, no par value cumulative perpetual preferred stock to the Treasury for $30.0 million. The Company also issued a warrant to the Treasury as part of the CPP allowing it to purchase 223,992 shares of the Company’s common stock at an exercise price of $20.09. In June 2012, the Treasury conducted an auction in which it sold all of its investment in the Company’s Series A preferred stock to private investors. The Company received no proceeds as part of the transaction. In July 2012, the Company repurchased the warrant issued to the Treasury at a

mutually agreed upon price of $75 thousand. Upon settlement of the warrent repurchase, the Treasury has no remaining equity stake in the Company.

The Company accounted for the allocation of the proceeds received from the issuance of the preferred shares, net of transaction costs, on a pro rata basis between the Series A preferred stock and the warrant based on their relative fair values. The Company used the Black-Scholes model to estimate the fair value of the warrant. The fair value of the Series A preferred stock was estimated using a discounted cash flow methodology with a discount rate of 13%. The Company assigned $2.0 million and $28.0 million to the warrant and the Series A preferred stock, respectively. The resulting discount on the Series A preferred stock is being accreted up to the $30.0 million liquidation amount over the initial five year expected life of the Series A preferred stock. The discount accretion is being recorded as additional preferred stock dividends, resulting in an effective dividend rate of 6.56%.

The Series A preferred shares have a liquidation preference of $1 thousand per share (plus any accrued and unpaid dividends) and pay a cumulative cash dividend quarterly at 5% per annum during the first five years, resetting to 9% thereafter. The Company may not pay dividends on the preferred shares without prior approval from its banking regulators. So long as the preferred shares are outstanding, the Company may not declare or pay a dividend or other distribution on its common stock, and generally may not purchase, redeem or otherwise acquire any shares of its common stock, unless all accrued and unpaid dividends on the preferred shares for all past dividend periods are paid in full. Holders of the preferred shares generally have no voting rights. However, if the Company defers dividend payments on its Series A preferred shares for an aggregate of six quarterly dividend periods, the authorized number of directors of the Company will increase by two and the holders of the Series A preferred shares will have the right to elect directors to fill such director positions at the Company’s next annual meeting of stockholders or special meeting called for that purpose. The Company may redeem the preferred shares for 100% of the liquidation preference amount at any time, in whole or in part, subject to obtaining prior approval of its banking regulators.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

On September 14, 2011, the Audit Committee of the Registrant dismissed Crowe Horwath LLP (“Crowe”) and engaged BKD, LLP (“BKD”) as its independent accountants. Crowe’s service terminated at the completion of its audit and issuance of its related report on the Company’s financial statements filed on Form 10-K for the Company’s fiscal year ended December 31, 2011. The change in the Registrant's independent accountants was the result of a competitive bidding process involving several accounting firms.

In connection with the audits of the two fiscal years ended December 31, 2010, and the subsequent interim period through September 14, 2011, there were no disagreements with Crowe on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of Crowe would have caused Crowe to make reference to the subject matter of the disagreements in connection with its reports. Crowe’s audit reports on the consolidated financial statements of the Company as of and for the years ended December 31, 2010 and 2009 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles.

None of the reportable events described under Item 304(a)(1)(v) of Regulation S-K occurred within the Company’s two most recent fiscal years and the subsequent interim period through September 14, 2011.

During the two most recent fiscal years, and any subsequent interim period prior to engaging BKD, neither the Company, nor anyone on its behalf, consulted BKD regarding (i) either: the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company's financial statements, and either a written report was provided to the Company or oral advice was provided that BKD concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement (as defined in paragraph 304(a)(1)(iv) of Regulation S-K and the related instructions) or a reportable event (as described in paragraph 304(a)(1)(v) of Regulation S-K).

The Company requested that Crowe furnish it with a letter addressed to the Securities and Exchange Commission (“SEC”) stating whether it agrees with the above statements. A copy of Crowe’s letter to the SEC dated September 20, 2011 is attached as an exhibit to this report.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures and internal control over financial reporting are, to the best of their knowledge, effective to ensure that information required to be disclosed by the Company in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

The Company’s Chief Executive Officer and Chief Financial Officer have also concluded that there were no changes in the Company’s internal control over financial reporting or in other factors that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting or any corrective actions with regard to significant deficiencies and material weaknesses in internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Management Responsibility.Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system is designed to provide reasonable

assurance to the Company’s management and Board of Directors regarding the reliability of financial reporting and the presentation of published financial statements. However, all internal control systems, no matter how well designed, have inherent limitations.

