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 ~~September~~March 3031, ~~2017~~2018

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,~~515~~519,~~849~~814 shares outstanding at ~~November~~May 1, ~~2017~~2018

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	98
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3332
Item 3. Quantitative and Qualitative Disclosures About Market Risk	5146
Item 4. Controls and Procedures	5246
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	5247
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	5247
Item 6. Exhibits	5247
SIGNATURES	5550

PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Unaudited Condensed Consolidated Balance Sheets
	September 30,			December 31,
(In thousands, except share data)	2017			2016
Assets
Cash and cash equivalents:
Cash and due from banks	$	24,361		$	25,666
Interest bearing deposits in other banks		65,493			62,696
Federal funds sold and securities purchased under agreements to resell		-			6,622
Money market mutual funds		27,754			18,550
Total cash and cash equivalents		117,608			113,534
Investment securities:
Available for sale, amortized cost of $448,995 (2017) and $486,038 (2016)		447,515			480,864
Held to maturity, fair value of $3,597 (2017) and $3,597 (2016)		3,448			3,488
Total investment securities		450,963			484,352
Loans, net of unearned income		995,111			970,975
Allowance for loan losses		(9,048	)		(9,344	)
Loans, net		986,063			961,631
Premises and equipment, net		31,357			31,900
Company-owned life insurance		30,607			30,914
Other real estate owned		6,106			10,673
Other assets		37,272			38,026
Total assets	$	1,659,976		$	1,671,030
Liabilities
Deposits:
Noninterest bearing	$	356,463		$	334,676
Interest bearing		1,005,361			1,035,231
Total deposits		1,361,824			1,369,907
Securities sold under agreements to repurchase		35,537			36,370
Federal Home Loan Bank advances		3,521			18,646
Subordinated notes payable to unconsolidated trusts		33,506			33,506
Dividends payable, common stock		751			751
Other liabilities		27,189			27,784
Total liabilities		1,462,328			1,486,964
Shareholders’ Equity
Common stock, par value $.125 per share; 14,608,000 shares authorized; 7,515,435 and 7,509,444 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		939			939
Capital surplus		52,120			51,885
Retained earnings		145,519			134,650
Accumulated other comprehensive loss		(930	)		(3,408	)
Total shareholders’ equity		197,648			184,066
Total liabilities and shareholders’ equity	$	1,659,976		$	1,671,030
See accompanying notes to unaudited condensed consolidated financial statements.

Unaudited Condensed Consolidated Balance Sheets

	March 31,			December 31,
(In thousands, except share and per share data)	2018			2017
Assets
Cash and cash equivalents:
Cash and due from banks	$	22,143		$	25,581
Interest bearing deposits in other banks		96,099			58,154
Money market mutual funds		34,979			36,673
Total cash and cash equivalents		153,221			120,408
Investment securities:
Available for sale, amortized cost of $411,995 (2018) and $427,831 (2017)		402,288			423,318
Equity investments, amortized cost of $1,560 (2018) and $864 (2017)		1,575			935
Held to maturity, fair value of $3,424 (2018) and $3,478 (2017)		3,350			3,364
Total investment securities		407,213			427,617
Loans, net of unearned income		1,035,469			1,035,263
Allowance for loan losses		(9,748	)		(9,783	)
Loans, net		1,025,721			1,025,480
Premises and equipment, net		30,909			30,928
Company-owned life insurance		30,731			30,817
Other real estate owned		5,087			5,489
Other assets		33,105			33,133
Total assets	$	1,685,987		$	1,673,872
Liabilities
Deposits:
Noninterest bearing	$	375,645		$	361,855
Interest bearing		1,018,446			1,018,048
Total deposits		1,394,091			1,379,903
Securities sold under agreements to repurchase		33,343			34,252
Federal Home Loan Bank advances		3,436			3,479
Subordinated notes payable to unconsolidated trusts		33,506			33,506
Dividends payable, common stock		940			939
Other liabilities		26,643			28,440
Total liabilities		1,491,959			1,480,519
Shareholders’ Equity
Common stock, par value $.125 per share; 14,608,000 shares authorized; 7,519,445 and 7,517,446 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively		940			940
Capital surplus		52,278			52,201
Retained earnings		148,535			143,778
Accumulated other comprehensive loss		(7,725	)		(3,566	)
Total shareholders’ equity		194,028			193,353
Total liabilities and shareholders’ equity	$	1,685,987		$	1,673,872

See accompanying notes to unaudited condensed consolidated financial statements.

