- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT

Pursuant to Section 13 OR 15(d) of

The Securities Exchange Act of 1934

For the quarterly period ended March 31, 2011

Farmers Capital Bank Corporation

(Exact name of registrant as specified in its charter)

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

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

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

	Not Applicable
	(Former name or former address, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

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

Yes ¨ No ¨

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

Large accelerated filer ¨	Accelerated filer ¨

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

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

Yes ¨ No x

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

Common stock, par value $0.125 per share

7,419,756 shares outstanding at May 5, 2011

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3. Quantitative and Qualitative Disclosures About Market Risk	43

Item 4. Controls and Procedures	43

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	43

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 6. Exhibits	45

SIGNATURES	47

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Unaudited Consolidated Balance Sheets

	March 31,			December 31,
(Dollars in thousands, except per share data)	2011			2010
Assets
Cash and cash equivalents:
Cash and due from banks	$	26,488		$	24,268
Interest bearing deposits in other banks		139,505			139,902
Federal funds sold and securities purchased under agreements to resell		18,194			17,886
Total cash and cash equivalents		184,187			182,056
Investment securities:
Available for sale, amortized cost of $512,845 (2011) and $440,580 (2010)		515,523			444,182
Held to maturity, fair value of $871 (2011) and $844 (2010)		930			930
Total investment securities		516,453			445,112
Loans, net of unearned income		1,151,467			1,192,840
Allowance for loan losses		(29,022	)		(28,784	)
Loans, net		1,122,445			1,164,056
Premises and equipment, net		39,133			39,612
Company-owned life insurance		26,778			28,791
Other intangibles, net		3,266			3,552
Other real estate owned		34,371			30,545
Other assets		41,055			41,969
Total assets	$	1,967,688		$	1,935,693
Liabilities
Deposits:
Noninterest bearing	$	216,061		$	206,887
Interest bearing		1,257,196			1,256,685
Total deposits		1,473,257			1,463,572
Term federal funds purchased and other short-term borrowings		72,810			47,409
Securities sold under agreements to repurchase and other long-term borrowings		201,068			203,239
Subordinated notes payable to unconsolidated trusts		48,970			48,970
Dividends payable		188			188
Other liabilities		21,321			22,419
Total liabilities		1,817,614			1,785,797
Shareholders’ Equity
Preferred stock, no par value 1,000,000 shares authorized; 30,000 Series A shares issued and outstanding at March 31, 2011 and December 31, 2010; Liquidation preference of $30,000		28,816			28,719
Common stock, par value $.125 per share 14,608,000 shares authorized; 7,419,756 and 7,411,676 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively		927			926
Capital surplus		50,725			50,675
Retained earnings		69,251			68,678
Accumulated other comprehensive income		355			898
Total shareholders’ equity		150,074			149,896
Total liabilities and shareholders’ equity	$	1,967,688		$	1,935,693

See accompanying notes to unaudited consolidated financial statements.

Unaudited Consolidated Statements of Income

	Three Months Ended
	March 31,
(In thousands, except per share data)	2011			2010
Interest Income
Interest and fees on loans	$	16,180		$	17,742
Interest on investment securities:
Taxable		3,370			4,699
Nontaxable		533			857
Interest on deposits in other banks		83			82
Interest on federal funds sold and securities purchased under agreements to resell		2			2
Total interest income		20,168			23,382
Interest Expense
Interest on deposits		3,947			6,702
Interest on federal funds purchased and other short-term borrowings		62			92
Interest on securities sold under agreements to repurchase and other long-term borrowings		1,998			2,637
Interest on subordinated notes payable to unconsolidated trusts		505			501
Total interest expense		6,512			9,932
Net interest income		13,656			13,450
Provision for loan losses		2,441			1,926
Net interest income after provision for loan losses		11,215			11,524
Noninterest Income
Service charges and fees on deposits		2,053			2,144
Allotment processing fees		1,329			1,368
Other service charges, commissions, and fees		1,029			1,121
Data processing income		264			347
Trust income		427			428
Investment securities gains, net		410			1,612
Gains on sale of mortgage loans, net		141			121
Income from company-owned life insurance		235			293
Other		5			56
Total noninterest income		5,893			7,490
Noninterest Expense
Salaries and employee benefits		6,765			7,096
Occupancy expenses, net		1,232			1,279
Equipment expenses		610			661
Data processing and communication expenses		1,228			1,443
Bank franchise tax		631			617
Deposit insurance expense		889			1,106
Correspondent bank fees		121			193
Amortization of intangibles		286			359
Other real estate expenses, net		680			1,672
Deposit fraud loss		700
Other		2,140			2,071
Total noninterest expense		15,282			16,497
Income before income taxes		1,826			2,517
Income tax expense		781			572
Net income		1,045			1,945
Dividends and accretion on preferred shares		(472	)		(466	)
Net income available to common shareholders	$	573		$	1,479
Per Common Share
Net income, basic and diluted	$	.08		$	.20
Cash dividends declared		N/A			N/A
Weighted Average Shares Common Outstanding
Basic and diluted		7,412			7,379

See accompanying notes to unaudited consolidated financial statements.

Unaudited Consolidated Statements of Comprehensive Income

	Three Months Ended
	March 31,
(In thousands)	2011			2010
Net Income	$	1,045		$	1,945
Other comprehensive income:
Net unrealized holding gain on available for sale securities arising during the period on securities held at end of period, net of tax of $24 and $602, respectively		45			1,118

Reclassification adjustment for prior period unrealized gain previously reported in other comprehensive income recognized during current period, net of tax of $348 and $458, respectively		(646	)		(850	)

Change in unfunded portion of postretirement benefit obligation, net of tax of $32 and $32, respectively		58			59
Other comprehensive (loss) income		(543	)		327
Comprehensive Income	$	502		$	2,272

See accompanying notes to unaudited consolidated financial statements.

Unaudited Consolidated Statements of Cash Flows

Three months ended March 31, (In thousands)	2011			2010
Cash Flows from Operating Activities
Net income	$	1,045		$	1,945
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,237			1,319
Net premium amortization of available for sale investment securities		828			364
Provision for loan losses		2,441			1,926
Noncash compensation expense		17			15
Mortgage loans originated for sale		(5,621	)		(5,473	)
Proceeds from sale of mortgage loans		7,027			6,417
Deferred income tax expense		2,063			1,724
Gain on sale of mortgage loans, net		(141	)		(121	)
Gain on disposal of premises and equipment, net					(24	)
Net loss on sale and write downs of repossessed real estate		396			1,388
Net gain on sale of available for sale investment securities		(410	)		(1,612	)
Decrease in accrued interest receivable		405			463
Income from company-owned life insurance		(235	)		(279	)
Increase in other assets		(1,298	)		(854	)
Decrease in accrued interest payable		(133	)		(401	)
(Decrease) increase in other liabilities		(875	)		(1,256	)
Net cash provided by operating activities		6,746			5,541
Cash Flows from Investing Activities
Proceeds from maturities and calls of available for sale investment securities		22,052			53,375
Proceeds from sale of available for sale investment securities		25,606			62,212
Purchase of available for sale investment securities		(120,341	)		(124,136	)
Purchase of restricted stock investments					(331	)
Net principal collected in excess of loans originated for investment		32,379			10,242
Proceeds from surrender of company-owned life insurance		2,248			8,567
Purchase of premises and equipment		(436	)		(413	)
Proceeds from sale of repossessed assets		1,303			6,761
Proceeds from sale of equipment					24
Net cash (used in) provided by investing activities		(37,189	)		16,301
Cash Flows from Financing Activities
Net increase (decrease) in deposits		9,685			(8,997	)
Net increase (decrease) in federal funds purchased and other short-term borrowings		25,401			(8,618	)
Repayments of securities sold under agreements to repurchase and other long-term debt		(2,171	)		(5,175	)
Dividends paid, common and preferred		(375	)		(1,112	)
Shares issued under employee stock purchase plan		34			42
Net cash provided by (used in) financing activities		32,574			(23,860	)
Net increase (decrease) in cash and cash equivalents		2,131			(2,018	)
Cash and cash equivalents at beginning of year		182,056			218,336
Cash and cash equivalents at end of period	$	184,187		$	216,318
Supplemental Disclosures
Cash paid during the period for:
Interest	$	6,645		$	10,333
Income taxes		750			89
Transfers from loans to other real estate		5,525			3,803
Cash dividends payable, preferred		188			188

See accompanying notes to unaudited consolidated financial statements.

Unaudited Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands, except per share data)												Accumulated
												Other			Total
Three months ended	Preferred		Common Stock				Capital		Retained			Comprehensive			Shareholders’
March 31, 2011 and 2010	Stock		Shares		Amount		Surplus		Earnings			Income			Equity
Balance at January 1, 2011	$	28,719		7,412	$	926	$	50,675	$	68,678		$	898		$	149,896
Net income										1,045						1,045
Other comprehensive loss													(543	)		(543	)
Preferred stock dividends, $12.50 per share										(375	)					(375	)
Preferred stock discount accretion		97								(97	)
Shares issued pursuant to employee stock purchase plan				8		1		33								34
Noncash compensation expense attributed to employee stock purchase plan								17								17
Balance at March 31, 2011	$	28,816		7,420	$	927	$	50,725	$	69,251		$	355		$	150,074



Balance at January 1, 2010	$	28,348		7,379	$	922	$	50,476	$	63,617		$	3,864		$	147,227
Net income										1,945						1,945
Other comprehensive income													327			327
Preferred stock dividends, $12. 50 per share										(375	)					(375	)
Preferred stock discount accretion		91								(91	)
Shares issued pursuant to employee stock purchase plan				5		1		41								42
Noncash compensation expense attributed to employee stock purchase plan								15								15
Balance at March 31, 2010	$	28,439		7,384	$	923	$	50,532	$	65,096		$	4,191		$	149,181

See accompanying notes to unaudited consolidated financial statements.

