FARMERS CAPITAL BANK CORP - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - FARMERS CAPITAL BANK CORP	ex32.htm
EX-31.2 - EXHIBIT 31.2 - FARMERS CAPITAL BANK CORP	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - FARMERS CAPITAL BANK CORP	ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT

Pursuant to Section 13 OR 15(d) of

The Securities Exchange Act of 1934

For the quarterly period ended March 31, 2017

	Farmers Capital Bank Corporation
	(Exact name of registrant as specified in its charter)

Kentucky

000-14412

61-1017851

(State or other jurisdiction of incorporation or organization)

(Commission

File Number)

(IRS Employer

Identification No.)

P.O. Box 309

202 West Main St.

Frankfort, KY

40601

(Address of principal executive offices)

(Zip Code)

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

	Not Applicable
	(Former name, former address and former fiscal year, if changed since last report.)

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

Yes ☒ No ☐

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

Yes ☒ No ☐

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

Large accelerated filer ☐	Accelerated filer ☒

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

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Yes ☐ No ☒

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

Common stock, par value $0.125 per share

7,512,002 shares outstanding at May 1, 2017

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk	46

Item 4. Controls and Procedures	47

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 6. Exhibits	47

SIGNATURES	50

PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Unaudited Condensed Consolidated Balance Sheets

	March 31,			December 31,
(In thousands, except share data)	2017			2016
Assets
Cash and cash equivalents:
Cash and due from banks	$	21,494		$	25,666
Interest bearing deposits in other banks		54,171			62,696
Federal funds sold and securities purchased under agreements to resell		4,133			6,622
Money market mutual funds		15,766			18,550
Total cash and cash equivalents		95,564			113,534
Investment securities:
Available for sale, amortized cost of $496,613 (2017) and $486,038 (2016)		492,906			480,864
Held to maturity, fair value of $3,600 (2017) and $3,597 (2016)		3,475			3,488
Total investment securities		496,381			484,352
Loans, net of unearned income		989,833			970,975
Allowance for loan losses		(9,507	)		(9,344	)
Loans, net		980,326			961,631
Premises and equipment, net		32,201			31,900
Company-owned life insurance		31,130			30,914
Other real estate owned		8,000			10,673
Other assets		38,857			38,026
Total assets	$	1,682,459		$	1,671,030
Liabilities
Deposits:
Noninterest bearing	$	350,668		$	334,676
Interest bearing		1,037,409			1,035,231
Total deposits		1,388,077			1,369,907
Federal funds purchased and short-term securities sold under agreements to repurchase		32,786			35,085
Securities sold under agreements to repurchase and other long-term borrowings		14,892			19,931
Subordinated notes payable to unconsolidated trusts		33,506			33,506
Dividends payable, common stock		751			751
Other liabilities		24,707			27,784
Total liabilities		1,494,719			1,486,964
Shareholders’ Equity
Common stock, par value $.125 per share; 14,608,000 shares authorized; 7,511,555 and 7,509,444 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively		939			939
Capital surplus		51,968			51,885
Retained earnings		137,228			134,650
Accumulated other comprehensive loss		(2,395	)		(3,408	)
Total shareholders’ equity		187,740			184,066
Total liabilities and shareholders’ equity	$	1,682,459		$	1,671,030

See accompanying notes to unaudited condensed consolidated financial statements.

Unaudited Condensed Consolidated Statements of Income

	Three Months Ended
	March 31,
(In thousands, except per share data)	2017			2016
Interest Income
Interest and fees on loans	$	11,722		$	12,090
Interest on investment securities:
Taxable		1,900			2,509
Nontaxable		591			630
Interest on deposits in other banks		142			95
Interest on federal funds sold, securities purchased under agreements to resell, and money market mutual funds		24			6
Total interest income		14,379			15,330
Interest Expense
Interest on deposits		533			646
Interest on federal funds purchased and short-term securities sold under agreements to repurchase		22			24
Interest on securities sold under agreements to repurchase and other long-term borrowings		163			1,186
Interest on subordinated notes payable to unconsolidated trusts		198			187
Total interest expense		916			2,043
Net interest income		13,463			13,287
Provision for loan losses		580			(473	)
Net interest income after provision for loan losses		12,883			13,760
Noninterest Income
Service charges and fees on deposits		1,958			1,867
Allotment processing fees		715			874
Other service charges, commissions, and fees		1,400			1,282
Trust income		704			654
Investment securities (losses) gains, net		(9	)		83
Gains on sale of mortgage loans, net		154			200
Income from company-owned life insurance		235			325
Gain on debt extinguishment		-			4,050
Other		94			207
Total noninterest income		5,251			9,542
Noninterest Expense
Salaries and employee benefits		7,617			7,979
Occupancy expenses, net		1,214			1,190
Equipment expenses		553			532
Data processing and communication expenses		1,293			1,217
Bank franchise tax		557			599
Deposit insurance expense		137			298
Other real estate expenses, net		74			639
Legal expenses		85			167
Other		1,999			1,786
Total noninterest expense		13,529			14,407
Income before income taxes		4,605			8,895
Income tax expense		1,276			2,715
Net income	$	3,329		$	6,180
Per Common Share
Net income – basic and diluted	$	.44		$	.82
Cash dividends declared		.10			.07
Weighted Average Common Shares Outstanding
Basic and diluted		7,510			7,500

See accompanying notes to unaudited condensed consolidated financial statements.

Unaudited Condensed Consolidated Statements of Comprehensive Income

	Three Months Ended
	March 31,
(In thousands)	2017		2016
Net Income	$	3,329	$	6,180
Other comprehensive income:
Unrealized holding gain on available for sale securities arising during the period, net of tax of $510 and $1,446, respectively		948		2,687

Reclassification adjustment for net realized loss (gain) included in net income, net of tax of $(3) and $29, respectively		6		(54	)

Change in unfunded portion of postretirement benefit obligation, net of tax of $32 and $5, respectively		59		9
Other comprehensive income		1,013		2,642
Comprehensive income	$	4,342	$	8,822

See accompanying notes to unaudited condensed consolidated financial statements.

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity

(In thousands, except per share data)										Accumulated
										Other			Total
Three months ended	Common Stock				Capital		Retained			Comprehensive			Shareholders’
March 31, 2017 and 2016	Shares		Amount		Surplus		Earnings			(Loss) Income			Equity
Balance at January 1, 2017		7,509	$	939	$	51,885	$	134,650		$	(3,408	)	$	184,066
Net income		-		-		-		3,329			-			3,329
Other comprehensive income		-		-		-		-			1,013			1,013
Cash dividends declared – common, $.10 per share		-		-		-		(751	)		-			(751	)
Shares issued under director compensation plan		1		-		28		-			-			28
Shares issued pursuant to employee stock purchase plan		2		-		46		-			-			46
Expense related to employee stock purchase plan		-		-		9		-			-			9
Balance at March 31, 2017		7,512	$	939	$	51,968	$	137,228		$	(2,395	)	$	187,740



Balance at January 1, 2016		7,500	$	937	$	51,608	$	120,371		$	2,782		$	175,698
Net income		-		-		-		6,180			-			6,180
Other comprehensive income		-		-		-		-			2,642			2,642
Cash dividends declared – common, $.07 per share		-		-		-		(525	)		-			(525	)
Shares issued under director compensation plan		1		-		17		-			-			17
Shares issued pursuant to employee stock purchase plan		1		1		30		-			-			31
Expense related to employee stock purchase plan		-		-		9		-			-			9
Balance at March 31, 2016		7,502	$	938	$	51,664	$	126,026		$	5,424		$	184,052

See accompanying notes to unaudited condensed consolidated financial statements.

Unaudited Condensed Consolidated Statements of Cash Flows

Three months ended March 31, (In thousands)	2017			2016
Cash Flows from Operating Activities
Net income	$	3,329		$	6,180
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		862			899
Net premium amortization of investment securities:
Available for sale		897			962
Held to maturity		13			13
Provision for loan losses		580			(473	)
Deferred income tax expense		18			72
Noncash employee stock purchase plan expense		9			9
Noncash director fee compensation		28			17
Mortgage loans originated for sale		(5,324	)		(6,890	)
Proceeds from sale of mortgage loans		6,624			7,362
Gain on sale of mortgage loans, net		(154	)		(200	)
Loss on disposal of premise and equipment, net		37			-
Net (gain) loss on sale and write downs of other real estate		(5	)		618
Gain on extinguishment of subordinated notes payable to unconsolidated trusts		-			(4,050	)
Net loss (gain) on sale of available for sale investment securities		9			(83	)
Curtailment gain on postretirement benefits plan liability		(351	)		-
Increase in cash surrender value of company-owned life insurance		(216	)		(226	)
Death benefits in excess of cash surrender value on company-owned life insurance		-			(81	)
Decrease in accrued interest receivable		434			281
Decrease in other assets		1,787			1,799
Decrease in accrued interest payable		(32	)		(6	)
Decrease in other liabilities		(2,603	)		(2,006	)
Net cash provided by operating activities		5,942			4,197
Cash Flows from Investing Activities
Proceeds from maturities and calls of available for sale investment securities		19,474			39,097
Proceeds from sale of available for sale investment securities		-			26,925
Purchase of available for sale investment securities		(31,061	)		(67,330	)
Purchase of restricted stock investments, net		(3,570	)		(472	)
Loans originated for investment greater than principal collected, net		(18,347	)		(3,841	)
Purchase of loans held for investment		(732	)		(375	)
Principal collected on purchased loans		643			855
Proceeds from death benefits of company-owned life insurance		-			341
Purchase of premises and equipment		(1,145	)		(334	)
Proceeds from sale of other real estate		699			288
Net cash used in investing activities		(34,039	)		(4,846	)
Cash Flows from Financing Activities
Net increase in deposits		18,170			5,465
Net (decrease) increase in federal funds purchased and short-term securities sold under agreements to repurchase		(2,299	)		134
Proceeds from securities sold under agreements to repurchase and other long-term borrowings		2			3
Repayments of securities sold under agreements to repurchase and other long-term borrowings		(5,041	)		(239	)
Cash paid to extinguish subordinated notes payable to unconsolidated trust		-			(10,950	)
Dividends paid, common stock		(751	)		-
Shares issued under employee stock purchase plan		46			31
Net cash provided by (used in) financing activities		10,127			(5,556	)
Net decrease in cash and cash equivalents		(17,970	)		(6,205	)
Cash and cash equivalents at beginning of year		113,534			120,493
Cash and cash equivalents at end of period	$	95,564		$	114,288
Supplemental Disclosures
Cash paid during the period for interest	$	948		$	2,049
Transfers from loans to other real estate		187			551
Sale and financing of other real estate		2,172			490
Cash dividends payable, common		751			525
Cancelation of investment in Farmers Capital Bank Trust II		-			464
Extinguishment of subordinated notes payable to Farmers Capital Bank Trust II		-			15,464

See accompanying notes to unaudited condensed consolidated financial statements.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Basis of Presentation and Nature of Operations

The condensed consolidated financial statements include the accounts of Farmers Capital Bank Corporation (the “Company” or “Parent Company”), a bank holding company, and its wholly owned subsidiaries. The Company has one bank subsidiary, United Bank & Capital Trust Company (“United Bank”), and one nonbank subsidiary, FFKT Insurance Services, Inc. (“FFKT Insurance”). In February 2017, the Company merged three of its subsidiary banks (United Bank & Trust Company in Versailles, KY; First Citizens Bank, Inc. in Elizabethtown, KY; and Citizens Bank of Northern Kentucky, Inc. in Newport, KY) and its data processing subsidiary (FCB Services, Inc. in Frankfort, KY) into its subsidiary bank Farmers Bank & Capital Trust Company in Frankfort, KY, the name of which was immediately changed under the merger to United Bank & Capital Trust Company. The Company accounted for the transfer of assets and liabilities of the merged subsidiaries at their respective historical cost amounts as of the date of the merger.