Unaudited Condensed Consolidated Statements of Income
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands, except per share data)	2017			2016			2017			2016
Interest Income
Interest and fees on loans	$	12,281		$	11,714		$	36,109		$	35,640
Interest on investment securities:
Taxable		1,857			2,159			5,741			7,095
Nontaxable		563			630			1,733			1,866
Interest on deposits in other banks		225			102			495			290
Interest on federal funds sold, securities purchased under agreements to resell, and money market mutual funds		57			14			114			31
Total interest income		14,983			14,619			44,192			44,922
Interest Expense
Interest on deposits		540			578			1,596			1,823
Interest on securities sold under agreements to repurchase		17			867			58			2,912
Interest on Federal Home Loan Bank advances		109			187			398			558
Interest on subordinated notes payable to unconsolidated trusts		227			177			638			534
Total interest expense		893			1,809			2,690			5,827
Net interest income		14,090			12,810			41,502			39,095
Provision for loan losses		(379	)		(190	)		(298	)		(819	)
Net interest income after provision for loan losses		14,469			13,000			41,800			39,914
Noninterest Income
Service charges and fees on deposits		2,041			2,046			6,011			5,840
Allotment processing fees		693			810			2,059			2,504
Other service charges, commissions, and fees		1,360			1,459			4,060			4,173
Trust income		724			715			2,054			2,034
Net gain (loss) on sales of available for sale investment securities		3			3,776			(7	)		3,990
Net gain on sales of cost method investment securities		82			-			82			-
Gains on sale of mortgage loans, net		172			273			515			695
Income from company-owned life insurance		467			229			923			785
Gain on debt extinguishment		-			-			-			4,050
Legal settlement		-			1,350			-			1,450
Other		85			114			283			314
Total noninterest income		5,627			10,772			15,980			25,835
Noninterest Expense
Salaries and employee benefits		7,309			7,810			22,572			23,444
Occupancy expenses, net		1,166			1,172			3,515			3,541
Equipment expenses		613			662			1,765			1,833
Data processing and communication expenses		1,119			1,085			3,505			3,411
Bank franchise tax		610			613			1,776			1,823
Deposit insurance expense		129			227			396			805
Other real estate expenses, net		316			454			716			1,466
Loss on debt extinguishment		-			3,776			-			3,776
Other		1,446			2,089			5,338			6,080
Total noninterest expense		12,708			17,888			39,583			46,179
Income before income taxes		7,388			5,884			18,197			19,570
Income tax expense		2,076			1,560			5,074			5,510
Net income	$	5,312		$	4,324		$	13,123		$	14,060
Per Common Share
Net income – basic and diluted	$	.71		$	.58		$	1.75		$	1.87
Cash dividends declared		.10			.07			.30			.21
Weighted Average Common Shares Outstanding
Basic and diluted		7,514			7,505			7,512			7,503
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)	2018			2017
Interest Income
Interest and fees on loans	$	12,469		$	11,722
Interest on investment securities:
Taxable		2,025			1,900
Nontaxable		475			591
Interest on deposits in other banks		269			142
Interest on federal funds sold and money market mutual funds		106			24
Total interest income		15,344			14,379
Interest Expense
Interest on deposits		586			533
Interest on securities sold under agreements to repurchase		19			25
Interest on Federal Home Loan Bank advances		28			160
Interest on subordinated notes payable to unconsolidated trusts		254			198
Total interest expense		887			916
Net interest income		14,457			13,463
Provision for loan losses		(261	)		580
Net interest income after provision for loan losses		14,718			12,883
Noninterest Income
Service charges and fees on deposits		1,912			1,958
Allotment processing fees		720			715
Other service charges, commissions, and fees		1,372			1,372
Trust income		789			704
Net loss on sales of available for sale investment securities		-			(9	)
Gains on sale of mortgage loans, net		95			154
Income from company-owned life insurance		293			235
Other		20			122
Total noninterest income		5,201			5,251
Noninterest Expense
Salaries and employee benefits		7,490			7,860
Occupancy expenses, net		1,254			1,214
Equipment expenses		601			553
Data processing and communication expenses		1,083			1,293
Bank franchise tax		500			557
Deposit insurance expense		126			137
Other real estate expenses, net		117			74
Other		1,947			1,841
Total noninterest expense		13,118			13,529
Income before income taxes		6,801			4,605
Income tax expense		1,160			1,276
Net income	$	5,641		$	3,329
Per Common Share
Net income – basic and diluted	$	.75		$	.44
Cash dividends declared		.125			.10
Weighted Average Common Shares Outstanding
Basic and diluted		7,518			7,510

See accompanying notes to unaudited condensed consolidated financial statements.

Unaudited Condensed Consolidated Statements of Comprehensive Income
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands)	2017			2016			2017		2016
Net Income	$	5,312		$	4,324		$	13,123	$	14,060
Other comprehensive income (loss):
Unrealized holding gain (loss) on available for sale securities arising during the period, net of tax of $64, $(824), $1,290 and $1,563, respectively		120			(1,531	)		2,397		2,905
Reclassification adjustment for net realized (gain) loss included in net income, net of tax of $1, $1,322, $(2) and $1,397, respectively		(2	)		(2,454	)		5		(2,593	)
Change in unfunded portion of postretirement benefit obligation, net of tax of $4, $4, $41 and $14, respectively		8			9			76		27
Other comprehensive income (loss)		126			(3,976	)		2,478		339
Comprehensive income	$	5,438		$	348		$	15,601	$	14,399
See accompanying notes to unaudited condensed consolidated financial statements.

Unaudited Condensed Consolidated Statements of Comprehensive Income

	Three Months Ended
	March 31,
(In thousands)	2018			2017
Net Income	$	5,641		$	3,329
Other comprehensive (loss) income:
Unrealized holding (loss) gain on available for sale securities arising during the period, net of tax of $(1,093) and $510, respectively		(4,102	)		948

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

Change in unfunded portion of postretirement benefit obligation, net of tax of $- and $32, respectively		(1	)		59
Other comprehensive (loss) income		(4,103	)		1,013
Comprehensive income	$	1,538		$	4,342