Notes to Unaudited Consolidated Financial Statements

1.	Basis of Presentation and Nature of Operations

The consolidated financial statements include the accounts of Farmers Capital Bank Corporation (the “Company” or “Parent Company”), a bank holding company, and its bank and nonbank subsidiaries. Bank subsidiaries include Farmers Bank & Capital Trust Company (“Farmers Bank”) in Frankfort, KY and its significant wholly-owned subsidiaries Leasing One Corporation (“Leasing One”), Farmers Capital Insurance Corporation (“Farmers Insurance”), and EG Properties, Inc. (“EG Properties”). Leasing One is a commercial leasing company in Frankfort, KY , Farmers Insurance is an insurance agency in Frankfort, KY, and EG Properties is involved in real estate management and liquidation for certain repossessed properties of Farmers Bank; First Citizens Bank in Elizabethtown, KY; United Bank & Trust Company (“United Bank”) in Versailles, KY and its wholly-owned subsidiary EGT Properties, Inc. EGT Properties is involved in real estate management and liquidation for certain repossessed properties of United Bank; and Citizens Bank of Northern Kentucky, Inc. in Newport, KY (“Citizens Northern”) and its wholly-owned subsidiary ENKY Properties, Inc. ENKY Properties 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 to manage and liquidate certain real estate properties repossessed by the Company. In addition, the Company has three subsidiaries organized as Delaware statutory trusts that are not consolidated into its financial statements. These trusts were formed for the purpose of issuing trust preferred securities.

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

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of 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 real estate, actuarial assumptions used to calculate postretirement benefits, and the fair values of financial instruments are estimates that are particularly subject to change.

The financial information presented as of any date other than December 31 has been prepared from the books and records without audit. The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. All significant intercompany transactions and balances are eliminated in consolidation.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010.

2.	Reclassifications

Certain reclassifications have been made to the consolidated financial statements of prior periods to conform to the current period presentation. These reclassifications do not affect net income or total shareholders’ equity as previously reported.

3. Net Income Per Common Share

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

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

Net income per common share computations were as follows at March 31, 2011 and 2010.

	Three Months Ended March 31,
(In thousands, except per share data)	2011			2010

Net income, basic and diluted	$	1,045		$	1,945
Preferred stock dividends and discount accretion		(472	)		(466	)
Net income available to common shareholders, basic and diluted	$	573		$	1,479


Average common shares issued and outstanding, basic and diluted		7,412			7,379

Net income per common share, basic and diluted	$	.08		$	.20

Options to purchase 24,049 and 28,049 shares of common stock at March 31, 2011 and 2010, respectively, were excluded from the computation of net income per common share because they were antidilutive. There were 223,992 potential common shares associated with a warrant issued to the U.S. Treasury that were excluded from the computation of earnings per common share at March 31, 2011 and 2010 because they were antidilutive.

4. Fair Value Measurements

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

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

Level 1:

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

Level 2:

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

Level 3:

Significant unobservable inputs that reflect a reporting entity’s own assumptions 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 March 31, 2011 and December 31, 2010 are as follows:

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

March 31, 2011
U.S. Treasury securities	$	49	$	49
Obligations of U.S. government-sponsored entities		96,490			$	96,490
Obligations of states and political subdivisions		66,871				66,871
Mortgage-backed securities – residential		343,410				343,410
Mortgage-backed securities – commercial		508				508
Money market mutual funds		471		471
Corporate debt securities		7,349				7,349
Equity securities		375		375
Total	$	515,523	$	895	$	514,628	$ 0

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

December 31, 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

The Company is required to measure and disclose certain other assets and liabilities at fair value on a nonrecurring basis to comply with U.S. GAAP. The Company’s disclosure about assets and liabilities measured at fair value on a nonrecurring basis consists of impaired loans and other real estate owned (“OREO”).

Impaired loans were $164 million and $130 million at March 31, 2011 and year-end 2010, respectively. The amount of impaired loans at March 31, 2011 includes $15.2 million that were adjusted downward to their estimated fair value of $14.1 million during the current quarter, resulting in an impairment charge of $1.1 million recorded through the provision for loan losses and the allowance for loan losses. Impaired loans at March 31, 2010 include $16.8 million that were adjusted downward to their estimated fair value of $16.0 million during the first quarter a year ago, resulting in an impairment charge of $810 thousand included recorded through the provision for loan losses 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 March 31, 2011 and December 31, 2010 OREO was $34.4 million and $30.5 million, respectively. OREO at March 31, 2011 includes $3.1 million that was written down to its estimated fair value of $2.9 million in the current quarter, resulting in an impairment charge of $229 thousand included in earnings. OREO at March 31, 2010 includes $5.9 million that was written down to its estimated fair value of $5.0 million in the first quarter a year ago, resulting in an impairment charge of $943 thousand. In addition to the impairment charges, net losses included in earnings from the sale of OREO were $170 thousand and $439 thousand for the first quarter of 2011 and 2010, respectively.

The following tables represent the carrying amount of assets measured at fair value on a nonrecurring basis and still held for the dates indicated. Impaired loan amounts in the tables below exclude restructured loans since they are measured based on present value techniques, which are outside the scope of the fair value reporting framework.

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

March 31, 2011
Impaired Loans
Real estate-construction and land development	$	7,939			$	7,939
Real estate mortgage-residential		9,610				9,610
Real estate mortgage-farmland and other commercial enterprises		17,126				17,126
Commercial and industrial		139				139
Consumer-secured		167				167
Total-Impaired Loans	$	34,981			$	34,981

OREO
Real estate-construction and land development	$	1,452			$	1,452
Real estate mortgage-residential		318				318
Real estate mortgage-farmland and other commercial enterprises		1,082				1,082
Total-OREO	$	2,852			$	2,852

			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, 2010
Impaired Loans
Real estate-construction and land development	$	12,573			$	12,573
Real estate mortgage-residential		10,376				10,376
Real estate mortgage-farmland and other commercial enterprises		9,331				9,331
Commercial and industrial		133				133
Consumer-secured		38				38
Total-Impaired Loans	$	32,451			$	32,451

OREO
Real estate-construction and land development	$	12,381			$	12,381
Real estate mortgage-residential		630				630
Real estate mortgage-farmland and other commercial enterprises		2,810				2,810
Total-OREO	$	15,821			$	15,821

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

(In thousands)
Three months ended	March 31, 2011		March 31, 2010
Impairment charges:
Impaired Loans	$	1,134	$	810
OREO		229		943
Total	$	1,363	$	1,753

Fair Value of Financial Instruments

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

The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

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

The carrying amount is a reasonable estimate of fair value.

Investment Securities Available for Sale

Available for sale investment securities are measured and carried at fair value on a recurring basis. Additional information about the methods and assumption used to estimate fair value of available for sale investment securities is described above.

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.

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


	March 31, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
(In thousands)	Amount		Value		Amount		Value
Assets
Cash and cash equivalents	$	184,187	$	184,187	$	182,056	$	182,056
Investment securities:
Available for sale		515,523		515,523		444,182		444,182
Held to maturity		930		871		930		844
FHLB and similar stock		9,516		N/A		9,515		N/A
Loans, net		1,122,445		1,115,798		1,164,056		1,157,606
Accrued interest receivable		6,853		6,853		7,258		7,258

Liabilities
Deposits		1,473,257		1,479,395		1,463,572		1,470,277
Federal funds purchased and other short-term borrowings		72,810		72,810		47,409		47,409
Securities sold under agreements to repurchase and other long-term borrowings		201,068		215,519		203,239		219,709
Subordinated notes payable to unconsolidated trusts		48,970		27,871		48,970		27,234
Accrued interest payable		2,678		2,678		2,811		2,811

5. Investment Securities

The following tables summarize the amortized costs and estimated fair value of the securities portfolio at March 31, 2011 and December 31, 2010. The summary is divided into available for sale and held to maturity investment securities.


	Amortized		Gross		Gross		Estimated
March 31, 2011 (In thousands)	Cost		Unrealized Gains		Unrealized Losses		Fair Value
Available For Sale
Obligations of U.S. government-sponsored entities	$	97,279	$	34	$	823	$	96,490
Obligations of states and political subdivisions		66,702		936		767		66,871
Mortgage-backed securities – residential		339,627		6,631		2,848		343,410
Mortgage-backed securities – commercial		494		14				508
U.S. Treasury securities		49						49
Money market mutual funds		471						471
Corporate debt securities		7,848				499		7,349
Equity securities		375						375
Total securities – available for sale	$	512,845	$	7,615	$	4,937	$	515,523
Held To Maturity
Obligations of states and political subdivisions	$	930	$	0	$	59	$	871

	Amortized		Gross		Gross		Estimated
December 31, 2010 (In thousands)	Cost		Unrealized Gains		Unrealized 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

The amortized cost and estimated fair value of the securities portfolio at March 31, 2011, by contractual maturity, are detailed below. The summary is divided into available for sale and held to maturity securities. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities are stated separately due to the nature of payment and prepayment characteristics of these securities, as principal is not due at a single date.


	Available For Sale				Held To Maturity
	Amortized		Estimated		Amortized		Estimated
March 31, 2011 (In thousands)	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	5,269	$	5,293
Due after one year through five years		90,430		90,293
Due after five years through ten years		55,967		55,565
Due after ten years		20,683		20,079	$	930	$	871
Mortgage-backed securities		340,121		343,918
Total	$	512,470	$	515,148	$	930	$	871

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

	Three Months Ended
	March 31 ,
(In thousands)	2011		2010

Gross realized gains	$	413	$	1,612
Gross realized losses		3
Net realized gains	$	410	$	1,612
Income tax provision related to net realized gains	$	144	$	564

Proceeds from sales and calls of available for sale investment securities	$	44,333	$	96,281

Investment securities with unrealized losses at March 31, 2011 and December 31, 2010 not recognized in income are presented in the tables below. The tables segregate investment securities that have been in a continuous unrealized loss position for less than twelve months from those that have been in a continuous unrealized loss position for twelve months or more. The tables also include the fair value of the related securities.