United Bank’s significant subsidiaries include EG Properties, Inc. and Farmers Capital Insurance Corporation (“Farmers Insurance”). EG Properties, Inc. is involved in real estate management and liquidation for certain repossessed properties of United Bank. Farmers Insurance is an insurance agency in Frankfort, KY.

FFKT Insurance is a captive insurance company that provides property and casualty coverage to the Parent Company and its subsidiaries for risk management purposes or where insurance may not be available or economically feasible. The Company has two 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 34 locations in 21 communities throughout Central and Northern Kentucky to individual, business, agricultural, governmental, and educational customers. Its primary deposit products are checking, savings, and term certificate accounts. Its primary lending products are residential mortgage, commercial lending, and consumer installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Other services include, but are not limited to, cash management services, issuing letters of credit, safe deposit box rental, and providing funds transfer services. Other financial instruments, which potentially represent concentrations of credit risk, include deposit accounts in other financial institutions and federal funds sold.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates used in the preparation of the condensed financial statements are based on various factors including the current interest rate environment and the general strength of the local and state economy. Changes in the overall interest rate environment can significantly affect the Company’s net interest income and the value of its recorded assets and liabilities. Actual results could differ from those estimates used in the preparation of the condensed financial statements. The allowance for loan losses, carrying value of other real estate owned, actuarial assumptions used to calculate postretirement benefits, and the fair values of financial instruments are estimates that are particularly subject to change.

The consolidated balance sheet as of December 31, 2016 has been derived from the audited financial statements of the Company as of that date. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2016 included in the Company’s annual report on Form 10-K. The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and the footnotes required by U.S. GAAP for complete statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such condensed financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. All significant intercompany transactions and balances are eliminated in consolidation.

2. Reclassifications

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

3. Accumulated Other Comprehensive (Loss) Income

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

	Three Months Ended March 31, 2017									Three Months Ended March 31, 2016
(In thousands)	Unrealized Gains and Losses on Available for Sale Investment Securities			Postretirement Benefit Obligation			Total			Unrealized Gains and Losses on Available for Sale Investment Securities			Postretirement Benefit Obligation			Total
Beginning balance	$	(3,363	)	$	(45	)	$	(3,408	)	$	3,219		$	(437	)	$	2,782
Other comprehensive income before reclassifications		948			10			958			2,687			-			2,687
Amounts reclassified from accumulated other comprehensive income		6			49			55			(54	)		9			(45	)
Net current-period other comprehensive income		954			59			1,013			2,633			9			2,642
Ending balance	$	(2,409	)	$	14		$	(2,395	)	$	5,852		$	(428	)	$	5,424

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

	Amount Reclassified from Accumulated Other Comprehensive Income						Affected Line Item in the Statement Where Net Income is Presented
(In thousands)	Three Months Ended March 31, 2017			Three Months Ended March 31, 2016
Unrealized gains and losses on available for sale investment securities	$	(9	)	$	83		Investment securities (losses) gains, net
		3			(29	)	Income tax expense
	$	(6	)	$	54		Net of tax

Amortization related to postretirement benefits
Prior service costs	$	(75	)	$	(13	)	Salaries and employee benefits
Actuarial losses		(1	)		(1	)	Salaries and employee benefits
		(76	)		(14	)	Total before tax
		27			5		Income tax expense
	$	(49	)	$	(9	)	Net of tax

Total reclassifications for the period	$	(55	)	$	45		Net of tax

4. Accounting Policy

Loans and Interest Income

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

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

Portfolio Segment	Class

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

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

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

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

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

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

Provision and Allowance for Loan Losses

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

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

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

The general portion of the Company’s loan portfolio is segregated into portfolio segments having similar risk characteristics identified as follows: real estate loans, commercial loans, and consumer loans. Each of these portfolio segments is assigned a loss percentage based on their respective rolling historical loss rates, adjusted for the qualitative risk factors summarized below. During the first quarter of 2017, the Company shortened the look-back period it uses to determine historical loss rates to the previous twelve quarters from sixteen quarters. The change in the look-back period is the result of the Company’s ongoing monitoring and evaluation of the adequacy of its allowance for loan losses. The shorter look-back period better reflects the Company’s loss estimates based on current market conditions. Shortening the look-back period increased the allowance for loan losses by $3 thousand compared to the previous sixteen quarter look-back period.

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

●

Delinquency trends

●

Trends in net charge-offs

●

Trends in loan volume

●

Lending philosophy risk

●

Management experience risk

●

Concentration of credit risk

●

Economic conditions risk

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

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

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and subsequently issued several amendments to the standard during 2015 and 2016. The primary principle of ASU No. 2014-09 is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

As amended, ASU No. 2014-09 is effective for the Company in annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted, but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within those reporting periods. Entities are permitted to apply the amendments either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. The Company expects to adopt ASU No. 2014-09 in the first quarter of 2018. The Company is continuing to evaluate the impact this ASU will have on its consolidated financial statements as well as the most appropriate transition method of application. Based on this evaluation to date, the Company has determined that the majority of its revenues earned are excluded from the scope of ASU No. 2014-09. The Company believes that for most revenue streams within the scope of ASU No. 2014-09, the amendments will not change the timing of when the revenue is recognized. The Company will continue to evaluate the impact the adoption of this ASU will have on its consolidated financial statements, focusing on noninterest income sources within the scope of the ASU as well as the new disclosures required; however, the adoption of ASU No. 2014-09 is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” to improve financial reporting about leasing transactions. This ASU will require organizations that lease assets (“lessees”) to recognize a lease liability and a right-of-use asset on its balance sheet for all leases with terms of more than twelve months. A lease liability is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset represents the lessee’s right to use, or control use of, a specified asset for the lease term. The amendments in this ASU simplify the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. This ASU leaves the accounting for the organizations that own the assets leased to the lessee (“lessor”) largely unchanged except for targeted improvements to align it with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.

For public companies, ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company has identified a project team to review its leases and to assess the impact of ASU No. 2016-02 on its consolidated financial position, results of operations, and cash flows.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU requires enhanced disclosures, including qualitative and quantitative requirements, which provide additional information about the amounts recorded in the financial statements. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

ASU No. 2016-13 is effective for the Company in annual and interim reporting periods beginning after December 15, 2019. Although early adoption is permitted for fiscal years beginning after December 15, 2018, the Company does not plan to early adopt. The Company has been preserving certain historical loan information from its core processing system in anticipation of adopting the standard. The Company has identified a project team to assess the impact of this ASU on its consolidated financial position, results of operations, and cash flows, as well as identifying resources needed to implement the standard.

In March 2017, the FASB issued ASU NO. 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires that employers offering benefit plans accounted for under Topic 715 report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. This ASU is effective for the Company in annual and interim reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of ASU No. 2017-07 on its consolidated financial position, results of operations, or cash flows upon adoption.

In March 2017, the FASB issued ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” This ASU shortens the amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest call date. The ASU does not change the accounting for securities held at a discount; the discount will continue to be amortized to maturity. This ASU is effective for the Company in annual and interim reporting periods beginning after December 15, 2018, with early adoption permitted. Entities are required to apply the amendments on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is considering early adoption and is in the process of determining the impact on its consolidated financial position, results of operations, or cash flows upon adoption.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

5. Net Income Per Common Share

Basic net income per common share is determined by dividing net income by the weighted average total number of common shares issued and outstanding. There were no dilutive instruments at March 31, 2017 and 2016.

Net income per common share computations was as follows for the periods indicated:

	Three Months Ended March 31,
(In thousands, except per share data)	2017		2016

Net income, basic and diluted	$	3,329	$	6,180


Average common shares issued and outstanding, basic and diluted		7,510		7,500

Net income per common share, basic and diluted	$	.44	$	.82

6. Investment Securities

The following tables summarize the amortized costs and estimated fair value of the securities portfolio at March 31, 2017 and December 31, 2016. The summary is divided into available for sale and held to maturity investment securities.

March 31, 2017 (In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available For Sale
Obligations of U.S. government-sponsored entities	$	95,120	$	168	$	405	$	94,883
Obligations of states and political subdivisions		130,412		857		1,674		129,595
Mortgage-backed securities – residential		213,588		1,335		2,284		212,639
Mortgage-backed securities – commercial		49,039		1		1,505		47,535
Corporate debt securities		7,627		1		235		7,393
Mutual funds and equity securities		827		38		4		861
Total securities – available for sale	$	496,613	$	2,400	$	6,107	$	492,906
Held To Maturity
Obligations of states and political subdivisions	$	3,475	$	125	$	-	$	3,600

December 31, 2016 (In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available For Sale
Obligations of U.S. government-sponsored entities	$	71,941	$	213	$	460	$	71,694
Obligations of states and political subdivisions		134,055		773		2,536		132,292
Mortgage-backed securities – residential		225,489		1,505		2,687		224,307
Mortgage-backed securities – commercial		47,164		6		1,557		45,613
Corporate debt securities		6,565		1		441		6,125
Mutual funds and equity securities		824		20		11		833
Total securities – available for sale	$	486,038	$	2,518	$	7,692	$	480,864
Held To Maturity
Obligations of states and political subdivisions	$	3,488	$	109	$	-	$	3,597

The amortized cost and estimated fair value of the debt securities portfolio at March 31, 2017, by contractual maturity, are detailed below. The summary is divided into available for sale and held to maturity securities. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mutual funds and equity securities in the available for sale portfolio consist of investments attributed to the Company’s captive insurance subsidiary. These securities have no stated maturity and are not included in the maturity schedule that follows.

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

	Available For Sale				Held To Maturity
	Amortized		Estimated		Amortized		Estimated
March 31, 2017 (In thousands)	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	46,954	$	46,994	$	-	$	-
Due after one year through five years		84,708		84,923		-		-
Due after five years through ten years		80,396		79,302		570		621
Due after ten years		21,101		20,652		2,905		2,979
Mortgage-backed securities		262,627		260,174		-		-
Total	$	495,786	$	492,045	$	3,475	$	3,600

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

	Three Months Ended
	March 31,
(In thousands)	2017			2016

Gross realized gains	$	-		$	162
Gross realized losses		9			79
Net realized (loss) gain	$	(9	)	$	83

Investment securities with unrealized losses at March 31, 2017 and December 31, 2016 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, 2017 (In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored entities	$	49,292	$	405	$	-	$	-	$	49,292	$	405
Obligations of states and political subdivisions		73,875		1,666		1,650		8		75,525		1,674
Mortgage-backed securities – residential		152,605		2,078		5,522		206		158,127		2,284
Mortgage-backed securities – commercial		46,319		1,505		-		-		46,319		1,505
Corporate debt securities		1,563		4		5,688		231		7,251		235
Mutual funds and equity securities		-		-		248		4		248		4
Total	$	323,654	$	5,658	$	13,108	$	449	$	336,762	$	6,107

	Less than 12 Months						12 Months or More		Total
December 31, 2016 (In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored entities	$	51,657	$	460	$	-	$	-	$	51,657	$	460
Obligations of states and political subdivisions		91,728		2,526		1,999		10		93,727		2,536
Mortgage-backed securities – residential		154,397		2,485		5,841		202		160,238		2,687
Mortgage-backed securities – commercial		43,309		1,557		-		-		43,309		1,557
Corporate debt securities		536		6		5,476		435		6,012		441
Mutual funds and equity securities		128		2		113		9		241		11
Total	$	341,755	$	7,036	$	13,429	$	656	$	355,184	$	7,692

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

Corporate debt securities in the Company’s investment securities portfolio at March 31, 2017 include single-issuer trust preferred capital securities with an unrealized loss of $231 thousand and a carrying value of $5.7 million. At year-end 2016, these securities had an unrealized loss of $435 thousand. These securities were issued by a national and global financial services firm and were purchased by the Company during 2007. The securities are currently performing and continue to be rated as investment grade by major rating agencies. The Company believes these securities are not impaired due to reasons of credit quality or other factors, but rather the unrealized loss is primarily attributed to continuing uncertainties in both international and domestic economies and market volatility. The Company believes that it will collect all amounts due according to the contractual terms of these securities and that the fair values of these securities will recover as they approach their maturity dates.