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
Nine months ended	Common Stock				Capital		Retained			Comprehensive			Shareholders’
September 30, 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		-		-		-		13,123			-			13,123
Other comprehensive income		-		-		-		-			2,478			2,478
Cash dividends declared – common, $.30 per share		-		-		-		(2,254	)		-			(2,254	)
Shares issued under director compensation plan		2		-		76		-			-			76
Shares issued pursuant to employee stock purchase plan		4		-		136		-			-			136
Expense related to employee stock purchase plan		-		-		23		-			-			23
Balance at September 30, 2017		7,515	$	939	$	52,120	$	145,519		$	(930	)	$	197,648
Balance at January 1, 2016		7,500	$	937	$	51,608	$	120,371		$	2,782		$	175,698
Net income		-		-		-		14,060			-			14,060
Other comprehensive income		-		-		-		-			339			339
Cash dividends declared – common, $.21 per share		-		-		-		(1,575	)		-			(1,575	)
Shares issued under director compensation plan		2		-		62		-			-			62
Shares issued pursuant to employee stock purchase plan		5		1		115		-			-			116
Expense related to employee stock purchase plan		-		-		24		-			-			24
Balance at September 30, 2016		7,507	$	938	$	51,809	$	132,856		$	3,121		$	188,724
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, 2018 and 2017	Shares		Amount		Surplus		Earnings			(Loss) Income			Equity
Balance at January 1, 2018		7,517	$	940	$	52,201	$	143,778		$	(3,566	)	$	193,353
Net income		-		-		-		5,641			-			5,641
Other comprehensive loss		-		-		-		-			(4,103	)		(4,103	)
Adoption of Accounting Standards Update 2016-01		-		-		-		56			(56	)		-
Cash dividends declared – common, $.125 per share		-		-		-		(940	)		-			(940	)
Shares issued under director compensation plan		-		-		18		-			-			18
Shares issued pursuant to employee stock purchase plan		2		-		51		-			-			51
Expense related to employee stock purchase plan		-		-		8		-			-			8
Balance at March 31, 2018		7,519	$	940	$	52,278	$	148,535		$	(7,725	)	$	194,028


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

See accompanying notes to unaudited condensed consolidated financial statements.

Unaudited Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, (In thousands)	2017			2016
Cash Flows from Operating Activities
Net income	$	13,123		$	14,060
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,630			2,712
Net premium amortization of investment securities:
Available for sale		2,633			3,054
Held to maturity		40			39
Provision for loan losses		(298	)		(819	)
Deferred income tax expense (benefit)		30			(76	)
Noncash employee stock purchase plan expense		23			24
Noncash director fee compensation		76			62
Mortgage loans originated for sale		(18,811	)		(26,399	)
Proceeds from sale of mortgage loans		20,891			27,650
Gain on sale of mortgage loans, net		(515	)		(695	)
Loss on disposal of premises and equipment, net		47			2
Net loss on sale and write downs of other real estate		490			1,301
Gain on extinguishment of subordinated notes payable to unconsolidated trusts		-			(4,050	)
Loss on extinguishment of long-term securities sold under agreements to repurchase		-			3,776
Net loss (gain) on sale of available for sale investment securities		7			(3,990	)
Net gain on sale of cost method investment securities		(82	)		-
Curtailment gain on postretirement benefits plan liability		(351	)		-
Increase in cash surrender value of company-owned life insurance		(658	)		(679	)
Death benefits in excess of cash surrender value on company-owned life insurance		(245	)		(81	)
Decrease in accrued interest receivable		324			873
Decrease in other assets		2,204			1,305
Increase (decrease) in accrued interest payable		23			(529	)
(Decrease) increase in other liabilities		(150	)		347
Net cash provided by operating activities		21,431			17,887
Cash Flows from Investing Activities
Proceeds from maturities and calls of available for sale investment securities		86,928			103,832
Proceeds from sale of available for sale investment securities		-			215,734
Purchase of available for sale investment securities		(52,592	)		(210,368	)
Proceeds from sale of cost method investment securities		132			-
Purchase of cost method investment securities		(3,445	)		(472	)
Loans originated for investment (greater) less than principal collected, net		(23,038	)		8,510
Purchase of loans held for investment		(2,129	)		(1,751	)
Principal collected on purchased loans		1,825			2,304
Proceeds from death benefits of company-owned life insurance		1,210			341
Purchase of premises and equipment		(1,967	)		(1,900	)
Proceeds from sale of other real estate		1,878			3,946
Net cash provided by investing activities		8,802			120,176
Cash Flows from Financing Activities
Net decrease in deposits		(8,083	)		(18,063	)
Net (decrease) increase in short-term securities sold under agreements to repurchase		(58	)		3,054
Proceeds from long-term securities sold under agreements to repurchase		7			9
Repayments of long-term securities sold under agreements to repurchase		(782	)		(103,977	)
Repayments of Federal Home Loan Bank advances		(15,125	)		(120	)
Cash paid to extinguish subordinated notes payable to unconsolidated trust		-			(10,950	)
Dividends paid, common stock		(2,254	)		(1,050	)
Shares issued under employee stock purchase plan		136			116
Net cash used in financing activities		(26,159	)		(130,981	)
Net increase in cash and cash equivalents		4,074			7,082
Cash and cash equivalents at beginning of year		113,534			120,493
Cash and cash equivalents at end of period	$	117,608		$	127,575