General Description of Internal Control over Financial Reporting.Internal control over financial reporting refers to a process designed by, or under the supervision of, the Company’s Chief Executive Officer and Chief Financial Officer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

· ●

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of Company assets;

· ●

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that Company’s receipts and expenditures are being made only in accordance with the authorization of Company’s management and members of the Company’s Board of Directors; and

· ●

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, uses or dispositions of Company assets that could have a material effect on the Company’s financial statements.

Inherent Limitations in Internal Control over Financial Reporting.Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented or overridden by collusion or other improper activities. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Management’s Assessment of the Company’s Internal Control over Financial Reporting.Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010.2013. In making this assessment, the Company’s management used the criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control-Integrated Framework (1992).

As a result of our assessment of the Company’s internal control over financial reporting, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 20102013 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. This annual report does not include an attestation report of

BKD, LLP, the Company’sindependent registered public accounting firm regardingthat audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K, has also audited the effectiveness of the Company’s internal control over financial reporting. Management’sreporting as of December 31, 2013. The audit report was not subject to attestation byon the effectiveness of the Company’s registered public accounting

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 firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s reportinternal control over financial reporting is included in this annual report.

Annual Report on page 77.

Item 9B. Other Information

None.

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Executive Officer1	Age	Positions and Offices With the Registrant	Years of Service
		Offices With	With the
Executive Officer1	Age	the Registrant	Registrant
Lloyd C. Hillard, Jr.	64 67	President and Chief	18*
		Executive Officer, Director2	213

1	R. Terry Bennett, Chairman of the Company’s board of directors, is considered an executive officer in name only for purposes of Regulation O.

2

Also a director of Farmers Bank, United Bank, First Citizens, Citizens Northern, FCB Services, Farmers Insurance (Chairman), FFKT Insurance, EGT Properties, EKT Properties, and an administrative trustee of Farmers Capital Bank Trust I, Farmers Capital Bank Trust II, and Farmers Capital Bank Trust III.

3	Includes years of service with the Company and its subsidiaries.

The Company has adopted a Code of Ethics that applies to the Company’s directors, officers, and employees, including the Company’s chief executive officer and chief financial officer. The Company makes available its Code of Ethics on its Internet website at www.farmerscapital.com.

www.farmerscapital.com.

Additional information required by Item 10 is hereby incorporated by reference from the Company's definitive proxy statement in connection with its annual meeting of shareholders scheduled for May 10, 2011,13, 2014, which will be filed with the Commission on or about April 1, 2011,2014, pursuant to Regulation 14A.

*	Includes years of service with the Company and its subsidiaries.

1	For Regulation O purposes, Frank W. Sower, Jr., Chairman of the Company’s board of directors, is considered an executive officer in name only.

2

Also a director of Farmers Bank, United Bank (Chairman), First Citizens Bank, Citizens Northern, FCB Services, Farmers Insurance (Chairman), Leasing One (Chairman), FFKT Insurance, EG Properties, EKT Properties, and an administrative trustee of Farmers Capital Bank Trust I, Farmers Capital Bank Trust II, and Farmers Capital Bank Trust III.

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accounting Fees and Services

The information required by Items 11 through 14 is hereby incorporated by reference from the Company's definitive proxy statement in connection with its annual meeting of shareholders scheduled for May 10, 2011,13, 2014, which will be filed with the Commission on or about April 1, 2011,2014, pursuant to Regulation 14A.

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PART IV

Item 15. Exhibits, Financial Statement Schedules

(a)1.

Financial Statements

The following consolidated financial statements and report of independent registered accounting firm of the Company is included in Part II, Item 8 on pages 75 through 117:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Comprehensive (Loss) Income

Consolidated Statements of Changes in Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

	The following consolidated financial statements and report of independent registered public accounting firm of the Company is included in Part II, Item 8 on pages 76 through 129:
	Report of Independent Registered Public Accounting Firm
	Consolidated Balance Sheets
	Consolidated Statements of Income
	Consolidated Statements of Comprehensive Income
	Consolidated Statements of Changes in Shareholders’ Equity
	Consolidated Statements of Cash Flows
	Notes to Consolidated Financial Statements
(a)2.	Financial Statement Schedules
	All schedules are omitted for the reason they are not required, or are not applicable, or the required information is disclosed elsewhere in the financial statements and related notes thereto.