The Company attributes the unrealized losses in other sectors of its investment securities portfolio to changes in market interest rates and volatility. Investment securities with unrealized losses at March 31, 2017 are performing according to their contractual terms, and the Company does not expect to incur a loss on these securities unless they are sold prior to maturity. The Company does not have the intent to sell these securities nor does it believe it is likely that it will be required to sell these securities prior to their anticipated recovery. The Company does not consider any of the securities to be impaired due to reasons of credit quality or other factors.

7. Loans and Allowance for Loan Losses

Major classifications of loans outstanding are summarized as follows:

(In thousands)	March 31, 2017		December 31, 2016

Real Estate
Real estate mortgage – construction and land development	$	121,021	$	120,230
Real estate mortgage – residential		343,992		350,295
Real estate mortgage – farmland and other commercial enterprises		421,912		400,367
Commercial
Commercial and industrial		55,320		48,607
States and political subdivisions		18,384		18,933
Other		20,724		23,308
Consumer
Secured		4,354		4,554
Unsecured		4,126		4,681
Total loans		989,833		970,975
Less unearned income		-		-
Total loans, net of unearned income	$	989,833	$	970,975

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

Three months ended March 31, 2017 (In thousands)	Real Estate			Commercial			Consumer			Total

Balance, beginning of period	$	8,205		$	854		$	285		$	9,344
Provision for loan losses		396			(7	)		191			580
Recoveries		17			49			11			77
Loans charged off		(434	)		(32	)		(28	)		(494	)
Balance, end of period	$	8,184		$	864		$	459		$	9,507

Three months ended March 31, 2016 (In thousands)	Real Estate			Commercial			Consumer			Total

Balance, beginning of period	$	9,173		$	820		$	322		$	10,315
Provision for loan losses		(453	)		(6	)		(14	)		(473	)
Recoveries		52			36			32			120
Loans charged off		(63	)		(11	)		(60	)		(134	)
Balance, end of period	$	8,709		$	839		$	280		$	9,828

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

March 31, 2017 (In thousands)	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Allowance for Loan Losses Allocated
Real Estate
Real estate mortgage – construction and land development	$	8,092	$	2,251	$	3,793	$	6,044	$	731
Real estate mortgage – residential		9,714		3,862		5,826		9,688		1,499
Real estate mortgage – farmland and other commercial enterprises		23,271		8,468		14,697		23,165		337
Commercial
Commercial and industrial		496		-		498		498		252
Consumer
Unsecured		334		-		337		337		334
Total	$	41,907	$	14,581	$	25,151	$	39,732	$	3,153

December 31, 2016 (In thousands)	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Allowance for Loan Losses Allocated
Real Estate
Real estate mortgage – construction and land development	$	9,076	$	2,599	$	3,800	$	6,399	$	759
Real estate mortgage – residential		9,930		4,388		5,590		9,978		1,503
Real estate mortgage – farmland and other commercial enterprises		25,045		9,699		15,235		24,934		304
Commercial
Commercial and industrial		435		20		418		438		236
Consumer
Unsecured		146		-		146		146		146
Total	$	44,632	$	16,706	$	25,189	$	41,895	$	2,948

Three Months Ended March 31, 2017 (In thousands)	Average		Interest Income Recognized		Cash Basis Interest Recognized
Real Estate
Real estate mortgage – construction and land development	$	6,247	$	76	$	52
Real estate mortgage – residential		9,702		118		117
Real estate mortgage – farmland and other commercial enterprises		24,089		302		291
Commercial
Commercial and industrial		499		7		6
Consumer
Unsecured		335		5		2
Total	$	40,872	$	508	$	468

Three Months Ended March 31, 2016 (In thousands)	Average		Interest Income Recognized		Cash Basis Interest Recognized
Real Estate
Real estate mortgage – construction and land development	$	8,292	$	47	$	47
Real estate mortgage – residential		9,035		103		99
Real estate mortgage – farmland and other commercial enterprises		23,791		269		263
Commercial
Commercial and industrial		420		4		4
Consumer
Unsecured		156		2		1
Total	$	41,694	$	425	$	414

The following tables present the balance of the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of March 31, 2017 and December 31, 2016.

March 31, 2017 (In thousands)	Real Estate		Commercial		Consumer		Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2,567	$	252	$	334	$	3,153
Collectively evaluated for impairment		5,617		612		125		6,354
Total ending allowance balance	$	8,184	$	864	$	459	$	9,507

Loans
Loans individually evaluated for impairment	$	38,897	$	498	$	337	$	39,732
Loans collectively evaluated for impairment		848,028		93,930		8,143		950,101
Total ending loan balance, net of unearned income	$	886,925	$	94,428	$	8,480	$	989,833

December 31, 2016 (In thousands)	Real Estate		Commercial		Consumer		Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2,566	$	236	$	146	$	2,948
Collectively evaluated for impairment		5,639		618		139		6,396
Total ending allowance balance	$	8,205	$	854	$	285	$	9,344

Loans
Loans individually evaluated for impairment	$	41,311	$	438	$	146	$	41,895
Loans collectively evaluated for impairment		829,581		90,410		9,089		929,080
Total ending loan balance, net of unearned income	$	870,892	$	90,848	$	9,235	$	970,975

The following tables present the recorded investment in nonperforming loans by class of loans as of March 31, 2017 and December 31, 2016.

March 31, 2017 (In thousands)	Nonaccrual		Restructured Loans		Loans Past Due 90 Days or More and Still Accruing
Real Estate
Real estate mortgage – construction and land development	$	475	$	3,627	$	-
Real estate mortgage – residential		2,343		3,774		3
Real estate mortgage – farmland and other commercial enterprises		2,361		14,641		-
Commercial
Commercial and industrial		-		376		-
Consumer
Secured		1		-		-
Unsecured		2		133		-
Total	$	5,182	$	22,551	$	3

December 31, 2016 (In thousands)	Nonaccrual		Restructured Loans		Loans Past Due 90 Days or More and Still Accruing
Real Estate
Real estate mortgage – construction and land development	$	712	$	3,637	$	-
Real estate mortgage – residential		2,316		4,006		-
Real estate mortgage – farmland and other commercial enterprises		3,383		14,787		-
Commercial
Commercial and industrial		-		377		-
Consumer
Secured		4		-		-
Unsecured		8		135		-
Total	$	6,423	$	22,942	$	-

The Company has allocated $2.0 million of specific reserves as of March 31, 2017 and December 31, 2016 to customers whose loan terms have been modified in troubled debt restructurings and that are in compliance with those terms. The Company had no commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings at March 31, 2017 and December 31, 2016. The Company had no credits during the first three months of 2017 or 2016 that were modified 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 the dates indicated. Past due loans that are also classified as nonaccrual are included in their respective past due category.

March 31, 2017 (In thousands)	30-89 Days Past Due		90 Days or More Past Due		Total		Current		Total Loans
Real Estate
Real estate mortgage – construction and land development	$	16	$	314	$	330	$	120,691	$	121,021
Real estate mortgage – residential		1,441		774		2,215		341,777		343,992
Real estate mortgage – farmland and other commercial enterprises		-		1,517		1,517		420,395		421,912
Commercial
Commercial and industrial		127		-		127		55,193		55,320
States and political subdivisions		-		-		-		18,384		18,384
Other		102		-		102		20,622		20,724
Consumer
Secured		-		1		1		4,353		4,354
Unsecured		184		2		186		3,940		4,126
Total	$	1,870	$	2,608	$	4,478	$	985,355	$	989,833

December 31, 2016 (In thousands)	30-89 Days Past Due		90 Days or More Past Due		Total		Current		Total Loans
Real Estate
Real estate mortgage – construction and land development	$	393	$	227	$	620	$	119,610	$	120,230
Real estate mortgage – residential		1,935		798		2,733		347,562		350,295
Real estate mortgage – farmland and other commercial enterprises		-		2,483		2,483		397,884		400,367
Commercial
Commercial and industrial		-		-		-		48,607		48,607
States and political subdivisions		-		-		-		18,933		18,933
Other		24		-		24		23,284		23,308
Consumer
Secured		13		-		13		4,541		4,554
Unsecured		30		8		38		4,643		4,681
Total	$	2,395	$	3,516	$	5,911	$	965,064	$	970,975

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 and are considered to have a low risk of loss. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows for the dates indicated. Each of the following tables excludes immaterial amounts attributed to accrued interest receivable.

	Real Estate						Commercial
March 31, 2017 (In thousands)	Real Estate Mortgage – Construction and Land Development		Real Estate Mortgage – Residential		Real Estate Mortgage –Farmland and Other Commercial Enterprises		Commercial and Industrial		States and Political Subdivisions		Other
Credit risk profile by internally assigned rating grades
Pass	$	114,397	$	318,555	$	388,228	$	53,943	$	18,384	$	20,701
Special Mention		523		10,980		19,020		744		-		23
Substandard		6,101		14,457		14,664		633		-		-
Doubtful		-		-		-		-		-		-
Total	$	121,021	$	343,992	$	421,912	$	55,320	$	18,384	$	20,724

	Real Estate						Commercial
December 31, 2016 (In thousands)	Real Estate Mortgage –Construction and Land Development		Real Estate Mortgage –Residential		Real Estate Mortgage –Farmland and Other Commercial Enterprises		Commercial and Industrial		States and Political Subdivisions		Other
Credit risk profile by internally assigned rating grades
Pass	$	112,435	$	323,300	$	363,448	$	47,254	$	18,933	$	23,308
Special Mention		1,413		12,147		21,088		764		-		-
Substandard		6,382		14,806		15,831		589		-		-
Doubtful		-		42		-		-		-		-
Total	$	120,230	$	350,295	$	400,367	$	48,607	$	18,933	$	23,308

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For consumer loan classes, the Company 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, 2017 and December 31, 2016.

	March 31, 2017				December 31, 2016
	Consumer				Consumer
(In thousands)	Secured		Unsecured		Secured		Unsecured
Credit risk profile based on payment activity
Performing	$	4,353	$	3,991	$	4,550	$	4,538
Nonperforming		1		135		4		143
Total	$	4,354	$	4,126	$	4,554	$	4,681

The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis. During the first quarter of 2017, the Company shortened the look-back period it uses to determine historical loss rates to the previous twelve quarters from sixteen quarters. No other significant changes were made to the loan risk grading system definitions and allowance for loan loss methodology during the past year.