	Less than 12 Months				12 Months or More				Total
March 31, 2011 (In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored entities	$	69,250	$	823					$	69,250	$	823
Obligations of states and political subdivisions		24,160		667	$	5,760	$	159		29,920		826
Mortgage-backed securities – residential		186,779		2,848						186,779		2,848
Corporate debt securities						5,330		499		5,330		499
Total	$	280,189	$	4,338	$	11,090	$	658	$	291,279	$	4,996


	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

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 March 31, 2011, the Company’s investment securities portfolio had gross unrealized losses of $5.0 million, unchanged from year-end 2010. Of the total gross unrealized losses at March 31, 2011, $658 thousand relates to investments that have been in a continuous loss position for 12 months or more. Unrealized losses on corporate debt securities make up $499 thousand of the total unrealized loss on investment securities in a continuous loss position of 12 months or more. This represents an improvement of $336 thousand or 40.2% from year-end 2010.

Corporate debt securities in the Company’s investment securities portfolio at March 31, 2011 consist primarily of single-issuer trust preferred capital securities issued by a national and global financial services firm. Each of these securities is currently performing and the issuer of these securities continues to be rated as investment grade by major rating agencies. The unrealized loss on corporate debt securities is primarily attributed to the general decline in financial markets and illiquidity events that began in 2008 and is not due to adverse changes in the expected cash flows of the individual securities. Overall market declines, particularly of banking and financial institutions, are a result of significant stress throughout the regional and national economy that began during 2008 that, while beginning to improve, has not fully stabilized.

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

Investment securities with unrealized losses at March 31, 2011 are performing according to their contractual terms. The Company does not have the intent to sell these securities and likely will not be required to sell these securities before their anticipated recovery. The Company does not consider any of the securities to be impaired due to reasons of credit quality or other factors.

6. Loans and Allowance for Loan Losses

Major classifications of loans outstanding are summarized as follows:

	March 31, 2011			December 31, 2010
(Dollars in thousands)	Amount			Amount

Real Estate:
Real estate – construction and land development	$	148,998		$	154,208
Real estate – residential		456,020			469,273
Real estate mortgage – farmland and other commercial enterprises		405,309			416,904
Commercial:
Commercial and industrial		55,263			57,029
States and political subdivisions		25,341			26,302
Lease financing		13,685			16,187
Other		21,807			25,628
Consumer:
Secured		19,724			22,607
Unsecured		6,267			5,925
Total loans		1,152,414			1,194,063
Less unearned income		(947	)		(1,223	)
Total loans, net of unearned income	$	1,151,467		$	1,192,840

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

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

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

Three months ended March 31, (Dollars in thousands)	2010

Balance, beginning of period	$	23,364
Provision for loan losses		1,926
Recoveries		159
Loans charged off		(1,755	)
Balance, end of period	$	23,694

Individually impaired loans were as follows for the dates indicated.


(In thousands)	March 31, 2011		December 31, 2010
Loans with no allocated allowance for loan losses	$	89,981	$	58,235
Loans with allocated allowance for loan losses		74,346		71,785
Total	$	164,327	$	130,020

Amount of the allowance for loan losses allocated	$	6,466	$	6,033


(In thousands)	March 31, 2011
Average of individually impaired loans:
Real Estate
Real estate – construction and land development	$	57,996
Real estate mortgage – residential		31,097
Real estate mortgage – farmland and other commercial enterprises		73,105
Commercial
Commercial and industrial		4,314
Consumer
Secured		203
Total average of impaired loans	$	166,715

Interest income recognized during impairment:
Real Estate
Real estate – construction and land development	$	341
Real estate mortgage – residential		351
Real estate mortgage – farmland and other commercial enterprises		1,107
Commercial
Commercial and industrial		50
Consumer
Secured		3
Total interest income recognized during impairment	$	1,852

Cash-basis interest income recognized:
Real Estate
Real estate – construction and land development	$	229
Real estate mortgage – residential		353
Real estate mortgage – farmland and other commercial enterprises		657
Commercial
Commercial and industrial		50
Consumer
Secured		2
Total cash-basis interest income recognized	$	1,291

For the year ended December 31, 2010, the average of individually impaired loans was $120 million. Interest income recognized on impaired loans for 2010 was $4.0 million and cash-basis interest income recognized was $3.9 million. Amounts for 2010 do not include the same level of detail as presented in the table above since expanded disclosure requirements did not take effect until 2011.

The following table presents individually impaired loans by class of loans for the dates indicated.

March 31, 2011 (In thousands)	Recorded Investment		Unpaid Principal Balance		Allowance for Loan Losses Allocated
Impaired loans with no related allowance recorded:
Real Estate
Real estate – construction and land development	$	27,822	$	27,777
Real estate mortgage – residential		12,479		12,439
Real estate mortgage – farmland and other commercial enterprises		45,856		45,537
Commercial
Commercial and industrial		4,230		4,228
Total	$	90,387	$	89,981

Impaired loans with an allowance recorded:
Real Estate
Real estate – construction and land development	$	28,118	$	28,068	$	2,738
Real estate mortgage – residential		23,676		23,545		2,299
Real estate mortgage – farmland and other commercial enterprises		22,189		22,095		1,098
Commercial
Commercial and industrial		438		436		297
Consumer
Secured		203		202		34
Total	$	74,624	$	74,346	$	6,466

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 tables above excludes immaterial amounts attributed to net deferred loan costs.

The following tables present the balance of the allowance for loan losses and the recorded investment in loans by portfolio segment based on the impairment method as of March 31, 2011 and December 31, 2010.

March 31, 2011 (In thousands)	Real Estate		Commercial		Consumer		Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	6,135	$	297	$	34	$	6,466
Collectively evaluated for impairment		18,753		2,917		886		22,556
Total ending allowance balance	$	24,888	$	3,214	$	920	$	29,022

Loans
Loans individually evaluated for impairment	$	159,461	$	4,664	$	202	$	164,327
Loans collectively evaluated for impairment		850,866		110,485		25,789		987,140
Total ending loan balance, net of unearned income	$	1,010,327	$	115,149	$	25,991	$	1,151,467

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 tables above exclude immaterial amounts attributed to accrued interest receivable.

The following tables present the recorded investment in nonperforming loans by class of loans as of March 31, 2011 and December 31, 2010.

March 31, 2011 (In thousands)	Nonaccrual		Restructured Loans		Loans Past Due 90 Days or More and Still Accruing
Real Estate:
Real estate – construction and land development	$	33,054	$	19,339
Real estate mortgage – residential		11,657		8,301	$	28
Real estate mortgage – farmland and other commercial enterprises		11,980		9,106
Commercial:
Commercial and industrial		522
Lease financing		143				13
Other		64
Consumer:
Secured		48
Unsecured		5				4
Total	$	57,473	$	36,746	$	45

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 tables above exclude immaterial amounts attributed to net deferred loan costs and accrued interest receivable.

The Company has allocated $3,846,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2011. The Company has committed to lend additional amounts totaling up to $33,000 to customers with outstanding loans that are classified as troubled debt restructurings.

The tables below present an age analysis of past due loans 30 days or more by class of loans as of March 31, 2011 and December 31, 2010. Past due loans that are also classified as nonaccrual are included in their respective past due category .

March 31, 2011 (In thousands)	30-89 Days Past Due		90 Days or More Past Due		Total		Current		Total Loans
Real Estate:
Real estate – construction and land development	$	734	$	19,571	$	20,305	$	128,693	$	148,998
Real estate mortgage – residential		4,803		6,290		11,093		444,927		456,020
Real estate mortgage – farmland and other commercial enterprises		9,111		10,452		19,563		385,746		405,309
Commercial:
Commercial and industrial		177		350		527		54,736		55,263
States and political subdivisions								25,341		25,341
Lease financing, net		163		155		318		12,420		12,738
Other		37		64		101		21,706		21,807
Consumer:
Secured		207		12		219		19,505		19,724
Unsecured		22				22		6,245		6,267
Total	$	15,254	$	36,894	$	52,148	$	1,099,319	$	1,151,467

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 tables above exclude immaterial amounts attributed to net deferred loan costs and accrued interest receivable.

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

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

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

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

Loans not meeting the criteria above which are analyzed individually as part of the above described process are considered to be pass rated loans. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows for the dates indicated.

	Real Estate						Commercial
March 31, 2011 (In thousands)	Real Estate-Construction and Land Development		Real Estate Mortgage-Residential		Real Estate Mortgage-Farmland and Other Commercial Enterprises		Commercial and Industrial		States and Political Subdivisions		Lease Financing		Other
Credit risk profile by internally assigned rating grades:
Pass	$	79,522	$	393,665	$	312,534	$	48,263	$	25,341	$	12,060	$	20,712
Special Mention		7,873		21,295		18,200		1,248						1,031
Substandard		55,120		36,412		69,110		5,574				678		64
Doubtful		6,483		4,648		5,465		178
Total	$	148,998	$	456,020	$	405,309	$	55,263	$	25,341	$	12,738	$	21,807

	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 March 31, 2011 and December 31, 2010.