Unaudited Condensed Consolidated Statements of Cash Flows

Three months ended March 31, (In thousands)	2018			2017
Cash Flows from Operating Activities
Net income	$	5,641		$	3,329
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		800			862
Net premium amortization of investment securities:
Available for sale		616			897
Held to maturity		14			13
Provision for loan losses		(261	)		580
Deferred income tax (benefit) expense		(10	)		18
Noncash employee stock purchase plan expense		8			9
Noncash director fee compensation		18			28
Mortgage loans originated for sale		(2,557	)		(5,324	)
Proceeds from sale of mortgage loans		2,537			6,624
Gain on sale of mortgage loans, net		(95	)		(154	)
Loss on disposal of premises and equipment, net		-			37
Net loss (gain) on sale and write downs of other real estate		76			(5	)
Net loss on sale of available for sale investment securities		-			9
Unrealized loss on equity investment securities		55			-
Curtailment gain on postretirement benefits plan liability		-			(351	)
Increase in cash surrender value of company-owned life insurance		(213	)		(216	)
Death benefits in excess of cash surrender value on company-owned life insurance		(67	)		-
Decrease in accrued interest receivable		363			434
Decrease in other assets		517			1,787
Increase (decrease) in accrued interest payable		4			(32	)
Decrease in other liabilities		(1,802	)		(2,603	)
Net cash provided by operating activities		5,644			5,942
Cash Flows from Investing Activities
Proceeds from maturities and calls of available for sale investment securities		16,715			19,474
Purchase of available for sale investment securities		(1,536	)		(31,058	)
Purchase of equity investment securities		(695	)		(3	)
Proceeds from cancelation of cost method investment securities		239			666
Purchase of cost method investment securities		-			(4,236	)
Loans originated for investment greater than principal collected, net		(493	)		(18,347	)
Purchase of loans held for investment		(709	)		(732	)
Principal collected on purchased loans		1,317			643
Proceeds from death benefits of company-owned life insurance		366			-
Purchase of premises and equipment		(729	)		(1,145	)
Proceeds from sale of other real estate		346			699
Net cash provided by (used in) investing activities		14,821			(34,039	)
Cash Flows from Financing Activities
Net increase in deposits		14,188			18,170
Net decrease in short-term securities sold under agreements to repurchase		(910	)		(2,299	)
Proceeds from long-term securities sold under agreements to repurchase		1			2
Repayments of long-term securities sold under agreements to repurchase		-			(5,041	)
Repayments of Federal Home Loan Bank advances		(43	)		-
Dividends paid, common stock		(939	)		(751	)
Shares issued under employee stock purchase plan		51			46
Net cash provided by financing activities		12,348			10,127
Net increase (decrease) in cash and cash equivalents		32,813			(17,970	)
Cash and cash equivalents at beginning of year		120,408			113,534
Cash and cash equivalents at end of period	$	153,221		$	95,564
Supplemental Disclosures
Cash paid during the period for interest	$	883		$	948
Transfers from loans to other real estate		104			187
Sale and financing of other real estate		84			2,172
Cash dividends payable, common		940			751

See accompanying notes to unaudited condensed consolidated financial statements.

Unaudited Condensed Consolidated Statements of Cash Flows—(Continued)
Nine months ended September 30, (In thousands)	2017		2016
Supplemental Disclosures
Cash paid during the period for:
Interest	$	2,667	$	6,356
Income Taxes		3,035		3,850
Transfers from loans to other real estate		435		1,640
Sale and financing of other real estate		2,792		3,050
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~~financial 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.

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.

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.

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 could 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~~2017 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~~2017 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 (“AOCI”) by component, net of tax, for the periods indicated. The table also includes $56 thousand cumulative-effect adjustment from AOCI to retained earnings related to the adoption of Accounting Standards Update (“ASU”) 2016-01 effective January 1, 2018. ASU 2016-01 requires changes in the fair value of the Company’s equity investments to be recognized through net income. Prior to 2018, changes in the fair value of equity securities were recognized through AOCI. Additional information related to the adoption of ASU 2016-01 can be found in Note 4 and Note 7.

Three Months Ended September 30,	2017									2016
	Three Months Ended March 31, 2018									Three Months Ended March 31, 2017
(In thousands)	Unrealized Gains (Losses) on Available for Sale Investment Securities			Postretirement Benefit Obligation			Total			Unrealized Gains (Losses) on Available for Sale Investment Securities			Postretirement Benefit Obligation			Total
Beginning balance	$	(13,~~079~~510	)	$	23(56	)	$	(13,~~056~~566	)	$	7(3,~~516~~363	)	$	(~~419~~45	)	$	7(3,~~097~~408	)
Other comprehensive income (loss) before reclassifications		120			7			127			(1,531	)		-			(1,531	)
Other comprehensive (loss) income before reclassifications		(4,102	)		-			(4,102	)		948			10			958
Amounts reclassified from accumulated other comprehensive income		(2-	)		(1	)		(1	)		~~(2,454~~6	)		949			~~(2,445~~55	)
Net current-period other comprehensive income (loss)		118			8			126			(3,985	)		9			(3,976	)
Net current-period other comprehensive (loss) income		(4,102	)		(1	)		(4,103	)		954			59			1,013
Ending balance	$	(961	)	$	31		$	(930	)	$	3,531		$	(410	)	$	3,121
Adoption of Accounting Standards Update 2016-01		(56	)		-			(56	)		-			-			-
Ending balance	$	(7,668	)	$	(57	)	$	(7,725	)	$	(2,409	)	$	14		$	(2,395	)

Nine Months Ended September 30,		2017									2016
(In thousands)		Unrealized Gains (Losses) on Available for Sale Investment Securities			Postretirement Benefit Obligation			Total			Unrealized Gains (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		2,397			25			2,422			2,905			-			2,905
Amounts reclassified from accumulated other comprehensive income		5			51			56			(2,593	)		27			(2,566	)
Net current-period other comprehensive income		2,402			76			2,478			312			27			339
Ending balance	$	(961	)	$	31		$	(930	)	$	3,531		$	(410	)	$	3,121