8. Other Real Estate Owned

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

(In thousands)	March 31, 2017		December 31, 2016
Construction and land development	$	6,049	$	7,996
Residential real estate		371		871
Farmland and other commercial enterprises		1,580		1,806
Total	$	8,000	$	10,673

OREO activity for the three months ended March 31, 2017 and 2016 was as follows:

Three months ended March 31, (In thousands)	2017			2016
Beginning balance	$	10,673		$	21,843
Transfers from loans and other increases		193			551
Proceeds from sales		(2,871	)		(778	)
Gain (loss) on sales, net		115			(21	)
Write downs and other decreases, net		(110	)		(597	)
Ending balance	$	8,000		$	20,998

At March 31, 2017, the Company had a total of $1.2 million of loans secured by residential real estate mortgages that were in the process of foreclosure.

9. Securities Sold under Agreements to Repurchase

Securities sold under agreements to repurchase represent transactions where the Company sells certain of its investment securities and agrees to repurchase them at a specific date in the future. Securities sold under agreements to repurchase are accounted for as secured borrowing and reflect the amount of cash received in connection with the transaction.

Securities sold under agreements to repurchase are collateralized by U.S. government agency securities, primarily mortgage-backed securities. The Company may be required to provide additional collateral securing the borrowings in the event of principal pay downs or a decrease in the market value of the pledged securities. The Company mitigates this risk by monitoring the market value and liquidity of the collateral and ensuring that it holds a sufficient level of eligible securities to cover potential increases in collateral requirements.

Of the total repurchase agreements, $32.8 million are classified as short-term borrowings and $1.3 million are classified as long-term borrowings on the balance sheet at March 31, 2017. At year-end 2016, $35.1 million and $1.3 million are classified as short-term and long-term borrowings, respectively. The following tables represent the remaining maturity of repurchase agreements disaggregated by the class of securities pledged as of the dates indicated.

	Remaining Contractual Maturity of the Agreements
March 31, 2017 (In thousands)	Overnight/ Continuous		Less Than 30 Days		30-89 Days		90 Days to One Year		Over One Year to Three Years		Total
U.S. government agency securities	$	31,386	$	258	$	-	$	1,400	$	1,029	$	34,073
Total	$	31,386	$	258	$	-	$	1,400	$	1,029	$	34,073

	Remaining Contractual Maturity of the Agreements
December 31, 2016 (In thousands)	Overnight/ Continuous		Less Than 30 Days		30-89 Days		90 Days to One Year		Over One Year to Three Years		Total
U.S. government agency securities	$	33,682	$	1,203	$	-	$	458	$	1,027	$	36,370
Total	$	33,682	$	1,203	$	-	$	458	$	1,027	$	36,370

10. Postretirement Medical Benefits

The Company provides lifetime medical and dental benefits upon retirement for certain employees meeting the eligibility requirements as of December 31, 1989 (“Plan 1”). Additional participants are not eligible to be included in Plan 1 unless they met the requirements on this date. During 2003, the Company implemented an additional postretirement health insurance program (“Plan 2”). Under Plan 2, any employee meeting the service requirement of 20 years of full time service to the Company and is at least age 55 upon retirement is eligible to continue their health insurance coverage. Under both plans, retirees not yet eligible for Medicare have coverage identical to the coverage offered to active employees. Under both plans, Medicare-eligible retirees are provided with a Medicare Advantage plan. The Company pays 100% of the cost of Plan 1. The Company and the retirees each pay 50% of the cost under Plan 2. Both plans are unfunded. Employees hired on or after January 1, 2016 are not eligible for benefits under Plan 2.

The following disclosures of the net periodic benefit cost components of Plan 1 and Plan 2 were measured at January 1, 2017 and 2016.

Three months ended March 31, (In thousands)	2017			2016
Service cost	$	147		$	159
Interest cost		167			171
Curtailment gain recognized		(351	)		-
Recognized prior service cost		8			13
Net periodic benefit cost	$	(29	)	$	343

In connection with the merger of certain of its subsidiaries in February 2017, the Company recognized a curtailment gain of $351 thousand during the first quarter of 2017 as a result of revaluing its postretirement medical benefits plan liability due to a reduction in workforce. The gain is net of $67 thousand of prior service costs recognized due to the curtailment.

The Company expects benefit payments of $468 thousand for 2017, of which $82 thousand have been made during the first three months of 2017.

11. Regulatory Matters

The Company and its subsidiary bank 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, banks must meet specific capital guidelines that involve quantitative measures of the bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and its subsidiary bank’s 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 bank were as follows for the dates indicated:

	March 31, 2017												December 31, 2016
	Common Equity Tier 1 Risk-based Capital¹			Tier 1 Risk-based Capital¹			Total Risk-based Capital¹			Tier 1 Leverage²			Common Equity Tier 1 Risk-based Capital¹			Tier 1 Risk-based Capital¹			Total Risk-based Capital¹			Tier 1 Leverage²
Consolidated		16.37	%		19.17	%		19.99	%		13.36	%		16.43	%		19.28	%		20.10	%		13.20	%
United Bank & Capital Trust Company		15.55			15.55			16.37			10.86			*			*			*			*
Farmers Bank & Capital Trust Company		*			*			*			*			16.53			16.53			17.23			9.80
United Bank & Trust Company		*			*			*			*			15.54			15.54			16.47			12.38
First Citizens Bank		*			*			*			*			13.56			13.56			14.16			9.76
Citizens Bank of Northern Kentucky, Inc.		*			*			*			*			15.24			15.24			16.40			10.68

¹Common Equity Tier 1 Risked-based, Tier 1 Risk-based, and Total Risk-based Capital ratios are computed by dividing a bank’s Common Equity Tier 1, 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.

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

*In February 2017, the Company merged United Bank & Trust Company, First Citizens Bank, Inc., and Citizens Bank of Northern Kentucky, Inc. into Farmers Bank & Capital Trust Company in Frankfort, KY, the name of which was immediately changed to United Bank & Capital Trust Company.

12. Fair Value Measurements

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

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

Level 1:

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

Level 2:

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

Level 3:

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

Following is a description of the valuation method used for financial instruments measured at fair value on a recurring basis. For this disclosure, the Company only has available for sale investment securities and money market mutual funds classified as cash equivalents that meet the requirement. The carrying value of the $15.8 million in money market mutual funds is equivalent to its fair value and based on Level 1 inputs.

Available for sale investment securities

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

●

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

●

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

Fair value disclosure for available for sale investment securities as of March 31, 2017 and December 31, 2016 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, 2017
Obligations of U.S. government-sponsored entities	$	94,883	$	-	$	94,883	$	-
Obligations of states and political subdivisions		129,595		-		129,595		-
Mortgage-backed securities – residential		212,639		-		212,639		-
Mortgage-backed securities – commercial		47,535		-		47,535		-
Corporate debt securities		7,393		-		7,393		-
Mutual funds and equity securities		861		861		-		-
Total	$	492,906	$	861	$	492,045	$	-

			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, 2016
Obligations of U.S. government-sponsored entities	$	71,694	$	-	$	71,694	$	-
Obligations of states and political subdivisions		132,292		-		132,292		-
Mortgage-backed securities – residential		224,307		-		224,307		-
Mortgage-backed securities – commercial		45,613		-		45,613		-
Corporate debt securities		6,125		-		6,125		-
Mutual funds and equity securities		833		833		-		-
Total	$	480,864	$	833	$	480,031	$	-

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

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

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

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

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

March 31, 2017
Collateral-dependent Impaired Loans
Real estate mortgage – residential	$	353	$	-	$	-	$	353
Commercial, financial, and agriculture		64		-		-		64
Total	$	417	$	-	$	-	$	417

OREO
Construction and land development	$	1,231		-		-		1,231
Residential real estate		27		-		-		27
Farmland and other commercial enterprises		132		-		-		132
Total	$	1,390	$	-	$	-	$	1,390

			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, 2016
Collateral-dependent Impaired Loans
Real estate mortgage – construction and land development	$	2,909	$	-	$	-	$	2,909
Real estate mortgage – residential		3,137		-		-		3,137
Real estate mortgage – farmland and other commercial enterprises		351						351
Total	$	6,397	$	-	$	-	$	6,397

OREO
Construction and land development	$	4,883	$	-	$	-	$	4,883
Residential real estate		234		-		-		234
Farmland and other commercial enterprises		1,070		-		-		1,070
Total	$	6,187	$	-	$	-	$	6,187

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,	2017		2016
Impairment charges:
Collateral-dependent impaired loans	$	65	$	41
OREO		110		597
Total	$	175	$	638

The following table presents quantitative information about unobservable inputs for assets measured on a nonrecurring basis using Level 3 measurements. As described above, the fair value of real estate securing collateral-dependent impaired loans and OREO are based on current third party appraisals. It is sometimes necessary, however, for the Company to discount the appraisal amounts supporting its impaired loans and OREO. These discounts relate primarily to marketing and other holding costs that are not included in certain appraisals or to update values as a result of market declines of similar properties for which newer appraisals are available. Discounts also result from contracts to sell properties entered into during the period. The range of discounts is presented in the table below for 2017 and 2016.

(In thousands)	Fair Value		Valuation Technique	Unobservable Inputs	Range			Average
March 31, 2017
Collateral-dependent impaired loans	$	417	Discounted appraisals	Marketability discount	0%	-	37.0%		6.4	%
OREO	$	1,390	Discounted appraisals	Marketability discount	5.4%	-	55.9%		44.0	%
December 31, 2016
Collateral-dependent impaired loans	$	6,397	Discounted appraisals	Marketability discount	0%	-	67.8%		3.5	%
OREO	$	6,187	Discounted appraisals	Marketability discount	0%	-	50.0%		11.2	%

Fair Value of Financial Instruments

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

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

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

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

Investment Securities Held to Maturity

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

Loans

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

Federal Home Loan Bank and Federal Reserve Bank Stock

The fair value of Federal Home Loan Bank and Federal Reserve Bank stock is estimated at book value due to restrictions that limit the sale or transfer of such securities.

Deposit Liabilities

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

Federal Funds Purchased and Short-term Securities Sold Under Agreements to Repurchase

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

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

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

Commitments to Extend Credit and Standby Letters of Credit

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

The following table presents the estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2017 and December 31, 2016. Information for available for sale investment securities is presented within this footnote in greater detail above.

					Fair Value Measurements Using
(In thousands)	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2017
Assets
Cash and cash equivalents	$	95,564	$	95,564	$	95,564	$	-	$	-
Held to maturity investment securities		3,475		3,600		-		3,600		-
Loans, net		980,326		980,178		-		-		980,178
Accrued interest receivable		4,585		4,585		-		4,585		-
Federal Home Loan Bank and Federal Reserve Bank Stock		13,410		13,410		-		-		13,410

Liabilities
Deposits		1,388,077		1,388,247		1,128,850		-		259,397
Federal funds purchased and short-term securities sold under agreements to repurchase		32,786		32,786		-		32,786		-
Securities sold under agreements to repurchase and other long-term borrowings		14,892		15,215		-		15,215		-
Subordinated notes payable to unconsolidated trusts		33,506		21,521		-		-		21,521
Accrued interest payable		289		289		-		289		-

December 31, 2016
Assets
Cash and cash equivalents	$	113,534	$	113,534	$	113,534	$	-	$	-
Held to maturity investment securities		3,488		3,597		-		3,597		-
Loans, net		961,631		962,437		-		-		962,437
Accrued interest receivable		5,019		5,019		-		5,019		-
Federal Home Loan Bank and Federal Reserve Bank Stock		9,840		9,840		-		-		9,840

Liabilities
Deposits		1,369,907		1,369,567		1,099,211		-		270,356
Federal funds purchased and short-term securities sold under agreements to repurchase		35,085		35,085		-		35,085		-
Securities sold under agreements to repurchase and other long-term borrowings		19,931		20,410		-		20,410		-
Subordinated notes payable to unconsolidated trusts		33,506		21,234		-		-		21,234
Accrued interest payable		321		321		-		321		-

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

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements with the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Statements in this report that are not statements of historical fact are forward-looking statements. In general, forward-looking statements relate to a discussion of future financial results or projections, future economic performance, future operational plans and objectives, and statements regarding the underlying assumptions of such statements. Although management of Farmers Capital Bank Corporation (the “Company” or “Parent Company”) believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate.