	March 31, 2011				December 31, 2010
	Consumer				Consumer
(In thousands)	Secured		Unsecured		Secured		Unsecured
Credit risk profile based on payment activity:
Performing	$	19,683	$	6,251	$	22,498	$	5,915
Nonperforming		41		16		109		10
Total	$	19,724	$	6,267	$	22,607	$	5,925

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

7 . Other Real Estate Owned

OREO was as follows as of the date indicated:

(In thousands)	March 31, 2011		December 31, 2010
Construction and land development	$	19,916	$	18,016
Residential real estate		5,452		3,203
Farmland and other commercial enterprises		9,003		9,326
Total	$	34,371	$	30,545

OREO activity for the three months ended March 31, 2011 and 2010 was as follows:

Three months ended March 31, (In thousands)	2011			2010
Beginning balance	$	30,545		$	31,232
Transfers from loans		5,525			3,803
Proceeds from sales		(1,303	)		(6,761	)
Loss on sales		(170	)		(439	)
Write downs and other decreases, net		(226	)		(1,149	)
Ending balance	$	34,371		$	26,686

8. Regulatory Matters

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

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

	March 31, 2011									December 31, 2010
	Tier 1 Risk-based Capital 1			Total Risk-based Capital 1			Tier 1 Leverage 2			Tier 1 Risk-based Capital 1			Total Risk-based Capital 1			Tier 1 Leverage 2
Consolidated		15.72	%		16.98	%		9.65	%		15.35	%		16.61	%		9.39	%
Farmers Bank		15.34			16.61			8.56			15.59			16.86			8.55
First Citizens Bank		13.81			14.59			8.90			12.76			13.50			8.46
United Bank		13.28			14.55			8.50			12.91			14.18			8.24
Citizens Northern		11.69			12.95			8.48			11.42			12.68			8.04

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.

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” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Parent Company

Primarily due to the regulatory actions and capital requirements at three of the Company’s subsidiary banks (as discussed below), the Federal Reserve Bank of St. Louis (“FRB St. Louis”) and Kentucky Department of Financial Institutions (“KDFI”) have entered into a Memorandum of Understanding (“Memorandum”) with the Company. 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 from $.25 per share down to $.10 per share during the fourth quarter of 2009 and to 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 March 31, 2011 Farmers Bank had a Tier 1 Leverage ratio of 8.56% and a Total Risk-based Capital ratio of 16.61%.

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

United Bank

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 March 31, 2011, United Bank had a Tier 1 Leverage ratio of 8.50% and a Total Risk-based Capital ratio of 14.55%.

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 8.04% as of year-end 2010. At March 31, 2011, Citizens Northern had a Tier 1 Leverage ratio of 8.48% and a Total Risk-based Capital ratio of 12.95%.

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 March 31, 2011, with the exception that the level of substandard loans at Farmers Bank exceed its target amount by $6.8 million. The level of substandard loans at Farmers Bank was in excess of its target amount due mainly to the addition of one credit relationship during the first quarter of 2011 in the amount of $7.1 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 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 under no directive by its regulators to raise any additional capital.

9. Uncertain Tax Position

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. The Company has a potential accumulated tax liability of $402 thousand at risk related to the determination for the tax years 2007 through 2010. Under ASC 740, “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. Additionally, ASC 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 recorded an accrual of $449 thousand including the $402 thousand accumulated tax liability and interest of $47 thousand in the first quarter of 2011.

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.

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

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements with the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Statements in this report that are not statements of historical fact are forward-looking statements. In general, forward-looking statements relate to a discussion of future financial results or projections, future economic performance, future operational plans and objectives, and statements regarding the underlying assumptions of such statements. Although 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” in the Company’s most recent Annual Report on Form 10-K, factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which the Company and its subsidiaries operate) and lower interest margins; competition for the Company’s customers from other providers of financial services; deposit outflows or reduced demand for financial services and loan products; government legislation, regulation, and changes in monetary and fiscal policies (which changes from time to time and over which the Company has no control); changes in interest rates; changes in prepayment speeds of loans or investment securities; inflation; material unforeseen changes in the liquidity, results of operations, or financial condition of the Company’s customers; changes in the level of non-performing assets and charge-offs; changes in the number of common shares outstanding; the capability of the Company to successfully enter into a definitive agreement for and close anticipated transactions; the possibility that acquired entities may not perform as well as expected; unexpected claims or litigation against the Company; technological or operational difficulties; the impact of new accounting pronouncements and changes in policies and practices that may be adopted by regulatory agencies; acts of war or terrorism; the ability of the parent company to receive dividends from its subsidiaries; the impact of larger or similar financial institutions encountering difficulties, which may adversely affect the banking industry or the Company; the Company or its subsidiary banks’ ability to maintain required capital levels and adequate funding sources and liquidity; and other risks or uncertainties detailed in the Company’s filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company.

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

RESULTS OF OPERATIONS

First Quarter 2011 Compared to First Quarter 2010

The Company reported net income of $1.0 million for the quarter ended March 31, 2011 compared to net income of $1.9 million for the same quarter of 2010. This represents a decrease of $900 thousand or 46.3% in the comparison. On a per common share basis, net income was $.08 for the current quarter, a decrease of $.12 or 60.0% compared to $.20 for the first quarter of 2010. The percentage change in per common share earnings is greater than the percentage change in net income due to dividends and accretion related to the preferred stock outstanding and a slight increase in the number of common shares outstanding in the comparable periods. A summary of the quarterly comparison follows.

The $900 thousand decrease in net income for the current quarter compared to a year earlier was driven mainly by a $515 thousand or 26.7% increase in the provision for loan losses, lower investment securities gains of $1.2 million or 74.6%, partially offset by lower noninterest expenses of $1.2 million or 7.4%.

The provision for loan losses was $2.4 million in the current quarter compared to $1.9 million a year ago. The increase in the provision for loan losses in the current period is due mainly to a higher amount of specific allocations related to impaired loans.

The decrease in net gains on the sale of investment securities in the comparison resulted from the timing of the sale of investment securities from the available for sale portfolio. The Company periodically sells investment securities to refine its securities portfolio for normal asset-liability management or to lock in gains to help offset operating expenses and support capital.

Net interest income increased $206 thousand or 1.5%. The increase in net interest income was driven by lower interest expense of $3.4 million or 34.4%, which offset a decrease in interest income of $3.2 million or 13.7%.

Net interest margin was 3.18% in the current quarter, an increase of 25 basis points from 2.93% compared to a year earlier. Net interest spread was 2.94%, an increase of 18 basis points compared to 2.76%.

Noninterest expenses decreased $1.2 million or 7.4% in the comparison. Significant declines include expenses related to repossessed real estate of $992 thousand or 59.3%, salaries and employee benefits of $331 thousand or 4.7%, deposit insurance expense of $217 thousand or 19.6%, and data processing and communication expense of $215 thousand or 14.9%. These decreases were partially offset by two non-routine losses in the aggregate amount of $1.0 million. One of these losses relates to a fraudulent transaction on a deposit account involving one of the Company’s customers totaling $700 thousand for which the Company is filing insurance claims seeking possible recovery of this loss. The other loss relates to a $303 thousand write-down attributed to uncollectible amounts of property tax receivables at the Company’s leasing subsidiary.

Income tax expense increased $209 thousand or 36.5% in the quarterly comparison and is discussed in further detail under the heading “Income Taxes”.

Return on average assets (“ROA”) and equity (“ROE”) was .22% and 2.80%, respectively for the current quarter compared to .36% and 5.25% for the previous-year first quarter.

Net Interest Income

With the exception of the 3 and 6-month Treasury Bills, which were nearly unchanged, the overall interest rate environment at March 31, 2011 edged upward when compared to year-end 2010 as measured by the Treasury yield curves. However, the overall interest rate environment in the first quarter of 2011 decreased when compared to the first quarter of 2010. The overall rate environment remains near historic lows which makes managing the Company’s net interest margin very challenging. At March 31, 2011 the short-term federal funds target interest rate was between zero and 0.25%, which has remained unchanged since December 2008. Short-term treasury yields for 3 and 6-month maturities decreased 6 basis points compared to a year ago. Yields for the 3, 5, 10, and 30-year maturity periods decreased 27, 27, 36, and 21 basis points, respectively.

Net interest income was $13.7 million for the first three months of 2011, an increase of $206 thousand or 1.5% from $13.5 million a year earlier. The increase in net interest income is attributed mainly to a $3.4 million or 34.4% decrease in interest expense, primarily on deposits, partially offset by a $3.2 million or 13.7% decrease in interest income. The decrease in total interest income and interest expense is attributed to both rate and volume declines of interest earning assets and interest paying liabilities and reflects an overall shrinking balance sheet and lower interest rate environment compared to a year ago. The Company is generally earning and paying less interest from its earning assets and funding sources as the average rates earned and paid have decreased. This includes repricing of variable and floating rate assets and liabilities that have reset to net overall lower amounts since their previous repricing date as well as activity related to new earning assets and funding sources.

Interest income and interest expense related to nearly all categories of the Company’s earning assets and interest paying liabilities have declined in the quarterly comparison. For earning assets, the decrease in interest income is split nearly even among investment securities and loans. The decrease in interest income on investment securities was primarily rate driven, while the decrease in interest income on loans was attributed mainly to lower volume. For interest bearing liabilities, the decrease in interest expense was driven nearly equally by lower average rates paid combined, to a lesser extent, with a decrease in volume. Lower average rates paid on deposit accounts was the primary driver of the decrease in interest expense on deposits, while lower volume was the primary driver of the decrease in interest expense on borrowed funds.

Total interest income was $20.2 million in the first quarter of 2011, a decrease of $3.2 million or 13.7% compared to the first quarter of 2010. The decrease in interest income is made up of lower interest on investment securities of $1.7 million or 29.8% and lower interest on loans of $1.6 million or 8.8%. The decrease in interest on investment securities is mainly driven by a decrease in the average rate earned, which has declined as reinvested funds from sold, matured, or called bonds have repriced downward in a lower interest rate environment. For taxable investment securities, the average rate earned was 3.4% in the current quarter, a decrease of 103 basis points compared to 4.4% a year ago. The average rate earned on nontaxable investment securities was 4.8% and 5.3% in the current quarter and year-ago quarter, respectively, a decrease of 52 basis points. The decrease in interest on loans was driven primarily by a $90.6 million or 7.2% decrease in volume and, to a lesser extent, a decrease in the average rate earned of 10 basis points to 5.7% from 5.8%.