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

	Amount Reclassified from Accumulated Other Comprehensive Income						Affected Line Item in the Statement Where Net Income is Presented							~~Affected Line Item in the Statement Where Net Income is Presented~~
	Three Months Ended September 30,							Nine Months Ended September 30,
(In thousands)	Three Months Ended March 31, 2018			Three Months Ended March 31, 2017
(In thousands)	2017			2016				2017			2016
Unrealized gains (losses) on available for sale investment securities	$	-		$	(9	)	Net loss on sales of available for sale investment securities
Unrealized gains (losses) on available for sale investment securities	$	3		$	3,776			$	(7	)	$	3,990		Net gain (loss) on sales of available for sale investment securities
		-			3		Income tax expense
		(1	)		(1,322	)			2			(1,397	)	Income tax expense
	$	-		$	(6	)	Net of tax
	$	2		$	2,454			$	(5	)	$	2,593		Net of tax
Amortization related to postretirement benefits
Amortization related to postretirement benefits
Prior service costs	$	-		$	(75	)	Salaries and employee benefits
Prior service costs	$	-		$	(12	)		$	(75	)	$	(37	)	Salaries and employee benefits
Actuarial gains (losses)		1			(1	)	Other noninterest expense
Actuarial losses		(1	)		(1	)			(4	)		(4	)	Salaries and employee benefits
		1			(76	)	Total before tax
		(1	)		(13	)			(79	)		(41	)	Total before tax
		-			27		Income tax expense
		-			4				28			14		Income tax expense
	$	1		$	(49	)	Net of tax
	$	(1	)	$	(9	)		$	(51	)	$	(27	)	Net of tax
Total reclassifications for the period	$	1		$	(55	)	Net of tax
Total reclassifications for the period	$	1		$	2,445			$	(56	)	$	2,566		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, and unamortized premiums and discounts on purchased 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.

12The 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 twelve quarter rolling historical loss rates, adjusted for the qualitative risk factors summarized below.

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 $49 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.

Adoption of New Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), and subsequently issued several amendments to the standard during 2015, 2016, and 2017. 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.

The majority of the Company’s revenues earned are excluded from the scope of the new standard. Revenue streams within the scope of this ASU include services charges and fees on deposits, allotment processing fees, trust income, and certain components of other service charges, commission, and fees. The Company has analyzed each revenue stream under Topic 606 and determined that there were no material changes to existing recognition practices. The Company adopted ASU No. 2014-09 effective January 1, 2018 using a modified retrospective approach and no cumulative-effect adjustment was recorded. Additional disclosures required by the new standard are included in Note 5.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and, in February 2018, issued an amendment for technical corrections and improvements related to this ASU. The amendments in this ASU require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). In addition, this ASU eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. Public business entities are required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. The Company adopted ASU No. 2016-01 effective January 1, 2018, recorded a cumulative-effect adjustment of $56 thousand, and began using the exit price notion rather than entrance price to determine the fair value for disclosure purposes. For equity securities without a readily determinable fair value, the Company elected the practical expedient and recorded them at cost adjusted for impairment (if any), plus or minus changes resulting from observable price changes in orderly transactions. Additional information related to the cumulative-effect adjustment can be found in Note 3 and Note 7. Fair value disclosures can be found in Note 13.

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. The Company retrospectively adopted ASU 2017-07 effective January 1, 2018, which did not have a material impact on its consolidated financial position, results of operations, or cash flows upon adoption. For prior periods, the interest cost, recognized actuarial loss, and recognized curtailment gain have been reclassified from salaries and employee benefits to other noninterest expense.

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which allows entities to reclassify the stranded tax effects caused by the Tax Cuts and Jobs Act (“Tax Act”), which was enacted in December 2017, from accumulated other comprehensive income (“AOCI”) to retained earnings. This ASU is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The Company early adopted this standard, resulting in the reclassification of $633 thousand from AOCI to retained earnings for the year ended December 31, 2017. There was no impact on total equity.

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 plans to adopt ASU No. 2014-09 in the first quarter of 2018 using a full retrospective approach. The majority of the Company’s revenues earned are excluded from the scope of the new standard. Revenue streams within the scope of this ASU include services charges and fees on deposits, allotment processing fees, trust income, and components of other service charges, commission, and fees. Based on the completed contract reviews thus far, any potential changes in revenue recognition for those revenue streams are not expected to result in a material impact to the Company’s consolidated financial statements upon adoption. The Company is in the process of developing the additional quantitative and qualitative disclosures that may be required upon adoption of the new standard.

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 toand ~~review~~is in the process of reviewing its leases and toassessing ~~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. The project team has developed a timeline for implementing the standard, has begun working with a third party software solution provider, and ishas inidentified ~~the~~an ~~process of identifying~~ independent third party for validation of the impending changes to our credit loss methodologies and processes. The team continues to assess the impact of the standard; however, the Company expects adopting this ASU will result in an increase in its allowance for loan losses. The amount of the increase in the allowance for loan losses upon adoption will be dependent upon the characteristics of the portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that date. A cumulative effect adjustment will be made to retained earnings for the impact of the standard at the beginning of the period the standard is adopted.

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.13

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~~Revenue ~~Income~~From ~~Per~~Contracts ~~Common~~With ~~Share~~Customers

~~Basic~~The ~~net~~Company ~~income~~records ~~per~~revenue ~~common~~from ~~share~~contracts iswith ~~determined~~customers byin ~~dividing~~accordance ~~net~~with ~~income~~ASC byTopic 606, “Revenue from Contracts with Customers.” ASC Topic 606 requires an entity to recognize revenue to depict the ~~weighted~~transfer ~~average~~of ~~total~~goods ~~number~~or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized when, or as, the Company satisfies a performance obligation. Primarily all of ~~common~~the ~~shares~~Company’s ~~issued~~revenue ~~and~~from ~~outstanding~~contracts with customers in the scope of ASC Topic 606 is recognized within noninterest income. ~~There~~Net ~~were~~gains noor ~~dilutive~~losses ~~instruments~~on atthe ~~September~~sale 30of other real estate owned (“OREO”) are included in net other real estate expenses. The following table presents the Company’s sources of noninterest income for the three months ended March 31, ~~2017~~2018 and ~~2016~~2017. Amounts in the table are within the scope of ASC Topic 606 unless otherwise noted.