Various risks and uncertainties may cause actual results to differ materially from those indicated by the Company’s forward-looking statements. In addition to the risks described under Part 1, Item 1A “Risk Factors” in the Company’s most recent annual report on Form 10-K, factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which the Company and its subsidiaries operate) and lower interest margins; competition for the Company’s customers from other providers of financial services; deposit outflows or reduced demand for financial services and loan products; government legislation, regulation, and changes in monetary and fiscal policies (which changes from time to time and over which the Company has no control); changes in interest rates; changes in prepayment speeds of loans or investment securities; inflation; material unforeseen changes in the liquidity, results of operations, or financial condition of the Company’s customers; changes in the level of non-performing assets and charge-offs; changes in the number of common shares outstanding; the capability of the Company to successfully enter into a definitive agreement for, close, and realize the benefits of anticipated transactions; unexpected claims or litigation against the Company; expected insurance or other recoveries; 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 bank’s 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 2017 Compared to First Quarter 2016

The Company reported net income of $3.3 million or $.44 per common share and $6.2 million or $.82 per common share for the quarters ended March 31, 2017 and 2016, respectively. This represents a decrease of $2.9 million or 46.1%, and $.38 on a per common share basis in the comparison. The current quarter includes pre-tax expenses of $472 thousand ($307 thousand after tax) or $.04 per common share related to the Company’s consolidation of its four bank subsidiaries and data processing subsidiary into one bank. This consolidation was completed in February 2017. Selected income statement amounts and related data are summarized in the table below.

(In thousands except per share data)
Three Months Ended March 31,	2017			2016			Increase (Decrease)
Interest income	$	14,379		$	15,330		$	(951	)
Interest expense		916			2,043			(1,127	)
Net interest income		13,463			13,287			176
Provision for loan losses		580			(473	)		1,053
Net interest income after provision for loan losses		12,883			13,760			(877	)
Noninterest income		5,251			9,542			(4,291	)
Noninterest expenses		13,529			14,407			(878	)
Income before income taxes		4,605			8,895			(4,290	)
Income tax expense		1,276			2,715			(1,439	)
Net income	$	3,329		$	6,180		$	(2,851	)

Basic and diluted net income per common share	$	.44		$	.82		$	(.38	)
Cash dividends declared per common share		.10			.07			.03

Weighted average common shares outstanding – basic and diluted		7,510			7,500			10
Return on average assets		.81	%		1.41	%	(60) bp
Return on average equity		7.27	%		13.73	%	(646) bp

bp – basis points.

The $2.9 million decline in net income is attributed primarily to a pretax gain during the prior-year first quarter of $4.1 million related to the early extinguishment of debt. Net interest income and the provision for loan losses increased $176 thousand or 1.3% and $1.1 million, respectively. Salaries and employee benefits and expenses related to repossessed real estate decreased $362 thousand and $565 thousand, respectively. Further information related to the more significant components making up the decline in net income follows.

Net Interest Income

The overall interest rate environment at March 31, 2017, as measured by the Treasury yield curve, remained at very low levels when compared with historical trends. The shape of the yield curve has flattened since year-end 2016, with lower yields on longer-term maturities and higher yields on shorter-term maturities. Yields for the ten and thirty-year maturity periods declined 6 basis points each while the six-month and two-year maturities were up 29 and 7 basis points, respectively. During March 2017, the Federal Reserve Board (“Federal Reserve”) raised the short-term federal funds target interest rate to a range between 0.75% and 1.00%, up from a target range of 0.50% to 0.75% established in December 2016 and a range of 0.25% to 0.50% targeted in December 2015. The Federal Reserve has indicated that it will continue to assess realized and expected economic conditions relative to its objectives of maximum employment and two percent inflation when determining the timing and size of future adjustments to the target rate. At March 31, 2017, the national and Kentucky unemployment rate was 4.5% and 5.0%, respectively. The national inflation rate at March 31, 2017 was 2.4% based on the Consumer Price Index published by the Bureau of Labor Statistics, up from 2.1% at year-end 2016.

Net interest income was $13.5 million for the first three months of 2017, an increase of $176 thousand or 1.3% compared to $13.3 million a year earlier. The increase in net interest income was driven by a decline in interest expense of $1.1 million or 55.2% partially offset by a decrease in interest income of $951 thousand or 6.2%. Interest expense on deposits and borrowed funds were down $113 thousand or 17.5% and $1.0 million or 72.6%, respectively. Interest income on loans declined $368 thousand or 3.0%. Interest on loans in the year-ago quarter was positively impacted by the collection of $236 thousand related to a nonaccrual commercial real estate loan that fully paid off during the quarter. Interest income on investments decreased $648 thousand or 20.6%.

The decline in interest income on loans was driven by a lower average rate earned of 19 basis points, partially offset by a higher average loan balance outstanding. The average rate earned on loans during the first quarter of 2016 was boosted 10 basis points by the collection of interest on the nonaccrual loan identified above. Average loans for the current quarter increased $15.9 million or 1.7% compared to the prior-year quarter. While loans have increased in the comparison and in six out of the last eight quarters, the Company continues to adhere to its strong credit underwriting standards and commitment to improving the overall credit quality of the loan portfolio.

Interest income on investment securities is down due mainly to lower volume. Average investment securities for the quarter decreased $88.2 million or 15.2% from a year ago. Volume declines are mainly the result of the balance sheet deleverage transaction that was announced during the third quarter of 2016, which is more fully described below.

The decrease in interest expense on deposits was driven by lower average outstanding balances and rate declines related to time deposits. Interest expense on borrowed funds was down primarily due to the early repayment of $100 million of high fixed-rate borrowings during the third quarter of 2016 and, to a lesser extent, the early extinguishment of $15.5 million of debt near the beginning of the first quarter of 2016.

Overall declines in the average rate earned from interest income on loans and average interest rate paid on deposits are the result of a slow growing economy and related low interest rate environment, competitive pressures, and the Company’s ongoing strategy of being more selective in pricing its loans and deposits. The goal of this strategy is to improve credit quality, net interest income, overall profitability, and capital position.

The Company is generally earning and paying less interest from its earning assets and funding sources as the average rates earned and paid have decreased. This includes repricing of variable and floating rate assets and liabilities that have reset to overall lower amounts since their previous repricing date as well as activity related to new earning assets and funding sources in a low interest rate environment. The Company continues to reprice its higher-rate maturing time deposits downward to lower market rates or to allow them to mature without renewal, as liquidity has been adequate.

As part of its strategy to improve net interest income and net interest margin, the Company completed a series of transactions during the last half of 2016 to deleverage its balance sheet and reposition its investment securities portfolio. The Company used a mixture of $10.4 million of excess cash and $93.4 million of proceeds from the sale of investment securities to prepay $100 million of high fixed-rate borrowings due to mature in November 2017. The Company incurred a prepayment fee of $3.8 million, which was offset by a gain in the same amount on the sale of investment securities. The average yield on the mix of cash and investment securities sold to fund the debt prepayment was 2.97%. The average cost of the fixed rate borrowings that were repaid was 3.95%. The Company also took action to reposition its investment securities portfolio by replacing approximately $78 million of certain lower yielding short-term investments with longer-term, higher-yielding investments consistent with a more normalized strategy and maturity periods. The lower yielding short-term investments were built up in anticipation of the debt repayment. The average yield on the investments identified for the repositioning strategy was 0.85% compared to a targeted reinvestment yield of 1.85%. As a result, the average life of the securities portfolio increased to 4.0 years from 3.5 years.

The net interest margin on a taxable equivalent basis was 3.60% for the current quarter, an increase of 24 basis points compared with 3.36% a year earlier. Net interest spread increased 30 basis points to 3.50% up from 3.20% a year ago. Net interest margin and spread for the prior-year first quarter was positively impacted six basis points related to the collection of interest on the nonaccrual commercial real estate loan identified above. The Company expects its net interest margin to trend slightly upward in the near term according to internal modeling using expectations about future market interest rates, the maturity structure of the Company’s earning assets and liabilities, and other factors. Future results could be significantly different than current expectations.

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

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

Three Months Ended March 31,	2017									2016
(In thousands)	Average Balance			Interest			Average Rate			Average Balance			Interest			Average Rate
Earning Assets
Investment securities¹
Taxable	$	369,635		$	1,900			2.08	%	$	456,424		$	2,509			2.21	%
Nontaxable²		123,174			887			2.92			124,606			939			3.03
Interest bearing deposits in banks, federal funds sold and securities purchased under agreements to resell, and money market mutual funds		92,593			166			.73			96,451			101			.42
Loans^2,3,4		974,987			11,796			4.91			959,048			12,157			5.10
Total earning assets		1,560,389		$	14,749			3.83	%		1,636,529		$	15,706			3.86	%
Allowance for loan losses		(9,448	)								(10,206	)
Total earning assets, net of allowance for loan losses		1,550,941									1,626,323
Nonearning Assets
Cash and due from banks		25,462									22,906
Premises and equipment, net		31,852									32,906
Other assets		58,660									82,560
Total assets	$	1,666,915								$	1,764,695
Interest Bearing Liabilities
Deposits
Interest bearing demand	$	349,212		$	91			.11	%	$	330,180		$	66			.08	%
Savings		421,230			124			.12			403,716			131			.13
Time		264,585			318			.49			317,608			449			.57
Federal funds purchased and short-term securities sold under agreements to repurchase		35,049			22			.25			36,693			24			.26
Securities sold under agreements to repurchase and other long-term borrowings		49,506			361			2.96			156,444			1,373			3.53
Total interest bearing liabilities		1,119,582		$	916			.33	%		1,244,641		$	2,043			.66	%
Noninterest Bearing Liabilities
Demand deposits		337,016									311,453
Other liabilities		24,541									27,531
Total liabilities		1,481,139									1,583,625
Shareholders’ equity		185,776									181,070
Total liabilities and shareholders’ equity	$	1,666,915								$	1,764,695
Net interest income					13,833									13,663
TE basis adjustment					(370	)								(376	)
Net interest income				$	13,463								$	13,287
Net interest spread								3.50	%								3.20	%
Impact of noninterest bearing sources of funds								.10									.16
Net interest margin								3.60	%								3.36	%

¹Average yields on securities available for sale have been calculated based on amortized cost.

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

³Loan balances include principal balances on nonaccrual loans.

⁴Loan fees included in interest income amounted to $326 thousand and $318 thousand in 2017 and 2016, respectively.