Total interest expense was $6.5 million in the first quarter of 2011. This represents a decrease of $3.4 million or 34.4% compared to $9.9 million a year ago. The decrease in interest expense was driven by lower interest expense on deposits of $2.8 million or 41.1%. The average rate paid on interest bearing deposit accounts was 1.3% in the current period, a decrease of 62 basis points compared to 1.9% a year earlier. Interest expense on time deposits, the largest component of interest expense on deposits, was the main driver of the lower interest expense. Interest expense on time deposits decreased $2.6 million or 42.6%, led by a 76 basis point lower average rate paid to 2.0% and a volume decline of $186 million or 20.7%. The lower average rate paid on deposits is a result of a lower rate environment and the Company’s action to more aggressively reprice certain higher-rate maturing time deposits downward or by allowing them to mature without renewing. Interest expense on long-term borrowings decreased $635 thousand or 20.2% due primarily to a lower average balance outstanding of $65.5 million or 20.7% that was driven by the maturity of long-term repurchase agreements of $50 million during the fourth quarter of 2010.

The net interest margin on a taxable equivalent basis increased 25 basis points to 3.18% during the first quarter of 2011 compared to 2.93% in the same quarter of 2010. The increase in net interest margin is due mainly to an 18 basis point increase in the spread between the average rate earned on earning assets and the average rate paid on interest bearing liabilities to 2.94% in the current quarter from 2.76% for the same quarter of 2010. The impact of noninterest bearing sources of funds contributed an additional seven basis points to net interest margin in the comparison. The Company expects its net interest margin to remain relatively flat in the near term according to internal modeling using expectations about future market interest rates, the maturity structure of the Company’s earning assets and liabilities, and other factors. Future results could be significantly different than expectations.

The following tables present an analysis of net interest income for the quarterly periods ended March 31.

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

Quarter Ended March 31,	2011									2010
(In thousands)	Average Balance			Interest			Average Rate			Average Balance			Interest			Average Rate
Earning Assets
Investment securities
Taxable	$	407,817		$	3,370			3.35	%	$	435,081		$	4,699			4.38	%
Nontaxable 1		66,099			785			4.82			94,999			1,252			5.34
Interest bearing deposits in banks, federal funds sold and securities purchased under agreements to resell		155,608			85			.22			152,431			84			.22
Loans 1,2,3		1,173,677			16,399			5.67			1,264,314			17,975			5.77
Total earning assets		1,803,201		$	20,639			4.64	%		1,946,825		$	24,010			5.00	%
Allowance for loan losses		(28,938	)								(23,709	)
Total earning assets, net of allowance for loan losses		1,774,263									1,923,116
Nonearning Assets
Cash and due from banks		20,233									93,696
Premises and equipment, net		39,291									38,815
Other assets		124,301									132,271
Total assets	$	1,958,088								$	2,187,898
Interest Bearing Liabilities
Deposits
Interest bearing demand	$	260,828		$	94			.15	%	$	272,481		$	144			.21	%
Savings		285,784			352			.50			265,083			460			.70
Time		710,504			3,501			2.00			896,074			6,098			2.76
Federal funds purchased and other short-term borrowings		46,086			62			.55			49,213			92			.76
Securities sold under agreements to repurchase and other long-term borrowings		250,591			2,503			4.05			316,066			3,138			4.03
Total interest bearing liabilities		1,553,793		$	6,512			1.70	%		1,798,917		$	9,932			2.24	%
Noninterest Bearing Liabilities
Commonwealth of Kentucky deposits		325									2,769
Other demand deposits		207,416									203,155
Other liabilities		45,229									32,910
Total liabilities		1,806,763									2,037,751
Shareholders’ equity		151,325									150,147
Total liabilities and shareholders’ equity	$	1,958,088								$	2,187,898
Net interest income					14,127									14,078
TE basis adjustment					(471	)								(628	)
Net interest income				$	13,656								$	13,450
Net interest spread								2.94	%								2.76	%
Impact of noninterest bearing sources of funds								.24									.17
Net interest margin								3.18	%								2.93	%

1 Income and yield stated at a fully tax equivalent basis using the marginal corporate Federal tax rate of 35%.

2 Loan balances include principal balances on nonaccrual loans.

3 Loan fees included in interest income amounted to $233 thousand and $362 thousand in 2011 and 2010, respectively.

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

(In thousands)	Variance			Variance Attributed to
Quarter Ended March 31,		2011/2010	1	Volume			Rate

Interest Income
Taxable investment securities	$	(1,329	)	$	(280	)	$	(1,049	)
Nontaxable investment securities 2		(467	)		(354	)		(113	)
Interest bearing deposits in banks, federal funds sold and securities purchased under agreements to resell		1			1
Loans 2		(1,576	)		(1,269	)		(307	)
Total interest income		(3,371	)		(1,902	)		(1,469	)
Interest Expense
Interest bearing demand deposits		(50	)		(6	)		(44	)
Savings deposits		(108	)		205			(313	)
Time deposits		(2,597	)		(1,115	)		(1,482	)
Federal funds purchased and other short-term borrowings		(30	)		(6	)		(24	)
Securities sold under agreements to repurchase and other long-term borrowings		(635	)		(743	)		108
Total interest expense		(3,420	)		(1,665	)		(1,755	)
Net interest income	$	49		$	(237	)	$	286
Percentage change		100.0	%		(483.7	)%		583.7	%

1	The changes that are not solely due to rate or volume are allocated on a percentage basis using the absolute values of rate and volume variances as a basis for allocation.

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

Provision for Loan Losses

The provision for loan losses represents charges (or credits) to earnings that maintain an allowance for loan losses at an adequate level based on credit losses specifically identified in the loan portfolio, as well as management’s best estimate of incurred probable loan losses in the remainder of the portfolio at the balance sheet date. The Company’s loan quality has been negatively impacted by adverse conditions in certain real estate sectors since the downturn in the overall economy and financial markets that started to take place in late 2007 and more significantly during 2008 and continuing through 2011. This has led to declines in real estate values and deterioration in the financial condition of many of the Company’s borrowers, particularly borrowers in the commercial and real estate development industry. The Company has, in turn, lowered its loan quality ratings on certain commercial and real estate development loans as part of its normal internal review process. Declining real estate values have resulted in loans that have become under collateralized, which has elevated nonperforming loans, net charge-offs, and the provision for loan losses.

The provision for loan losses for the quarter ended March 31, 2011 was $2.4 million, an increase of $515 thousand or 26.7% compared to $1.9 million for the same quarter of 2010. The increase in the provision for loan losses is attributed mainly to an increase in activity of impaired loans with specific allocations in the comparable quarters. Impaired loans with specific allocations were $74.3 million at March 31, 2011, an increase of $2.6 million or 3.6% during the current quarter. Specific allocations on impaired loans were $6.5 million, an increase of $433 thousand or 7.2% in the current quarter. Impaired loans with specific allocations were $79.0 million at March 31, 2010, an increase of $18.3 million or 30.1% for the first quarter of 2010. Although impaired loans with specific allocation increased during the first quarter a year ago, the specific allocation decreased $153 thousand, which was relatively unchanged. The specific allocations for impaired loans was relatively unchanged during the first quarter of 2010 since a large portion of the increase in impaired loans was made up of restructured loans. Specific reserves assigned to credits that are restructured with lower interest rates represent the difference in the present value of future cash flows calculated at the loan’s original interest rate and the new lower rate. This generally results in a reserve for loan losses that is less severe that for other loans that are collateral dependent.

Net charge-offs were $2.2 million in the current quarter, an increase of $606 thousand or 37.9% compared to $1.6 million for the first quarter of 2010. Of the $2.2 million in net charge-offs in the current quarter, $984 thousand is attributed to three separate credit relationships secured by real estate. On an annualized basis, quarterly net charge-offs were .76% of average loans outstanding for the three months ended March 31, 2011 compared .51% for the first quarter of a year ago.

The allowance for loan losses was $29.0 million, $28.8 million, and $23.7 million at March 31, 2011, year-end 2010, and March 31, 2010, respectively. As a percentage of outstanding loans (net of unearned income), the allowance for loan loss increased to 2.52% at March 31, 2011 compared to 2.41% at year-end 2010 and 1.89% at March 31, 2010.

Noninterest Income

Noninterest income was $5.9 million for the first quarter of 2011, a decrease of $1.6 million or 21.3% compared to $7.5 million for the first quarter a year ago. Nearly all noninterest income categories declined in the comparison, but the overall decrease in noninterest income was driven by lower net gains on the sale of investment securities of $1.2 million or 74.6%. Other more significant decreases in the quarterly comparison include non-deposit service charges, commissions, and fees of $92 thousand or 8.2%, service charges and fees on deposits of $91 thousand or 4.2%, data processing fees of $83 thousand or 23.9%, and income from company-owned life insurance of $58 thousand or 19.8%.

The $92 thousand decrease in other service charges, commissions, and fees was driven by lower custodial safekeeping fees of $104 thousand or 96.3%. The decrease in custodial safekeeping fees was volume driven and relates to a custodial services contract that expired at the end of the second quarter of 2010 and was not renewed. The $91 thousand decrease in service charges and fees on deposits is mainly driven by lower overdraft/insufficient funds charges of $98 thousand or 7.0% and due to volume declines. Transaction volumes have been negatively impacted by the prohibition during the third quarter of 2010 of financial institutions from charging fees to customers for paying overdrafts on one-time debit card and automated teller machines without the customer opting-in to the overdraft service. The Company also adopted during 2010 certain regulatory “best practices” related to overdraft which also contributed to volume declines.