Three Months Ended March 31, (In thousands)	2018		2017
Service charges and fees on deposits
Overdraft fees	$	956	$	927
Dormant account fees		593		665
Service charges on checking and savings accounts		314		310
Other		49		56
Allotment processing fees		720		715
Other service charges, commissions, and fees
Interchange fees		827		781
Other¹		545		591
Trust income		789		704
Investment securities (losses) gains, net²		-		(9	)
Gain on sale of mortgage loans, net²		95		154
Income from company-owned life insurance²		293		235
Other		20		122
Total noninterest income	$	5,201	$	5,251

¹Includes broker, ATM, and other fees totaling $402 thousand and $457 thousand for the three months ended March 31, 2018 and 2017, respectively, which is within the scope of ASC Topic 606.

²Not within the scope of ASC Topic 606.

Net other real estate expenses include a net loss on the sale of OREO of $43 thousand and a net gain of $115 thousand for the three months ended March 31, 2018 and 2017, respectively.

A description of the Company’s revenue-generating activities accounted for under Topic 606 follows.

Service charges and fees on deposits consist primarily of overdraft fees, dormant account fees, and service charges on checking and savings accounts. Overdraft fees are recognized at the time an account is overdrawn. Dormant account fees are recognized when an account is inactive for 365 days. The majority of service charges on checking and savings accounts are for account maintenance services performed and recognized in the same calendar month. Other fees are primarily for transaction-based services completed at the request of the customer and recognized at the time the transaction is executed. These transaction-based services include foreign ATM usage and stop payments services. All service charges and fees on deposits are withdrawn from the customer’s account balance.

Allotment processing fees relate to the Company’s bill payment and electronic funds transfer (“EFT”) services provided under the name of FirstNet. The Company processes payments by individual customers to unaffiliated third party lenders on bi-weekly and monthly schedules. Other EFT services are available to customers upon request. The Company does not provide credit to individuals under the program. Fees are primarily withdrawn from the customer’s account and recognized at the time the transaction is executed.

Other service charges, commissions, and fees include interchange fees earned primarily from debit card holder transactions conducted through the VISA payment network and other networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are received and recognized daily, concurrent with the transaction processing services provided to the cardholder.

Trust income is earned from living trusts and investment management agency accounts, estate planning and estate settlement, custody accounts, individual retirement accounts, and other related services. These fees are primarily earned and accrued over the period of time the Company provides the contracted services and are generally assessed based on tiered scale of the market value of the assets of the accounts. Fees for other services, including the preparation of fiduciary income tax returns, are recognized when the services are rendered. Fees are generally paid out of the assets held in the customer’s account.

6. 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, 2018 and 2017.

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands, except per share data)

~~2017~~2018

~~2016~~2017

~~2017~~

~~2016~~

Net income, basic and diluted

5,~~312~~641

43,~~324~~329

~~13,123~~

~~14,060~~

Average common shares issued and outstanding, basic and diluted

7,~~514~~518

7,~~505~~510

~~7,512~~

~~7,503~~

Net income per common share, basic and diluted

.7175

.5844

~~1.75~~

~~1.87~~

7. Investment Securities

Equity Securities

Equity securities consist of money market mutual funds classified as cash and cash equivalents on the balance sheet and mutual funds and equity securities in the investment portfolio of the Company’s captive insurance subsidiary. Money market mutual funds were $35.0 million and $36.7 million at March 31, 2018 and December 31, 2017, respectively. The Company held $1.6 million and $935 thousand in mutual funds and equity securities recorded at fair value at March 31, 2018 and December 31, 2017, respectively.

Effective January 1, 2018, the Company adopted ASU 2016-01, which requires the Company to recognize changes in the fair value of its equity securities through net income. Prior to 2018, changes in the fair value of equity securities were recognized through AOCI. At December 31, 2017, unrealized gains, net of tax, of $56 thousand had been recognized in AOCI. At the beginning of 2018, the Company made a cumulative-effect adjustment to reclassify those gains out of AOCI and into retained earnings. During the three months ended March 31, 2018, the Company recognized an unrealized loss of $55 thousand on the equity securities held at March 31, 2018, which was recorded in other noninterest income. There were no sales of equity securities during the three months ended March 31, 2018.

6.Debt ~~Investment~~ Securities

The Company’s debt securities are classified as available for sale or held to maturity. The following tables summarize the amortized costs and estimated fair value of the ~~securities~~Company’s ~~portfolio~~debt securities at March ~~September 30~~31, ~~2017~~2018 and December 31, ~~2016~~2017.