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

(In thousands)	Variance			Variance Attributed to
Three Months Ended March 31,	2017/2016¹			Volume			Rate

Interest Income
Taxable investment securities	$	(609	)	$	(465	)	$	(144	)
Nontaxable investment securities²		(52	)		(12	)		(40	)
Interest bearing deposits in banks, federal funds sold and securities purchased under agreements to resell, and money market mutual funds		65			(27	)		92
Loans²		(361	)		1,013			(1,374	)
Total interest income		(957	)		509			(1,466	)
Interest Expense
Interest bearing demand deposits		25			3			22
Savings deposits		(7	)		27			(34	)
Time deposits		(131	)		(71	)		(60	)
Federal funds purchased and short-term securities sold under agreements to repurchase		(2	)		(1	)		(1	)
Securities sold under agreements to repurchase and other long-term borrowings		(1,012	)		(819	)		(193	)
Total interest expense		(1,127	)		(861	)		(266	)
Net interest income	$	170		$	1,370		$	(1,200	)
Percentage change		100.0	%		805.9	%		(705.9	)%

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 are necessary to maintain an allowance for loan losses at an adequate level to cover credit losses specifically identified in the loan portfolio, as well as management’s best estimate of incurred probable loan losses in the remainder of the portfolio at the balance sheet date. The credit quality of the Company’s loan portfolio continued recent trends of improvement during the current quarter, as certain credit quality metrics are at or near recent quarterly bests.

The Company recorded a provision for loan losses in the amount of $580 thousand and a credit to the provision of $473 thousand for the current and year-ago quarters, respectively. The allowance for loan losses as a percentage of outstanding loans was 0.96% at March 31, 2017 compared to 0.96% and 1.02% at year-end 2016 and March 31, 2016, respectively. The provision for loan losses was driven by net charge-offs of $417 thousand for the current quarter combined with an increase in specific reserves on impaired loans. Net charge-offs during the quarter were limited primarily to one credit relationship in the amount of $405 thousand which was secured by several multifamily residential properties. Although impaired loans declined $2.2 million during the quarter, the specific reserves attributed to the impaired loan portion of the portfolio increased $205 thousand primarily due to one unsecured consumer credit. This is due to the characteristics of the individual loans that are classified as impaired.

While historical loss rates continued to be low, the effect of the decline in loss rates on the allowance for loan losses was offset by the loan growth during the current quarter. The loan portfolio increased $18.9 million or 1.9% during the quarter. Overall credit quality metrics of the loan portfolio has continued to improve. Nonperforming loans, loans graded as substandard or below, and watch list loans have each declined when compared with a year earlier. For further information about improvements in the Company’s overall credit quality, please refer to the discussion under the captions “Allowance for Loan Losses” and “Nonperforming Loans” that follows.

Noninterest Income

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

Three Months Ended March 31, (In thousands)	2017			2016		Increase (Decrease)			%
Service charges and fees on deposits	$	1,958		$	1,867	$	91			4.9	%
Allotment processing fees		715			874		(159	)		(18.2	)
Other service charges, commissions, and fees		1,400			1,282		118			9.2
Trust income		704			654		50			7.6
Investment securities (losses) gains, net		(9	)		83		(92	)		(110.8	)
Gain on sale of mortgage loans, net		154			200		(46	)		(23.0	)
Income from company-owned life insurance		235			325		(90	)		(27.7	)
Gain on debt extinguishment		-			4,050		(4,050	)		NM
Other		94			207		(113	)		(54.6	)
Total noninterest income	$	5,251		$	9,542	$	(4,291	)		(45.0	)%

NM – not meaningful.

The decline in noninterest income is mainly attributed to the $4.1 million pre-tax gain during the first quarter of 2016 related to the early extinguishment of debt. Noninterest income in the year-ago quarter also includes a $100 thousand payment received related to a litigation settlement. Service charges and fees on deposits increased primarily due to higher service charges of $103 thousand or 85.7%, partially offset by lower overdraft fees of $59 thousand or 6.0%. During the second quarter of 2016, the Company standardized and reduced the number of its deposit account product offerings throughout the corporation. This contributed to an overall increase in service charges compared to the prior year. The Company anticipates that service charges on deposits will increase incrementally in the short term compared with the year-ago periods; however, it cannot quantify with precision the longer term impact of this change on customer behavior and related deposit balances and fee income. The increase in nondeposit service charges, commissions, and fees was driven by small increases across multiple line items.

The decrease in allotment processing fees is a result of lower processing volume stemming from the U.S. Department of Defense policy that went into effect on January 1, 2015 which restricts the types of purchases active duty service members are able to make using the military allotment system for payment. The Company seeks to mitigate these declines by diversifying its customer base beyond the historically strong level of military participants and by expanding its payment processing options. Net losses on the sale of investment securities compared to net gains in the prior year is attributed to normal asset/liability management strategies, as the Company periodically sells investment securities to lock in gains, increase yield, restructure expected future cash flows, improve risk exposures, and/or enhance its capital position. The decline in income from company-owned life insurance is primarily due to a tax-free death benefit received in excess of the cash surrender value during the first quarter of 2016 of $81 thousand.

Noninterest Expense

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

Three Months Ended March 31, (In thousands)	2017		2016		Increase (Decrease)			%
Salaries and employee benefits	$	7,617	$	7,979	$	(362	)		(4.5	)%
Occupancy expenses, net		1,214		1,190		24			2.0
Equipment expenses		553		532		21			3.9
Data processing and communication expenses		1,293		1,217		76			6.2
Bank franchise tax		557		599		(42	)		(7.0	)
Deposit insurance expenses		137		298		(161	)		(54.0	)
Other real estate expenses, net		74		639		(565	)		(88.4	)
Legal expenses		85		167		(82	)		(49.1	)
Other		1,999		1,786		213			11.9
Total noninterest expense	$	13,529	$	14,407	$	(878	)		(6.1	)%

Noninterest expense for the current quarter includes $472 thousand related to the consolidation of the Company’s subsidiaries. The decline in noninterest expense in the comparison was driven by lower expenses related to repossessed real estate, which were down primarily as a result of lower property write-downs of $487 thousand or 81.6%. The prior-year period includes one larger-balance commercial real estate property with a write-down of $352 thousand as a result of receiving an updated appraisal.

The decrease in salaries and employee benefits is attributed to lower employee benefits of $604 thousand or 44.0% primarily related to a curtailment gain of $351 thousand in the current quarter, which was the result of revaluing the Company’s postretirement medical benefits plan liability due to a reduction in workforce related to the subsidiary consolidation plan that was completed in the current quarter. Also contributing to the decline in employee benefits was lower claims activity related to the Company’s self-funded health insurance plan of $198 thousand due to the reduced workforce. Salary expense for the current quarter includes $301 thousand for severance pay accruals related to the consolidation. There were no similar accruals during the prior year quarter. The Company had 443 full time equivalent employees at quarter-end, down from 495 a year ago.

Legal expenses are lower mainly due to a recovery of $56 thousand in the current quarter combined with the level of activity occurring in the normal course of business. The reduction in deposit insurance expense is due to a combination of further improvement in the risk rating at the Company’s subsidiary bank and lower assessment rates. Data processing and communication expense were up mainly due to additional expenses during the current year of $127 thousand related to the consolidation of subsidiaries. The increase in other noninterest expense was driven by higher supplies expense of $72 thousand or 67.0% due to $21 thousand related to the consolidation and the timing of the replenishment of operational supplies.

Income Taxes

Income tax expense was $1.3 million for the first quarter of 2017, a decrease of $1.4 million or 53.0% compared to $2.7 million for the first quarter of 2016. The effective income tax rates were 27.7% and 30.5% for the current and year-ago quarters, respectively. Income tax expense and the effective tax rate are down in the current period as a result of lower pretax income, made up by a higher mix of tax-exempt versus taxable sources of revenue that was driven by the $4.1 million pretax gain on extinguishment of debt in the year-ago quarter.

FINANCIAL CONDITION

Total assets were $1.7 billion at March 31, 2017, an increase of $11.4 million or 0.7% from year-end 2016, led by an increase in loans, net of allowance, of $18.7 million. Liabilities were up $7.8 million of 0.5% and equity increased $3.7 million or 2.0% in the comparison. Selected balance sheet amounts and related data are presented in the table below and discussion that follows.

(Dollars in thousands, except per share data)	March 31, 2017			December 31, 2016			Increase (Decrease)			%
Cash and cash equivalents	$	95,564		$	113,534		$	(17,970	)		(15.8	)%
Investment securities		496,381			484,352			12,029			2.5
Loans, net of allowance of $9,507 and $9,344		980,326			961,631			18,695			1.9
Other real estate owned		8,000			10,673			(2,673	)		(25.0	)
Other assets		102,188			100,840			1,348			1.3
Total assets	$	1,682,459		$	1,671,030		$	11,429			.7	%

Deposits	$	1,388,077		$	1,369,907		$	18,170			1.3	%
Federal funds purchased and short-term securities sold under agreements to repurchase		32,786			35,085			(2,299	)		(6.6	)
Other borrowings		48,398			53,437			(5,039	)		(9.4	)
Other liabilities		25,458			28,535			(3,077	)		(10.8	)
Total liabilities		1,494,719			1,486,964			7,755			.5

Common stock		939			939			-			-
Capital surplus		51,968			51,885			83			.2
Retained earnings		137,228			134,650			2,578			1.9
Accumulated other comprehensive income		(2,395	)		(3,408	)		1,013			29.7
Total shareholders’ equity		187,740			184,066			3,674			2.0
Total liabilities and shareholders’ equity	$	1,682,459		$	1,671,030		$	11,429			.7	%

End of period tangible book value per common share¹	$	24.99		$	24.51		$	.48			2.0	%
End of period per common share closing price		40.40			42.05			(1.65	)		(3.9	)

¹Represents total common equity less intangible assets divided by the number of common shares outstanding at the end of the period.

Cash and cash equivalents are down mainly as a result of funding new loans, investment securities, and the repayment of long-term borrowings partially offset by an increase in deposits. The increase in loans was driven mainly by loans secured by real estate, primarily commercial and construction related lending, partially offset by lower residential real estate. OREO decreased primarily due to property sales and impairment charges to adjust carrying amounts to their estimated fair value less cost to sell.

The increase in total liabilities was driven by higher deposits, partially offset by a reduction in both short and long-term borrowings. Deposits were up primarily from higher noninterest bearing demand deposits and savings deposits. The trend over the last several years has been for deposits in the first quarter of the year to exceed the prior year-end amount, then decreasing in the second and third quarters before trending back up during the fourth quarter. These trends indicate a certain amount of seasonality in our customer deposit base. The decrease in long-term borrowings was driven by principal payments of $5.0 million related to Federal Home Loan Bank (“FHLB”) borrowings during the quarter.

Shareholders’ equity was up primarily due to net income of $3.3 million and other comprehensive income of $1.0 million, partially offset by dividends declared on common stock of $751 thousand. Other comprehensive income was driven by an increase in the after-tax unrealized gain related to the available for sale investment securities portfolio of $948 thousand.

Temporary Investments

Temporary investments consist of interest bearing deposits in other banks, federal funds sold and securities purchased under agreements to resell, and money market mutual funds. The Company uses these funds in the management of liquidity and interest rate sensitivity or as a short-term holding prior to subsequent movement into other investments with higher yields or for other purposes. At March 31, 2017, temporary investments were $74.1 million, a decrease of $13.8 million or 15.7% from year-end 2016.

Investment Securities

The investment securities portfolio is comprised primarily of residential mortgage-backed securities, tax-exempt securities of states and political subdivisions, and debt securities issued by U.S. government-sponsored agencies. Substantially all of the Company’s investment securities are designated as available for sale. Proceeds received from maturing or called investment securities not needed to fund higher-earning loans are either reinvested in similar investments or used to manage liquidity, such as for deposit outflows or other payment obligations. Total investment securities had a carrying amount of $496 million at March 31, 2017, an increase of $12.0 million or 2.5% compared to $484 million at year-end 2016.