The $83 thousand decrease in data processing fees was driven by lower processing volumes mainly attributed to a decrease from unemployment insurance transactions. Data processing fees have also declined as a result of an increase in paperless payment transactions related to the Commonwealth of Kentucky’s WIC program. The Company recorded $291 thousand in data processing fees for calendar year 2010 related to this program. For the first quarter of 2011, data processing income from WIC was $56 thousand, a decrease of $18 thousand or 24.0% from the first quarter of 2010. WIC revenues will continue to decline for the Company as the WIC program progresses in its transition to a paperless payment method which will be processed by an unrelated third party. The transition is currently expected to be completed during the fourth quarter of 2011 or the first quarter of 2012. Income from company-owned life insurance decreased $58 thousand mainly as a result of a lower average outstanding balance. Late in the first quarter of 2010 the Parent Company liquidated $8.6 million of its life insurance investment and in the first quarter of 2011 liquidated its remaining $2.2 million amount. The Company’s subsidiary banks maintain an aggregate balance of $26.8 million in company-owned life insurance at March 31, 2011.

Noninterest Expense

Total noninterest expenses were $15.3 million for the first quarter of 2011, a decrease of $1.2 million or 7.4% compared to $16.5 million for the first quarter of 2010. Decreases in expenses occurred across a wide range of line items, led by lower expenses related to the following: repossessed real estate $992 thousand or 59.3%, salaries and employee benefits $331 thousand or 4.7%, deposit insurance expense $217 thousand or 19.6%, and data processing and communications expense $215 thousand or 14.9%.

Other real estate expenses were $680 thousand for the first quarter of 2011, a decrease of $992 thousand or 59.3% compared to a year earlier. The decrease in other real estate expenses is attributed mainly to a $714 thousand or 75.7% decrease in impairment charges relating to writing down a property’s book value to its fair value less estimated costs to sell. The Company recorded an impairment charge of $601 thousand related to a single property during the first quarter of 2010 which drove the higher balance of a year ago.

The $331 thousand decrease in salaries and employee benefits is mainly attributed to a smaller workforce. The average number of full time equivalent employees was 513 for the first quarter of 2011, a decrease of 25 compared to 538 a year ago. The reduction in full time equivalent employees is mainly attributed to attrition combined with the impact of operational efficiencies gained from internal consolidations.

The $217 thousand decrease in deposit insurance is attributed mainly to a lower assessment base primarily at two of the Company’s subsidiary banks which corresponds with a decrease in deposits. Lower assessment rates, including the elimination of a separate assessment under the Transaction Account Guarantee Program, contributed to the decrease in deposit insurance to a lesser extent. The $215 thousand decrease in data processing and communications expense is attributed to a combination of the following: elimination of the Company’s debit card reward program accounting for $98 thousand, lower data processing fees of $92 thousand mainly because the prior year included incremental conversion expenses attributed to the Farmers Bank & Capital Trust Co. (“Farmers Bank”) and The Lawrenceburg Bank and Trust Company merger, and lower telephone expenses of $24 thousand mainly as a result of billing credits and refunds from third party service providers.

The Company incurred a non-routine loss in the current quarter related to a fraudulent transaction on a deposit account involving one of its customers totaling $700 thousand. The Company is filing insurance claims seeking possible recovery of this loss. Other noninterest expense was $2.1 million for the current quarter, an increase of $69 thousand or 3.3% compared to a year earlier. Included in other noninterest expense for the current quarter is a non-routine loss of $303 thousand related to a write-down of uncollectible amounts of property tax receivables at the Company’s leasing subsidiary.

Income Taxes

Income tax expense for the first quarter of 2011 was $781 thousand, an increase of $209 thousand compared to $572 thousand for the same period a year earlier. The effective federal income tax rate was 42.8% and 22.7% for the first quarter of 2011 and 2010, respectively. The increase in income tax expense and the effective tax rate for the current quarter is primarily attributed to the Company’s learning that one of its tax-exempt customers had received notification that the Internal Revenue Service intends to issue an adverse ruling to the customer regarding the qualified status of their debt arrangement with the Company. The amount of income tax expense recognized in the current quarter related to this issue was $449 thousand, including interest of $47 thousand. The loan contract contains provisions that the customer will indemnify the Company for any penalties, taxes, or interest thereon for which the Company becomes liable as a result of a determination of taxability. The Company intends to exercise its rights under the contract; however, due to the contingent nature of the indemnification provisions, the Company will not record the effects of the indemnification until it is realized. Additional information related to this matter is set forth in footnote 24 of the Company’s 2010 audited consolidated financial statements.

FINANCIAL CONDITION

Total assets were $2.0 billion at March 31, 2011, an increase of $32.0 million or 1.7% from year-end 2010. The increase in total assets is attributed mainly to an increase in investment securities of $71.3 million or 16.0% partially offset by a $41.4 million or 3.5% decrease in loans (net of unearned income). Investment securities have increased as loan volume has declined. The Company has also been able to move balances from lower earning interest bearing deposits in other banks to investment securities, although the Company received a large cash deposit from the Commonwealth of Kentucky on March 31, 2011 that boosted interest bearing deposits in other banks with an offset to short-term repurchase agreements by $31.9 million. Other real estate owned was $34.4 million at quarter-end, up $3.8 million or 12.5% compared to $30.5 million at year-end. Company-owned life insurance was $26.8 million at March 31, 2011, a decrease of $2.0 million or 7.0% as the Parent Company liquidated the remaining $2.2 million balance of its investment during the current quarter.

Total liabilities were $1.8 billion at March 31, 2011, an increase of $31.8 million or 1.8% compared to December 31, 2010. Deposits edged up $9.7 million or .7% while net borrowed funds increased $23.2 million or 7.8%. Borrowed funds increased mainly due to higher short-term borrowings of $25.4 million or 53.6%, which was boosted by the large deposit received from the Commonwealth at quarter end that was placed into a repurchase agreement. Shareholders’ equity was relatively unchanged at $150 million as the amount of net income was nearly offset by preferred stock dividends and changes in comprehensive income.

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.

As disclosed in the Company’s Form 10-K for year-end 2010, the Company submitted a bid to the Commonwealth to continue providing banking services as the general depository for the Commonwealth. The Company learned in the first quarter of 2011 that it was not successful in renewing the contract, which was won by a competitor with a much more aggressive proposal. The Company is still under contract to provide these services through June 30, 2011. However, it is likely that a transition to the Commonwealth’s new service provider will take longer to finalize and that the Company’s contract may be extended in some manner that has yet to be determined. The impact of not retaining the general depository services contract of the Commonwealth is not expected to have a material impact on the Company’s results of operations, overall liquidity, or net cash flows, although gross cash flows such as for cash on hand, deposit outstanding, and short-term borrowings are expected to decrease.

On an average basis, total assets were $2.0 billion for the first three months of 2011, a decrease of $144 million or 6.8% from the year ended December 31, 2010 average. Average assets decreased mainly as a result of the Company’s overall balance sheet realignment strategy to improve its net interest margin, nonperforming asset levels, capital ratios, and overall profitability. Average earning assets decreased $90.5 million or 4.8% from year-end 2010. Average earning assets were 92.1% and 90.1% of total average assets for the first three months of 2011 and the year 2010, respectively. Average loans, net of unearned income, decreased $62.5 million or 5.1% in the comparison. Average investment securities decreased $50.0 million or 9.6% while temporary investments increased $22.0 million or 16.5%. Deposits averaged $1.5 billion for the three months ended March 31, 2011, a decrease of $84.0 million or 5.4% from the prior year-end. Average interest bearing deposit balances declined $81.4 million or 6.1% in the comparison led by a sharp decrease in time deposits of $97.2 million or 12.0% partially offset by higher savings deposits of $13.7 million or 5.0%.

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. At March 31, 2011, temporary investments were $158 million, unchanged from year-end 2010.

On an average basis, temporary investments were $156 million during the first three months of 2011, an increase of $22.0 million or 16.5% compared to $134 million from year-end 2010. 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 in 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 U.S. government-sponsored agency securities, residential 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 $516 million at March 31, 2011, an increase of $71.3 million or 16.0% compared to $445 million at year-end 2010. Investment securities have increased as loan volume has declined. The Company has also been able to move balances from lower earning interest bearing deposits in other banks to investment securities while liquidity has remained stable and adequate to meet its needs.

At March 31, 2011, the Company holds $5.8 million amortized cost amounts of single-issuer trust preferred capital securities of a global and national financial services firm with an estimated fair value of $5.3 million. These securities had an estimated fair value of $5.0 million at year-end 2010, an improvement of $340 thousand or 6.8%. 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 general uncertainties in the financial markets and market volatility. The Company believes that it will be able to collect all amounts due according to the contractual terms of these securities and that the fair values of these securities will continue to recover as they approach their maturity dates.

Loans

Loans, net of unearned interest, were $1.2 billion at March 31, 2011, a decrease of $41.4 million or 3.5% from year-end 2010. The Company continues to take a measured and cautious approach to loan originations as it continues to refine the composition of its balance sheet and work through 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 and have remained elevated since that time.

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

	March 31, 2011					December 31, 2010
(Dollars in thousands)	Amount		%			Amount		%

Commercial, financial, and agriculture	$	102,411		8.9	%	$	108,959		9.1	%
Real estate – construction		148,998		12.9			154,208		12.9
Real estate mortgage - residential		456,020		39.6			469,273		39.3
Real estate mortgage - farmland and other commercial enterprises		405,309		35.2			416,904		35.0
Installment		25,991		2.3			28,532		2.4
Lease financing		12,738		1.1			14,964		1.3
Total	$	1,151,467		100.0	%	$	1,192,840		100.0	%

On average, loans represented 65.1% of earning assets during the current three-month period, a decrease of 19 basis points compared to 65.3% for year-end 2010. As loan demand fluctuates, the available funds are reallocated between loans and temporary investments or investment securities, which typically involve a decrease in credit risk and lower yields.