All schedules are omitted for the reason they are not required, or are not applicable, or the required information is disclosed elsewhere in the financial statements and related notes thereto.

(a)3.

Exhibits:

3.1	Second Amended and Restated Articles of Incorporation of Farmers Capital Bank Corporation (incorporated by reference to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006 (File No. 000-14412)).
3.2	Articles of Amendment to Second Amended and Restated Articles of Incorporation of Farmers Capital Bank Corporation dated January 6, 2009 (incorporated by reference to the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003, and Current Report on Form 8-K dated January 13, 2009)2009 (File No. 000-14412)).
3.2 3.3	Articles of Amendment to Second Amended and Restated Articles of Incorporation of Farmers Capital Bank Corporation dated November 16, 2009 (incorporated by reference to the Current Report on Form 8-K dated November 17, 2009 (File No. 000-14412)).
3.4	Amended and Restated Bylaws of Farmers Capital Bank Corporation (incorporated by reference to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009)2009 (File No. 000-14412)).
4.1*	Junior Subordinated Indenture, dated as of July 21, 2005, between Farmers Capital Bank Corporation and Wilmington Trust Company, as Trustee, relating to unsecured junior subordinated deferrable interest notes that mature in 2035.
4.2*	Amended and Restated Trust Agreement, dated as of July 21, 2005, among Farmers Capital Bank Corporation, as Depositor, Wilmington Trust Company, as Property and Delaware Trustee, the Administrative Trustees (as named therein), and the Holders (as defined therein).
4.3*	Guarantee Agreement, dated as of July 21, 2005, between Farmers Capital Bank Corporation, as Guarantor, and Wilmington Trust Company, as Guarantee Trustee.
4.4*	Junior Subordinated Indenture, dated as of July 26, 2005, between Farmers Capital Bank Corporation and Wilmington Trust Company, as Trustee, relating to unsecured junior subordinated deferrable interest notes that mature in 2035.
4.5*	Amended and Restated Trust Agreement, dated as of July 26, 2005, among Farmers Capital Bank Corporation, as Depositor, Wilmington Trust Company, as Property and Delaware Trustee, the Administrative Trustees (as named therein), and the Holders (as defined therein).
4.6*	Guarantee Agreement, dated as of July 26, 2005, between Farmers Capital Bank Corporation, as Guarantor, and Wilmington Trust Company, as Guarantee Trustee.
4.7*	Indenture, dated as of August 14, 2007 between Farmers Capital Bank Corporation, as Issuer, and Wilmington Trust Company, as Trustee, relating to fixed/floating rate junior subordinated debt due 2037.
4.8*	Amended and Restated Declaration of Trust, dated as of August 14, 2007, by Farmers Capital Bank Corporation, as Sponsor, Wilmington Trust Company, as Delaware and Institutional Trustee, the Administrative Trustees (as named therein), and the Holders (as defined therein).

120

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4.9*
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 (incorporated by reference to the Current Report on Form 8-K dated January 13, 2009)2009 (File No. 000-14412)).