The increase in investment securities was driven by net purchases totaling $11.6 million and higher market values related to the available for sale portfolio of $1.5 million, partially offset by net premium amortization of $910 thousand. Net purchases for the quarter include investing excess cash of $25.0 million near the end of the quarter in a short-term FHLB discount note that matured early in the second quarter.

Loans

Loans were $990 million at March 31, 2017, an increase of $18.9 million or 1.9% compared to year-end 2016, and represents the second consecutive quarter of growth. The back-to-back quarterly increase in loans represent the largest two consecutive quarterly increases in loans since the first two quarters of 2007. While recent loan demand and near term prospects are encouraging, the Company continues a conservative approach to loan originations while it works to further reduce its level of nonperforming assets. Generating high quality loan demand remains a challenge as economic growth remains unsteady.

From time to time the Company may purchase a limited amount of loans originated by otherwise nonaffiliated third parties. The Company performs its own risk assessment and makes the credit decision on each loan prior to purchase. The Company purchased smaller balance commercial loans totaling $732 thousand and $375 thousand in the aggregate during the first three months of 2017 and 2016, respectively. The average amount of the purchased loans was $122 thousand for 2017 and $94 thousand for 2016.

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

	March 31, 2017					December 31, 2016
(Dollars in thousands)	Amount		%			Amount		%

Real estate mortgage – construction and land development	$	121,021		12.2	%	$	120,230		12.4	%
Real estate mortgage – residential		343,992		34.8			350,295		36.1
Real estate mortgage – farmland and other commercial enterprises		421,912		42.6			400,367		41.2
Commercial, financial, and agriculture		94,428		9.5			90,848		9.4
Installment		8,480		.9			9,235		.9
Total	$	989,833		100.0	%	$	970,975		100.0	%

On an average basis, loans represented 62.5% of earning assets for the first three months of 2017, an increase of 388 basis points compared to 58.6% for the year 2016. The increase in the level of loans as a percentage of earning assets reflects the continued growth in the loan portfolio over the past year combined with a significant decrease in investment securities as a result of unwinding the balance sheet leverage transaction. The increase in loans in recent periods has been funded by cash flows from investment securities and temporary investments. Loans typically involve an increase in credit risk and higher yields when compared to investment securities and temporary investment alternatives.

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

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

The allowance for loan losses was $9.5 million or 0.96% of outstanding loans at March 31, 2017. This compares to $9.3 million or 0.96% of net loans outstanding at year-end 2016. The allowance as a percentage of net loans outstanding remained unchanged from the prior year-end as a result of loan growth during the quarter. As a percentage of nonperforming loans, the allowance for loan losses was 34.3% at March 31, 2017 compared to 31.8% at year-end 2016. The relatively low amount of the allowance for loan losses as a percentage of nonperforming loans is due mainly to the makeup of nonperforming loans as discussed further below.

Nonperforming loans include $22.6 million of accruing restructured loans, which represents 81.3% of total nonperforming loans at the end of the quarter. At year-end 2016, this amount was $22.9 million or 78.1%. The allowance attributed to credits that are restructured with lower interest rates generally represents the difference in the present value of future cash flows calculated at the loan’s original effective interest rate and the new lower rate resulting from the restructuring. This typically results in a reserve for loan losses that is less severe than for other loans that are collateral dependent. The allowance specifically allocated to impaired loans, which includes restructured loans, was $3.2 million or 7.9% and $2.9 million or 7.0% of such loans at quarter-end and year-end, respectively. The increase in allowance specifically allocated to impaired loans was driven by $178 thousand related to one unsecured consumer credit. As a percentage of nonaccrual loans and loans past due 90 days or more and still accruing, the allowance for loan losses was 183% and 145% for the current quarter and year-end 2016, respectively.

The overall improvement in the credit quality of the loan portfolio experienced during 2016 continued during the first three months of 2017. While the specific reserve on total impaired loans edged up $205 thousand or 7.0% during the quarter primarily related to one credit, total impaired loans declined $2.2 million or 5.2%. This is due to the characteristics of the individual loans that are classified as impaired.

Certain credit quality measures are summarized in the table that follows for the periods indicated. Several of these measures are at or near the best level in the last three years.

(In thousands)	March 31, 2017		December 31, 2016		March 31, 2016		Three-year High¹		Three-year Low¹
Nonperforming loans	$	27,736	$	29,365	$	31,227	$	43,551	$	27,736
Nonaccrual loans		5,182		6,423		7,540		18,095		5,182
Loans past due 30-89 days and still accruing		1,453		2,259		852		3,651		588
Loans graded substandard or below		35,855		37,650		41,756		68,448		35,855
Impaired loans		39,732		41,895		39,964		49,623		37,182
Loans, net of unearned income		989,833		970,975		962,289		989,833		927,389

¹Based on quarter-end balances over the previous three years.

Nonperforming Loans

Nonperforming loans consist of nonaccrual loans, accruing restructured loans, and loans 90 days or more past due and still accruing interest. The accrual of interest on loans is discontinued when it is determined that the collection of interest or principal is doubtful, or when a default of interest or principal has existed for 90 days or more, unless such loan is well secured and in the process of collection.

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

Nonperforming loans were $27.7 million at March 31, 2017, a decrease of $1.6 million or 5.5% compared to $29.4 million at year-end 2016. Nonaccrual loans and accruing restructured loans decreased $1.2 million or 19.3% and $391 thousand or 1.7%, respectively. Loan payments include $954 thousand related to nonaccrual loans during the quarter, which include two larger balance credits totaling $712 thousand in the aggregate. One of these larger balance credits also had a charge-off totaling $405 thousand and the remaining collateral securing the loan was repossessed and subsequently sold at a small gain. There are no further balances outstanding related to this credit.

Accruing restructured loans make up $22.6 million or 81.3% of the Company’s nonperforming loans at March 31, 2017 compared with $5.2 million or 18.7% related to nonaccrual loans. Additionally, three larger balance credits account for $21.4 million or 94.7% of total restructured loans. Nonaccrual loans have decreased to the lowest level since the second quarter of 2007.

Nonperforming loans, presented by class, were as follows for the periods indicated:

Nonperforming Loans

(In thousands)	March 31, 2017			December 31, 2016
Nonaccrual Loans
Real Estate
Real estate mortgage – construction and land development	$	475		$	712
Real estate mortgage – residential		2,343			2,316
Real estate mortgage – farmland and other commercial enterprises		2,361			3,383
Consumer
Secured		1			4
Unsecured		2			8
Total nonaccrual loans	$	5,182		$	6,423

Restructured Loans
Real Estate
Real estate mortgage – construction and land development	$	3,627		$	3,637
Real estate mortgage – residential		3,774			4,006
Real estate mortgage – farmland and other commercial enterprises		14,641			14,787
Commercial
Commercial and industrial		376			377
Consumer
Unsecured		133			135
Total restructured loans	$	22,551		$	22,942

Past Due 90 Days or More and Still Accruing
Real Estate
Real estate mortgage – residential	$	3		$	-
Total past due 90 days or more and still accruing	$	3		$	-

Total nonperforming loans	$	27,736		$	29,365

Ratio of total nonperforming loans to total loans		2.8	%		3.0	%

The most significant components of nonperforming loans include nonaccrual and restructured loans. Activity during 2017 related to these two components was as follows:

(In thousands)	Nonaccrual Loans			Restructured Loans
Balance at December 31, 2016	$	6,423		$	22,942
Additions		340			-
Principal paydowns		(954	)		(391	)
Transfers to other real estate owned		(187	)		-
Charge-offs		(440	)		-
Balance at March 31, 2017	$	5,182		$	22,551

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 $39.8 million and $44.0 million at March 31, 2017 and year-end 2016, 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 attributed to a slow-growth economy which continues to strain certain of the Company’s customers. Potential problem loans include a variety of borrowers and are secured primarily by various types of real estate including commercial, construction properties, and residential real estate developments. At March 31, 2017, the five largest potential problem credits were $11.4 million in the aggregate compared to $11.5 million at year-end 2016.

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 are established in accordance with the appropriate accounting guidance.

Other Real Estate

OREO includes real estate properties acquired by the Company through, or in lieu of, actual foreclosure. At March 31, 2017, OREO was $8.0 million, a decrease of $2.7 million or 25.0% compared to $10.7 million at year-end 2016. The decrease was driven by sales activity, primarily attributed to the sale of a residential real estate development property with a carrying value of $1.9 million and related gain of $147 thousand. OREO has declined $44.6 million or 84.8% from its peak of $52.6 million, which occurred at year-end 2012. A summary of OREO activity for 2017 follows.

(In thousands)	Amount
Balance at December 31, 2016	$	10,673
Transfers from loans and other increases		193
Proceeds from sales		(2,871	)
Gain on sales, net		115
Write-downs		(110	)
Balance at March 31, 2017	$	8,000

Deposits

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

	End of Period							Average
(In thousands)	March 31, 2017		December 31, 2016		Increase (Decrease)			Three Months March 31, 2017		Twelve Months December 31, 2016		Increase (Decrease)
Noninterest Bearing	$	350,668	$	334,676	$	15,992		$	337,016	$	324,596	$	12,420

Interest Bearing
Demand		353,419		348,197		5,222			349,212		334,818		14,394
Savings		424,763		416,611		8,152			421,230		407,353		13,877
Time		259,227		270,423		(11,196	)		264,585		296,258		(31,673	)
Total interest bearing		1,037,409		1,035,231		2,178			1,035,027		1,038,429		(3,402	)

Total Deposits	$	1,388,077	$	1,369,907	$	18,170		$	1,372,043	$	1,363,025	$	9,018

The increase in total end of period deposits was driven by higher noninterest bearing demand deposits and savings deposits of $16.0 million or 4.8% and $8.2 million or 2.0%, respectively. Interest bearing demand deposits increased $5.2 million or 1.5% and time deposits decreased $11.2 million or 4.1%. The decrease in time deposits is a result of the Company’s overall high liquidity position and a strategy to lower overall funding costs, mainly by allowing higher-rate certificates of deposit to roll off or reprice at lower interest rates. Many of those balances have been rolled into interest and noninterest bearing demand accounts or savings accounts by the customer. As rates have generally decreased throughout the deposit portfolio, many customers have opted to transfer funds from maturing time deposits or investments from other sources into short-term demand or savings accounts. The Company has not sought out or accepted brokered deposits in the past nor does it have plans to do so in the future.

Borrowed Funds

Total borrowed funds were $81.2 million at March 31, 2017, down $7.3 million or 8.3% from year-end 2016. The decline in borrowed funds was driven by a $5.0 million or 9.4% decrease in long-term borrowings. Long-term borrowings were down due to a principal payment to the FHLB of $5.0 million for borrowings that matured in February which carried a fixed interest rate of 4.45%. The Company has $10.0 million of FHLB debt outstanding with a fixed interest rate of 3.95% which matures during the third quarter of 2017.

Short-term borrowings were $32.8 million at quarter-end, down $2.3 million or 6.6% from year-end 2016. This is attributable to a decline in repurchase agreements with commercial depositors in the normal course of business. Short-term borrowings primarily represent funds that have been swept out of the deposit accounts to facilitate the needs of certain qualifying commercial customers into repurchase agreements. Such transactions are accounted for as secured borrowings by the Company.