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

Allowance for Loan Losses

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

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

The allowance for loan losses was $29.0 million or 2.52% of outstanding loans (net of unearned income) at March 31, 2011. This compares to $28.8 million or 2.41% of net loans outstanding at year-end 2010. The increase in the allowance for loan losses as a percentage of net loans outstanding from year-end 2010 is the result of the provision for loan losses exceeding net charge-offs by $238 thousand or 10.8% coupled with the $41.4 million or 3.5% decrease in loans outstanding (net of unearned income). The higher allowance for loan losses from year-end 2010 was driven by a $3.3 million or 3.6% increase in the level of nonperforming loans, higher overall impaired loans, and elevated levels of recent historical net charge-offs. As a percentage of nonperforming loans, the allowance for loan losses was 30.8% and 31.6% at March 31, 2011 and year-end 2010, respectively.

Although the amount of nonperforming loans has increased at March 31, 2011 compared to year-end 2010, the allowance for loan losses as a percentage of nonperforming loans dipped slightly to 30.8%. The allowance for loan losses as a percentage of nonperforming loans at March 31, 2011 compared to year-end 2010 remained relatively unchanged mainly due to the makeup of nonperforming loans. The $3.3 million increase in nonperforming loans since year-end 2010 was driven mainly by a single credit in the amount of $4.6 million secured by commercial real estate in which there was no specific allowance required as determined by detailed loan review analysis.

While certain data indicates that economic recovery in the U.S. is on firmer footing, the Company’s high level of nonperforming and impaired loans is driven by overall weaknesses that remain in the general economy stemming from one of the most severe recessions in many decades. Certain housing markets are showing signs of stabilizing, but the overall housing sector continues to be depressed. Inflation concerns have remained stable, but labor markets continue to be weak with elevated unemployment rates. For the Company, economic conditions in recent quarters have resulted in higher stress in the real estate development portion of its lending portfolio.

Nonperforming Loans

Nonperforming loans consist of nonaccrual loans, restructured loans, and loans 90 days or more past due and still accruing interest. In general, 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.

Nonperforming loans were $94.3 million at March 31, 2011, an increase of $3.3 million or 3.6% compared to year-end 2010. The high level of nonperforming loans is a result of ongoing weaknesses in the overall economy that continues to strain the Company and many of its customers, particularly real estate development lending. Nonperforming loans were as follows at March 31, 2011 and December 31, 2010 and are presented by loan class.

Nonperforming Loans

(In thousands)	March 31, 2011			December 31, 2010
Nonaccrual Loans
Real Estate:
Real estate-construction and land development	$	33,054		$	35,893
Real estate mortgage-residential		11,657			10,728
Real estate mortgage-farmland and other commercial enterprises		11,980			6,528
Commercial:
Commercial and industrial		522			627
Lease financing		143			50
Other		64			31
Consumer:
Secured		48			109
Unsecured		5			5
Total nonaccrual loans	$	57,473		$	53,971

Restructured Loans
Real Estate:
Real estate-construction and land development	$	19,339		$	16,793
Real estate mortgage-residential		8,301			9,147
Real estate mortgage-farmland and other commercial enterprises		9,106			11,038
Total restructured loans	$	36,746		$	36,978

Past Due 90 Days or More and Still Accruing
Real Estate:
Real estate mortgage-residential	$	28		$	28
Commercial:
Lease financing		13			9
Consumer:
Unsecured		4			5
Total past due 90 days or more and still accruing	$	45		$	42

Total nonperforming loans	$	94,264		$	90,991

Ratio of total nonperforming loans to total loans (net of unearned income)		8.2	%		7.6	%

Nonaccrual loans make up the largest component of nonperforming assets. Such loans were $57.5 million at March 31, 2011, an increase of $3.5 million or 6.5% compared to $53.4 million at year-end 2010. The increase in nonaccrual loans was driven primarily by a single credit in the amount of $4.6 million secured by commercial real estate that was added during the quarter. This credit had been graded as special mention at year-end 2010.

Restructured loans and loans past due 90 days or more and still accruing interest were each relatively unchanged at $36.7 million and $45 thousand, respectively at March 31, 2011. Restructured loans occur when a lender, because of economic or legal reasons related to a borrower’s financial difficulty, grants a concession to the borrower that it would not otherwise consider. Restructured loans typically include a reduction of the stated interest rate or an extension of the maturity date, among other possible concessions. The Company gives careful consideration to identifying which of its challenged credits merit a restructuring of terms that it believes will result in maximum loan repayments and mitigate possible losses. Cash flow projections are carefully scrutinized prior to restructuring any credits; past due credits are typically not granted concessions.

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 $138 million and $127 million at March 31, 2011 and year-end 2010, respectively, which were performing but considered potential problem loans and are not included in the nonperforming loan totals in the table above. These loans, however, are considered in establishing an appropriate allowance for loan losses. The balance outstanding for potential problem credits is mainly a result of ongoing weaknesses in the overall economy that continue to strain the Company and many of its customers, particularly real estate development lending. Potential problem loans include a variety of borrowers and are secured primarily by real estate. At March 31, 2011 the five largest potential problem credits were $36.3 million in the aggregate compared to $35.9 million at year-end 2010 and secured by various types of real estate including commercial, construction properties, and residential real estate development.

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

Other Real Estate

Other real estate owned (“OREO”) includes real estate properties acquired by the Company through foreclosure. At March 31, 2011 OREO was $34.4 million, an increase of $3.8 million or 12.5% compared to $30.5 million at year-end 2010. The net increase in OREO during the current quarter is due mainly to the Company taking possession of real estate in the amount of $3.3 million securing five separate larger-balance credit relationships, $2.6 million of which was previously classified in nonaccrual loans. Of the $3.3 million larger-balance real estate repossessions during the current quarter, $1.4 million represents construction/land development projects, $1.2 million represents residential real estate, and $676 thousand represents commercial real estate properties.

Deposits

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

	End of Period							Average
(In thousands)	March 31, 2011		December 31, 2010		Difference			(Three Months) March 31, 2011		(Twelve Months) December 31, 2010		Difference
Noninterest Bearing
Commonwealth	$	89	$	643	$	(554	)	$	325	$	1,347	$	(1,022	)
Other		215,972		206,244		9,728			207,416		209,020		(1,604	)
Total	$	216,061	$	206,887	$	9,174		$	207,741	$	210,367	$	(2,626	)

Interest Bearing
Demand	$	267,163	$	259,569	$	7,594		$	260,828	$	258,674	$	2,154
Savings		285,708		283,272		2,436			285,784		272,080		13,704
Time		704,325		713,814		(9,489	)		710,504		807,730		(97,226	)
Total	$	1,257,196	$	1,256,655	$	541		$	1,257,116	$	1,338,484	$	(81,368	)

Total Deposits	$	1,473,257	$	1,463,542	$	9,715		$	1,464,857	$	1,548,851	$	(83,994	)

Deposit balances of the Commonwealth can fluctuate significantly from day to day. The Company believes average balances are important when analyzing its deposit balances. The decrease in balances of the Commonwealth is due primarily 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. Outstanding deposit balances of the Commonwealth are expected to remain at lower than recent historical levels as a result of this change.

As previously disclosed, the Company learned in the first quarter of 2011 that it was not successful in renewing its general depository services contract with the Commonwealth. The Company is still under contract to provide these services through June 30, 2011, although it is likely that a transition to the Commonwealth’s new service provider will take longer to finalize and that the Company’s contract may be extended in some manner that has yet to be determined. The impact of not retaining the general depository services contract of the Commonwealth is not expected to have a material impact on the Company’s results of operations, overall liquidity, or net cash flows; although gross cash flows such as for cash on hand, deposit outstanding, and short-term borrowings are expected to decrease.

The decline in average time deposits for the three months ended March 31, 2011 compared to year-end 2010 is due in part to the maturity structure of the portfolio and the overall liquidity position of the Company. The Company’s liquidity position has enabled it to lower its cost of funds by allowing higher-rate certificates of deposit, particularly those in excess of $100 thousand in outstanding balances, to roll off or reprice at significantly lower interest rates.

Borrowed Funds

Total borrowed funds were $323 million at March 31, 2011, an increase of $23.2 million or 7.8% from $300 million at year-end 2010. Long-term borrowings decreased $2.2 million or .9% due mainly to principal repayments on FHLB advances. Short-term borrowings increased $25.4 million or 53.6% due mainly to a large deposit received from the Commonwealth on March 31, 2011 included in short-term repurchase agreements. The Company’s short-term funding fluctuates as its overall net funding position changes and, in terms of transactions with the Commonwealth, can fluctuate significantly on a daily basis.

LIQUIDITY

The primary source of funds for the Parent Company is the receipt of dividends from its subsidiary banks, cash balances maintained, short-term investments, and borrowings from nonaffiliated sources. Payment of dividends by the Company’s subsidiary banks is subject to certain regulatory restrictions as set forth in national and state banking laws and regulations. In addition, Farmers Bank, United Bank & Trust Company (“United Bank”), and Citizens Bank of Northern Kentucky, Inc. (“Citizens Northern”) each must obtain regulatory approval to declare or pay dividends to the Parent Company as a result of increased capital required in connection with recent regulatory exams. Capital ratios at each of the Company’s four subsidiary banks exceed regulatory established “well-capitalized” status at March 31, 2011 under the prompt corrective action regulatory framework; however, Farmers Bank, United Bank, and Citizens Northern are required to maintain capital ratios at higher levels as outlined in their regulatory agreements.

The Parent Company’s primary uses of cash include the payment of dividends to its common and preferred shareholders, injecting capital into subsidiaries, interest expense on borrowings, and paying for general operating expenses. Due to recent regulatory agreements, dividend payments on the Parent Company’s common and preferred stock and interest payments on its trust preferred borrowings must have regulatory approval before being paid. While regulatory agencies have so far granted approval to all of the Company’s requests to make interest payments on its trust preferred securities and dividends on its preferred stock, the Company did not (based on the assessment by Company management of both the Company’s capital position and the earnings of its subsidiaries) seek regulatory approval for the payment of common stock dividends. Moreover, the Company will not pay any such dividend on its common stock in any subsequent quarter until the regulator’s assessment of the earnings of the Company’s subsidiaries, and the Company’s assessment of its capital position, both yield the conclusion that the payment of a Company common stock dividend is warranted.