September 30, 2017 (In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
March 31, 2018 (In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available For Sale
Obligations of U.S. government-sponsored entities	$	7242,~~945~~633	$	~~132~~14	$	~~337~~691	$	7241,~~740~~956
Obligations of states and political subdivisions		~~121~~109,~~403~~652		~~1,021~~281		~~837~~2,365		~~121~~107,~~587~~568
Mortgage-backed securities – residential		~~200~~186,~~058~~441		~~1,360~~318		15,~~819~~158		~~199~~181,~~599~~601
Mortgage-backed securities – commercial		4649,~~173~~990		1-		12,~~114~~116		4547,~~060~~874
Corporate debt securities		7,576		51		3		7,624
Asset-backed securities		15,538		8		29		15,517
Mutual funds and equity securities		840		65		-		905
Corporate debt securities		7,741		49		18		7,772
Total securities – available for sale	$	~~448~~411,995	$	~~2,630~~670	$	410,~~110~~377	$	~~447~~402,~~515~~288
Held To Maturity
Obligations of states and political subdivisions	$	3,~~448~~350	$	~~149~~74	$	-	$	3,~~597~~424

December 31, 2016 (In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
December 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	$	7143,~~941~~601	$	~~213~~44	$	~~460~~437	$	7143,~~694~~208
Obligations of states and political subdivisions		~~134~~114,~~055~~960		~~773~~562		21,~~536~~273		~~132~~114,~~292~~249
Mortgage-backed securities – residential		~~225~~195,~~489~~605		~~1,505~~523		2,~~687~~735		~~224~~193,~~307~~393
Mortgage-backed securities – commercial		4750,~~164~~518		642		1,~~557~~208		4549,~~613~~352
Corporate debt securities		6,565		1		441		6,125
Asset-backed securities		15,569		9		4		15,574
Mutual funds and equity securities		824		20		11		833
Corporate debt securities		7,578		1		37		7,542
Total securities – available for sale	$	~~486~~427,~~038~~831	$	21,~~518~~181	$	75,~~692~~694	$	~~480~~423,~~864~~318
Held To Maturity
Obligations of states and political subdivisions	$	3,~~488~~364	$	~~109~~114	$	-	$	3,~~597~~478

~~Investment~~Debt securities with a carrying value of $208 million and $~~191~~214 million at March ~~September 30~~31, ~~2017~~2018 and December 31, ~~2016~~2017, respectively, were pledged to secure public and trust deposits, repurchase agreements, and for other purposes.

The amortized cost and estimated fair value of the debt securities portfolio at March ~~September 30~~31, ~~2017~~2018, by contractual maturity, are detailed below. 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~~Mortgage-backed ~~funds and equity~~ securities inare ~~the~~stated ~~available~~separately ~~for~~due ~~sale~~to ~~portfolio~~the ~~consist~~nature of ~~investments~~payment ~~attributed~~and toprepayment ~~the~~characteristics ~~Company’s~~of ~~captive~~these ~~insurance subsidiary. These~~ securities, ~~have~~as noprincipal ~~stated~~is ~~maturity and are~~ not ~~included~~due inat ~~the~~a ~~maturity~~single ~~schedule that follows~~date.

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, 2018 (In thousands)

Cost

Fair Value

Cost

Fair Value

Due in one year or less

28,921

28,872

Due after one year through five years

52,222

51,572

Due after five years through ten years

55,496

53,726

1,232

1,289

Due after ten years

38,925

38,643

2,118

2,135

Mortgage-backed securities

236,431

229,475

Total

411,995

402,288

3,350

3,424

	Available For Sale				Held To Maturity
	Amortized		Estimated		Amortized		Estimated
September 30, 2017 (In thousands)	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	30,884	$	30,911	$	-	$	-
Due after one year through five years		71,412		71,703		-		-
Due after five years through ten years		76,611		76,197		1,302		1,402
Due after ten years		23,017		23,140		2,146		2,195
Mortgage-backed securities		246,231		244,659		-		-
Total	$	448,155	$	446,610	$	3,448	$	3,597

Gross realized gains and losses on the sale of available for sale ~~investment~~debt securities ~~were~~are aspresented ~~follows:~~in the table below for the periods indicated.

	Three Months Ended					~~Nine Months Ended~~
	September 30,					September 30,
	March 31,
(In thousands)	~~2017~~2018		~~2016~~2017			~~2017~~			~~2016~~
Gross realized gains	$	3-	$	~~3,829~~-		$	3		$	~~4,181~~
Gross realized losses		-		539			10			~~191~~
Net realized gain (loss)	$	3	$	3,776		$	(7	)	$	3,990
Net realized loss	$	-	$	(9	)

~~Investment~~Debt securities with unrealized losses at March ~~September 30~~31, ~~2017~~2018 and December 31, ~~2016~~2017 not recognized in income are presented in the tables below. The tables segregate ~~investment~~debt 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
September 30, 2017 (In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2018 (In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored entities	$	4213,~~246~~336	$	~~191~~182	$	1127,~~570~~010	$	~~146~~509	$	5340,~~816~~346	$	~~337~~691
Obligations of states and political subdivisions		2652,~~809~~756		~~162~~956		3233,~~799~~058		~~675~~1,409		5985,~~608~~814		~~837~~2,365
Mortgage-backed securities – residential		9374,~~192~~591		1,642		5593,~~308~~924		13,~~177~~516		~~148~~168,~~500~~515		15,~~819~~158
Mortgage-backed securities – commercial		1214,~~366~~798		~~109~~378		2933,~~900~~076		1,~~005~~738		4247,~~266~~874		12,~~114~~116
Corporate debt securities		2,992		3		-		-		2,992		3
Asset-backed securities		11,721		29		-		-		11,721		29
Total	$	177,605	$	1,107	$	129,577	$	3,003	$	307,182	$	4,110
Corporate debt securities		2,721		15		498		3		3,219		18
Total	$	169,923	$	3,202	$	187,566	$	7,175	$	357,489	$	10,377