LIQUIDITY

The primary source of funds for the Parent Company is the receipt of dividends from its subsidiary bank, United Bank & Capital Trust Company (“United Bank” or the “Bank”), balances of cash and cash equivalents maintained, and borrowings from nonaffiliated sources. Primary uses of cash include the payment of dividends to its shareholders, paying interest expense on borrowings, and payments to fund general operating expenses.

Payments of dividends to the Parent Company by the Bank are subject to certain regulatory restrictions as set forth in national and state banking laws and regulations. A depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it is already undercapitalized. The federal banking agencies may prevent the payment of a dividend if they determine that the payment would be an unsafe and unsound banking practice. Moreover, the federal agencies have issued policy statements which provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. Capital ratios at the Bank exceed regulatory established “well-capitalized” status at March 31, 2017 under the prompt corrective action regulatory framework.

The Parent Company had cash and cash equivalents of $40.5 million and $44.3 million at March 31, 2017 and year-end 2016, respectively. Significant cash receipts for 2017 include management fees from subsidiaries of $550 thousand. Significant cash payments include $1.5 million to the Bank in connection with the transfer of Parent Company personnel and related liabilities resulting from the consolidation of its subsidiaries; $1.4 million for salaries, payroll taxes, and employee benefits incurred prior to the consolidation of subsidiaries; $751 thousand for the payment of dividends on common stock; and $196 thousand for the payment of interest expense on subordinated notes payable.

The Company's objective as it relates to liquidity is to ensure that the Bank has funds available to meet deposit withdrawals and credit demands without unduly penalizing profitability. In order to maintain a proper level of liquidity, the Bank has several sources of funds available on a daily basis. For assets, those sources of funds include liquid assets that are readily marketable or that can be pledged, or which mature in the near future. These assets primarily include cash and due from banks, federal funds sold, investment securities, and cash flow generated by the repayment of principal and interest on loans and investment securities. For liabilities, sources of funds primarily include the Bank’s core deposits, FHLB and other borrowings, and federal funds purchased and securities sold under agreements to repurchase. While maturities and scheduled amortization of loans and investment securities are generally a predictable source of funds, deposit outflows and mortgage prepayments are influenced significantly by general interest rates, economic conditions, and competition in our local markets.

As of March 31, 2017, the Company had $294 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 was $275 million at year-end 2016.

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 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 and cash equivalents and available for sale investment securities. At March 31, 2017, consolidated liquid assets were $588 million, down $5.9 million or 1.0% compared to $594 million at year-end 2016. Although liquid assets decreased in the comparison, the Company’s liquidity position remains elevated mainly as a result of the Company’s overall net funding position, including an overall increase in deposits of $18.2 million during the current quarter. 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 $5.9 million and $4.2 million for the first three months of 2017 and 2016, respectively. This represents an increase of $1.7 million or 41.6%. Net cash used in investing activities was $34.0 million and $4.8 million in the comparable periods. This represents an increase of $29.2 million, driven by investment securities activity, loan activity and, to a lesser extent, purchases of restricted stock investments. The Company had net cash outflows of $11.6 million related to investment securities for 2017, up $10.3 million compared with the year-ago period. Net cash outflows represent purchases in excess of proceeds from the sale, maturity, and call of investment securities. For loans, the Company had cash outflow representing overall net principal advances of $18.4 million for 2017 compared to $3.4 million a year earlier. In the first quarter of 2017, the Company purchased $3.6 million of restricted stock investments consisting of Federal Reserve Bank (“FRB”) stock compared to purchases of $472 thousand in 2016. The Company purchased the additional FRB stock in 2017 as a result of the merger of its subsidiaries. Two of the merged banks were previously not members of a regional FRB.

Net cash provided by financing activities was $10.1 million for the first three months of 2017 compared with net cash used in financing activities of $5.6 million for the comparable period a year earlier. The change was driven primarily by deposit activity, cash paid in the prior year to extinguish subordinated notes payable to unconsolidated trusts, and net repayments of long-term borrowings. For 2017, deposits increased $18.2 million, up $12.7 million compared with an increase of $5.5 million for 2016. During 2016, the Company paid $11.0 million to purchase the trust preferred securities issued by Trust II and subsequently extinguished the subordinated debt issued to the trust. There was no similar transaction in the current year. For 2017, the Company had net repayments of long-term borrowings of $5.0 million, up $4.8 million from $236 thousand in 2016.

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

CAPITAL RESOURCES

Shareholders’ equity was $188 million at March 31, 2017, an increase of $3.7 million or 2.0% compared to $184 million at year-end 2016. The increase in shareholders’ equity was driven by net income of $3.3 million and higher accumulated other comprehensive income of $1.0 million, partially offset by dividends declared on common stock of $751 thousand. The increase in accumulated other comprehensive income is primarily due to a $948 thousand after-tax increase in the market value of the available for sale investment securities portfolio, which correlates with a general decline in long term market interest rates during the quarter. As market interest rates fall, the value of fixed rate investments generally increase.

At March 31, 2017, the Company’s tangible common equity ratio was 11.16%, an increase of 14 basis points compared to 11.02% at year-end 2016. The tangible common equity ratio represents tangible common equity as a percentage of tangible assets, which excludes intangible assets.

In July 2013, U.S. banking regulators adopted final rules related to standards on bank capital adequacy and liquidity (commonly referred to as “Basel III”). The new rules were effective for the Company beginning on January 1, 2015, subject to a phase-in period for certain provisions extending through January 1, 2019. The rules include a new common equity Tier 1 capital ratio, an increase to the minimum Tier 1 capital ratio, an increase to risk-weightings of certain assets, implementation of a new capital conservation buffer in excess of the required minimum (which began being phased in during 2016), and changes to how regulatory capital is defined. The Company and the Bank meet the minimum capital ratios and a fully phased-in capital conservation buffer under the new rules.

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 capital ratios of the Company and its subsidiary bank are presented in the following table for the dates indicated.

	March 31, 2017												December 31, 2016
	Common Equity Tier 1 Risk-based Capital¹			Tier 1 Risk-based Capital¹			Total Risk-based Capital¹			Tier 1 Leverage²			Common Equity Tier 1 Risk-based Capital¹			Tier 1 Risk-based Capital¹			Total Risk-based Capital¹			Tier 1 Leverage²
Consolidated		16.37	%		19.17	%		19.99	%		13.36	%		16.43	%		19.28	%		20.10	%		13.20	%
United Bank & Capital Trust Company		15.55			15.55			16.37			10.86			*			*			*			*
Farmers Bank & Capital Trust Company		*			*			*			*			16.53			16.53			17.23			9.80
United Bank & Trust Company		*			*			*			*			15.54			15.54			16.47			12.38
First Citizens Bank		*			*			*			*			13.56			13.56			14.16			9.76
Citizens Bank of Northern Kentucky, Inc.		*			*			*			*			15.24			15.24			16.40			10.68

Regulatory minimum		4.50			6.00			8.00			4.00			4.50			6.00			8.00			4.00
Well-capitalized status		6.50			8.00			10.00			5.00			6.50			8.00			10.00			5.00

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

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 and net income or the effect of interest rate changes on net interest income and net income. Actual results could differ significantly from simulated results.

At March 31, 2017, 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 0.52% and 1.31%, respectively for the year ending December 31, 2017 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 1.23% and 3.01%, respectively.

In the current low interest rate environment, it is not practical or possible to reduce certain deposit rates by the same magnitude as rates on earning assets. The average rate paid on the Company’s deposits is presently below 1.5%. This situation magnifies the model’s predicted results when modeling a decrease in interest rates, as earning assets with higher yields have more of an opportunity to reprice at lower rates than lower-rate deposits.

Item 4. Controls and Procedures

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

The Company’s Chief Executive Officer and Chief Financial Officer have also concluded that there were no significant changes during the quarter ended March 31, 2017 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, 2017, there were various pending legal actions and proceedings against the Company arising from the normal course of business and in which claims for damages are asserted. It is the opinion of management, after discussion with legal counsel, that the disposition or ultimate resolution of such claims and legal actions will not have a material effect upon the consolidated financial statements of the Company.

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

During 2014, the Company changed the form of payment to its directors for board meeting and quarterly fees from 100% cash to 50% in cash and 50% in Company common stock. The shares are issued as part of a plan adopted by the Board of Directors. Each director has elected to participate by entering into an agreement with the Company to accept common stock in lieu of cash for 50% of the director’s board meeting and quarterly fees. As the shares are only issued to directors as part of a plan approved by the Board, the shares are exempt from the registration requirements of the Securities Act of 1933, as amended (the “1933 Act”), as a sale not involving any public offering under Section 4(2) of the 1933 Act. Attendance for committee meetings continues to be paid completely in cash. As employee directors are not paid director’s fees, only non-employee directors receive stock under this plan.

In the quarter ended March 31, 2017, the Company issued a total of 746 shares of common stock to its non-employee directors under this plan as compensation for $28 thousand of director fees. The cash retained by the Company by issuing common stock in lieu of paying cash is used for general corporate purposes. There are no brokers involved in the issuance of stock to directors and no commissions or other broker fees are paid.

At various times, the Company’s Board of Directors has authorized the purchase of shares of the Company’s outstanding common stock. No stated expiration dates have been established under any of the previous authorizations. There were no shares of common stock repurchased by the Company during the quarter ended March 31, 2017. There are 84,971 shares that may still be purchased under the various authorizations, although no shares have been purchased since 2008.

Item 6. Exhibits

List of Exhibits

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

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

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

3.4	Amended and Restated Bylaws of Farmers Capital Bank Corporation (incorporated by reference to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015 (File No. 000-14412)).

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

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

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

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

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

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

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

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

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

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

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

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

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

10.5	Amendment No. 2 to Employment agreement dated December 10, 2012 between Farmers Capital Bank Corporation and Lloyd C. Hillard, Jr. (incorporated by reference to Exhibit 10.1 to Form 8-K filed December 8, 2014 (File No. 000-14412)).

10.6	Amendment No. 3 to Employment agreement dated December 10, 2012 between Farmers Capital Bank Corporation and Lloyd C. Hillard, Jr. (incorporated by reference to Exhibit 10.1 to Form 8-K filed December 9, 2015 (File No. 000-14412)).

10.7	Amendment No. 4 to Employment agreement dated December 10, 2012 between Farmers Capital Bank Corporation and Lloyd C. Hillard, Jr. (incorporated by reference to Exhibit 10.1 to Form 8-K filed January 4, 2017).

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

10.9	Employment agreement dated October 28, 2014 between Farmers Capital Bank Corporation and Mark A. Hampton (incorporated by reference to Exhibit 10.1 to Form 8-K filed October 28, 2014 (File No. 000-14412)).

10.10	Employment agreement dated November 18, 2015 between Farmers Capital Bank Corporation and J. David Smith, Jr. (incorporated by reference to Exhibit 10.1 to Form 8-K filed November 19, 2015 (File No. 000-14412)).

10.11	Executive Short-Term Incentive Plan January 1, 2017 (incorporated by reference to Exhibit 10.1 to Form 8-K filed January 24, 2017).

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

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

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

101**	Interactive Data Files

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

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

SIGNATURES

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

Date:	May 8, 2017	/s/ Lloyd C. Hillard, Jr.
		Lloyd C. Hillard, Jr.
		President and CEO
		(Principal Executive Officer)

Date:	May 8, 2017	/s/ Mark A. Hampton
		Mark A. Hampton
		Executive Vice President, CFO, and Secretary
		(Principal Financial and Accounting Officer)

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