The Parent Company had cash and cash equivalents of $17.5 million at March 31, 2011, an increase of $1.3 million or 7.8% from $16.2 million at year-end 2010. Significant cash receipts of the Parent Company during 2011 include $2.2 million proceeds from the liquidation of company-owned life insurance at the Parent Company and management fees from subsidiaries of $850 thousand. Significant cash payments by the Parent Company during 2011 include salaries, payroll taxes, and employee benefits of $517 thousand, interest expense on borrowed funds of $505 thousand, and $375 thousand for the payment of preferred stock dividends.

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. Those sources of funds include the subsidiary banks' core deposits, consisting of both business and nonbusiness deposits; cash flow generated by repayment of principal and interest on loans and investment securities; FHLB and other borrowings; and federal funds purchased and securities sold under agreements to repurchase. While maturities and scheduled amortization of loans and investment securities are generally a predictable source of funds, deposit outflows and mortgage prepayments are influenced significantly by general interest rates, economic conditions, and competition in our local markets.

As of March 31, 2011, the Company had $187 million of additional borrowing capacity under various FHLB, federal funds, and other borrowing agreements. However, there is no guarantee that these sources of funds will continue to be available to the Company, or that current borrowings can be refinanced upon maturity, although the Company is not aware of any events or uncertainties that are likely to cause a decrease in the Company’s liquidity from these sources. The Company’s borrowing capacity increased $71.5 million or 61.8% since year-end 2010 primarily as a result of one of the Company’s subsidiary banks initial approval by the Federal Reserve to borrow on a short-term basis up to $70 million through its Discount Window program.

For the longer term, the liquidity position is managed by balancing the maturity structure of the balance sheet. This process allows for an orderly flow of funds over an extended period of time. The Company’s Asset and Liability Management Committee, both at the bank subsidiary level and on a consolidated basis, meets regularly and monitors the composition of the balance sheet to ensure comprehensive management of interest rate risk and liquidity.

Liquid assets consist of cash, cash equivalents, and available for sale investment securities. At March 31, 2011, consolidated liquid assets were $700 million, an increase of $73.5 million or 11.7% from year-end 2010. The increase in liquid assets was driven by higher available for sale investment securities of $71.3 million or 16.1%. Liquid assets remain elevated mainly as a result of the Company’s overall net funding position, which has been influenced by the Company’s balance sheet realignment strategy that included reducing the overall size of the balance sheet as it manages a high level of nonperforming assets. The overall funding position of the Company changes as loan demand, deposit levels, and other sources and uses of funds fluctuate.

Net cash provided by operating activities was $6.7 million for the first quarter of 2011, an increase of $1.2 million or 21.7% compared to $5.5 million for 2010. Net cash used in investing activities was $37.2 million for 2011 compared to net cash inflows of $16.3 million for 2010. The $53.5 million change in net cash flows in the comparison is mainly due to $63.8 million net cash outflows related to investment and restricted securities partially offset by net cash inflows related to loan activity of $22.1 million. These cash flow activities correlate to the overall increase in investment securities and decrease in outstanding loan balances. In addition, the Company received the remaining proceeds from the liquidation of the Parent Company’s investment in company-owned life insurance of $2.2 million in the current quarter. The Company initiated this transaction in the first quarter of the prior year and it received $8.6 million at that time.

Net cash provided by financing activities was $32.6 million in the first quarter of 2011 compared to net cash used of $23.9 million for the first quarter of 2010. For 2011, cash flows provided by financing activities mainly resulted from an increase in deposits of $9.7 million and an increase in outstanding borrowings of $23.2 million. For 2010, deposits decreased $9.0 million, outstanding borrowings decreased $13.8 million, and dividends paid were $1.1 million, all of which were cash outflows.

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

CAPITAL RESOURCES

Consolidated shareholders’ equity was $150 million at March 31, 2011, relatively unchanged compared to December 31, 2010. Net income for the current quarter was nearly offset by preferred stock dividends and changes in comprehensive income.

Although the Parent Company is under no directive by its regulators to raise any additional capital, the Company filed a registration statement on Form S-3 with the SEC that became effective on October 19, 2009. 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.

At March 31, 2011, the Company’s tangible capital ratio was 7.47% compared to 7.57% at year-end 2010. 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 6.01% at March 31, 2011 compared to 6.09% at year-end 2010. Although the amount of tangible equity and tangible common equity both increased at March 31, 2011 compared to year-end 2010, their amount as a percentage of tangible assets decreased 10 and 8 basis points, respectively, due to a faster rate of increase in tangible assets.

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 March 31, 2011 and the regulatory minimums are as follows.

	March 31, 2011									December 31, 2010
	Tier 1 Risk-based Capital 1			Total Risk-based Capital 1			Tier 1 Leverage 2			Tier 1 Risk-based Capital 1			Total Risk-based Capital 1			Tier 1 Leverage 2
Consolidated		15.72	%		16.98	%		9.65	%		15.35	%		16.61	%		9.39	%

Farmers Bank 3		15.34			16.61			8.56			15.59			16.86			8.55
First Citizens Bank		13.81			14.59			8.90			12.76			13.50			8.46
United Bank 3		13.28			14.55			8.50			12.91			14.18			8.24
Citizens Northern 3		11.69			12.95			8.48			11.42			12.68			8.04

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

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.

3	See Note 8 to the Company’s unaudited consolidated financial statements included as part of this Form 10-Q for minimum capital ratios required as part of the banks regulatory agreement.

Regulatory Agreements

The Parent Company and three of its subsidiary banks have entered into supervisory agreements with their primary banking regulator. The Parent Company, Farmers Bank, and United Bank each entered into their respective agreements during 2009 and Citizens Northern entered into their agreement in mid 2010. These agreements are summarized in Note 8 to the unaudited consolidated financial statements of this Form 10-Q. These agreements are also discussed in significantly greater detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 under the caption “Capital Resources” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

There have been no changes to the regulatory agreements since year-end 2010. The Company believes that it is adequately addressing all issues included in the regulatory agreements. However, only the respective regulatory agencies can determine if compliance with the applicable regulatory agreements have been met. The Company and its subsidiary banks are in compliance with the requirements identified in the regulatory agreements as of March 31, 2011, with the exception that the level of substandard loans at Farmers Bank exceed its target amount by $6.8 million. The level of substandard loans at Farmers Bank was in excess of its target amount due mainly to the addition of one credit relationship during the first quarter of 2011 in the amount of $7.1 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company uses a simulation model as a tool to monitor and evaluate interest rate risk exposure. The model is designed to measure the sensitivity of net interest income and net income to changing interest rates over future time periods. Forecasting net interest income and its sensitivity to changes in interest rates requires the Company to make assumptions about the volume and characteristics of many attributes, including assumptions relating to the replacement of maturing earning assets and liabilities. Other assumptions include, but are not limited to, projected prepayments, projected new volume, and the predicted relationship between changes in market interest rates and changes in customer account balances. These effects are combined with the Company’s estimate of the most likely rate environment to produce a forecast of net interest income and net income. The forecasted results are then adjusted for the effect of a gradual increase and decrease in market interest rates on the Company’s net interest income and net income. Because assumptions are inherently uncertain, the model cannot precisely estimate net interest income or net income or the effect of interest rate changes on net interest income and net income. Actual results could differ significantly from simulated results.

At March 31, 2011, the model indicated that if rates were to gradually increase by 150 basis points during the remainder of the calendar year, then net interest income and net income would increase 2.7% and 12.5%, respectively for the year ending December 31, 2011 when compared to the forecasted results for the most likely rate environment. The model indicated that if rates were to gradually decrease by 150 basis points over the same period, then net interest income and net income would decrease 1.0% and 4.5%, respectively.

Item 4. Controls and Procedures

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

The Company’s Chief Executive Officer and Chief Financial Officer have also concluded that there were no significant changes during the quarter ended March 31, 2011 in the Company’s internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

As of March 31, 2011, there were various pending legal actions and proceedings against the Company arising from the normal course of business and in which claims for damages are asserted. Management, after discussion with legal counsel, believes that these actions are without merit and that the ultimate liability resulting from these legal actions and proceedings, if any, will not have a material effect upon the consolidated financial statements of the Company.

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

At various times, the Company’s Board of Directors has authorized the purchase of shares of the Company’s outstanding common stock. No stated expiration dates have been established under any of the previous authorizations. There were no Company shares purchased during the quarter ended March 31, 2011. There are 84,971 shares that may still be purchased under the various authorizations.

The Company’s participation in the U.S. Treasury’s Capital Purchase Program 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 any 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. The Company must also be granted permission by the Federal Reserve Bank of St. Louis and the Kentucky Department of Financial Institutions before it can repurchase or redeem any of its outstanding common or preferred stock as a result of its regulatory agreement.

Item 6. Exhibits

List of Exhibits

3.1	Articles of Incorporation of Farmers Capital Bank Corporation (incorporated by reference to Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006, 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).

3.2	Amended and Restated Bylaws of Farmers Capital Bank Corporation (incorporated by reference to Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009).

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

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

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

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

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

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

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

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

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

4.10	Form of Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated by reference to the Current Report on Form 8-K dated January 13, 2009).

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

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

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

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

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

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

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

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

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:	May 5, 2011	/s/ Lloyd C. Hillard, Jr.
		Lloyd C. Hillard, Jr.
		President and CEO
		(Principal Executive Officer)

Date:	May 5, 2011	/s/ Doug Carpenter
		C. Douglas Carpenter
		Executive Vice President, Secretary, and CFO
		(Principal Financial and Accounting Officer)