4.11
4.11	Letter Agreement, dated January 9, 2009, between Farmers Capital Bank Corporation and the United States Treasury, with respect to the issuance and sale of the Series A preferred stock and the Warrant, forand Securities Purchase of Shares of Common Stock (incorporatedAgreement-Standard Terms attached thereto as Exhibit A (incorporated by reference to the Current Report on Form 8-K dated January 13, 2009)2009 (File No. 000-14412)).
10.1	Agreement and Employee Stock Purchase 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 (incorporated by reference to Appendix A of Registration Statement filed on Form S-4 on October 11, 2005)S-8 effective June 24, 2004 (File No. 333-116801)).
10.2	Amended and Restated Nonqualified Stock Option 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(incorporated by reference to Form 424B3 on August 7, 2006)S-8 effective September 8, 1998 (File No. 333-63037)).
10.3	Stock Purchase Agreement Dated June 1, 2006 by and among Employment agreement dated December 10, 2012 between Farmers Capital Bank Corporation Kentucky Banking Centers, Inc. and Citizens First Corporation.Lloyd C. Hillard, Jr. (incorporated by reference to the Quarterly Report onExhibit 10.1 to Form 10-Q for the quarterly period ended September 30, 2008)8-K/A filed December 26, 2012).
21 10.4	Subsidiaries of the Registrant Amendment No. 1 to Employment agreement dated December 10, 2012 between Farmers Capital Bank Corporation and Lloyd C. Hillard, Jr. (incorporated by reference to Exhibit 10.1 to Form 8-K filed December 30, 2013).
23 10.5	Employment agreement dated December 17, 2013 between Farmers Capital Bank Corporation and Rickey D. Harp (incorporated by reference to Exhibit 10.1 to Form 8-K filed December 30, 2013).
16**	Letter re Change in Certifying Accountant
21**	Subsidiaries of the Registrant
23.1**	Consent of Independent Registered Public Accounting Firm (BKD, LLP)
31.1 23.2**	Consent of Independent Registered Public Accounting Firm (Crowe Horwath LLP)
31.1**	CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 31.2**	CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 32**	CEO and CFO Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 101	Annual Certification of Chief Executive Officer Pursuant to 31 C.F.R. 30.15
99.2	Annual Certification of Chief Financial Officer Pursuant to 31 C.F.R. 30.15 Interactive Data Files

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

**	Filed with this Annual Report on Form 10-K.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	FARMERS CAPITAL BANK CORPORATION
	By:	/s/ Lloyd C. Hillard, Jr.
		Lloyd C. Hillard, Jr.
		President and Chief Executive Officer
	Date:	March 8, 20116, 2014

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ Lloyd C. Hillard, Jr.	President, Chief Executive Officer	March 8, 20116, 2014
Lloyd C. Hillard, Jr.	and Director (principal executive
	officer of the Registrant)
/s/ Frank W. Sower, Jr.R. Terry Bennett	Chairman	February 26, 201124, 2014
Frank W. Sower, Jr. R. Terry Bennett
/s/ Ben F. BrownJ. Barry Banker	Director Vice Chairman	February 28, 201126, 2014
Ben F. Brown J. Barry Banker
/s/ Daniel M. SullivanMichael J. Crawford	Director	March 1, 2011 February 25, 2014
Daniel M. Sullivan Michael J. Crawford
/s/ John R. Terry BennettFarris	Director	February 26, 201125, 2014
John R. Terry BennettFarris
/s/ Shelley S. SweeneyWilliam C. Nash	Director	February 27, 201123, 2014
Shelley S. Sweeney Dr. William C. Nash
/s/ David R. O’Bryan	Director	February 28, 201127, 2014
David R. O’Bryan
/s/ William C. NashFred N. Parker	Director	February 26, 20112014
Dr. William C. Nash Fred N. Parker
/s/ J. D. SutterlinDavid Y. Phelps	Director	February 25, 201128, 2014
Dr. John D. Sutterlin David Y. Phelps
/s/ Marvin E. Strong, Jr.	Director	February 28, 201127, 2014
Marvin E. Strong, Jr.
/s/ J. Barry BankerFred Sutterlin	Director	February 28, 201127, 2014
J. Barry Banker Fred Sutterlin
/s/ Michael J. CrawfordShelley S. Sweeney	Director	February 28, 201122, 2014
Michael J. Crawford Shelley S. Sweeney
/s/ Doug Carpenter	Executive Vice President, Secretary,	March 8, 20116, 2014
C. Douglas Carpenter	and Chief Financial Officer
	(principal (principal financial and accounting officer)

 

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INDEX OF EXHIBITS

Exhibit		Page
21	Subsidiaries of the Registrant	124
23	Consent of Independent Registered Public Accounting Firm	125
31.1	CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	126
31.2	CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	127
32	Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	128
99.1	Annual Certification of Chief Executive Officer Pursuant to 31 C.F.R. 30.15	129
99.2	Annual Certification of Chief Financial Officer Pursuant to 31 C.F.R. 30.15	131

123

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Exhibit		Page
16	Letter re Change in Certifying Accountant	137
21	Subsidiaries of the Registrant	138
23.1	Consent of Independent Registered Public Accounting Firm	139
23.2	Consent of Independent Registered Public Accounting Firm	140
31.1	CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	141
31.2	CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	142
32	CEO and CFO Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	143