	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
December 31, 2017 (In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored entities	$	5111,~~657~~544	$	~~460~~43	$	-25,298	$	-394	$	5136,~~657~~842	$	~~460~~437
Obligations of states and political subdivisions		9140,~~728~~402		~~2,526~~413		133,~~999~~965		10860		9374,~~727~~367		21,~~536~~273
Mortgage-backed securities – residential		~~154~~77,~~397~~312		~~2,485~~481		599,~~841~~986		~~202~~2,254		~~160~~177,~~238~~298		2,~~687~~735
Mortgage-backed securities – commercial		437,~~309~~758		~~1,557~~62		-34,139		-1,146		4341,~~309~~897		1,~~557~~208
Corporate debt securities		536		6		5,476		435		6,012		441
Asset-backed securities		1,166		4		-		-		1,166		4
Mutual funds and equity securities		128		2		113		9		241		11
Corporate debt securities		7,251		36		200		1		7,451		37
Total	$	~~341~~145,~~755~~433	$	71,~~036~~039	$	13193,~~429~~588	$	~~656~~4,655	$	~~355~~339,~~184~~021	$	75,~~692~~694

Unrealized losses included in the tables above have not been recognized in income since they have been identified as temporary. The Company evaluates ~~investment~~debt 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.

The Company attributes the unrealized losses in its investment securities portfolio to changes in market interest rates and volatility. Investment securities with unrealized losses at September 30, 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.

7The Company attributes the unrealized losses in its debt securities portfolio to changes in market interest rates and volatility. ~~Loans~~Debt securities with unrealized losses at March 31, 2018 and ~~Allowance~~December ~~for~~31, ~~Loan~~2017 ~~Losses~~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.

8. Loans and Allowance for Loan Losses

Major classifications of loans outstanding are summarized as follows:

(In thousands)	~~September~~March 3031, ~~2017~~2018		December 31, ~~2016~~2017
Real Estate
Real estate mortgage – construction and land development	$	~~112~~131,~~005~~376	$	~~120~~129,~~230~~181
Real estate mortgage – residential		~~342~~351,~~350~~838		~~350~~355,~~295~~304
Real estate mortgage – farmland and other commercial enterprises		~~427~~440,~~575~~680		~~400~~432,~~367~~321
Commercial
Commercial and industrial		6368,~~853~~472		4863,~~607~~417
States and political subdivisions		2018,~~250~~883		1827,~~933~~209
Other		2016,~~308~~663		2319,~~308~~916
Consumer
Secured		43,~~728~~980		4,~~554~~853
Unsecured		43,~~042~~577		43,~~681~~062
Total loans		~~995~~1,~~111~~035,469		~~970~~1,~~975~~035,263
Less unearned income		-		-
Total loans, net of unearned income	$	~~995~~1,~~111~~035,469	$	~~970~~1,~~975~~035,263

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

(In thousands)	Real Estate			Commercial			Consumer			Total
Three months ended September 30, 2017
Three months ended M arch 31, 2018
Balance, beginning of period	$	78,~~961~~509		$	~~900~~951		$	~~361~~323		$	9,~~222~~783
Provision for loan losses		(~~376~~191	)		25(47	)		(2823	)		(~~379~~261	)
Recoveries		~~259~~341			4420			27			~~330~~388
Loans charged off		(1658	)		(8688	)		(2316	)		(~~125~~162	)
Balance, end of period	$	78,~~828~~601		$	~~883~~836		$	~~337~~311		$	9,~~048~~748
Nine months ended September 30, 2017
Balance, beginning of period	$	8,205		$	854		$	285		$	9,344
Provision for loan losses		(526	)		153			75			(298	)
Recoveries		674			110			46			830
Loans charged off		(525	)		(234	)		(69	)		(828	)
Balance, end of period	$	7,828		$	883		$	337		$	9,048

(In thousands)	Real Estate			Commercial			Consumer			Total
Three months ended September 30, 2016
Three months ended M arch 31, 2017
Balance, beginning of period	$	8,~~404~~205		$	~~806~~854		$	~~275~~285		$	9,~~485~~344
Provision for loan losses		~~(425~~396	)		~~203~~(7	)		32191			~~(190~~580	)
Recoveries		3117			5249			911			9277
Loans charged off		(88434	)		(~~134~~32	)		(1928	)		(~~241~~494	)
Balance, end of period	$	78,~~922~~184		$	~~927~~864		$	~~297~~459		$	9,~~146~~507
Nine months ended September 30, 2016
Balance, beginning period	$	9,173		$	820		$	322		$	10,315
Provision for loan losses		(1,025	)		193			13			(819	)
Recoveries		133			107			52			292
Loans charged off		(359	)		(193	)		(90	)		(642	)
Balance, end of period	$	7,922		$	927		$	297		$	9,146

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

September 30, 2017 (In thousands)

Unpaid Principal Balance

Recorded Investment With No Allowance

Recorded Investment With Allowance

Total Recorded Investment

Allowance for Loan Losses Allocated

March 31, 2018 (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

43,~~569~~473

21,~~003~~501

1,~~962~~597

3,~~965~~098

~~385~~325

Real estate mortgage – residential

910,~~985~~177

23,~~807~~056

7,~~207~~120

10,~~014~~176

12,~~650~~115

Real estate mortgage – farmland and other commercial enterprises

198,~~961~~675

42,~~342~~169

156,~~494~~338

198,~~836~~507

~~313~~307

Commercial

Commercial and industrial

~~400~~391

~~401~~391

~~219~~214

Consumer

Unsecured

~~313~~305

~~221~~212

Total

3523,~~228~~021

96,~~152~~726

2515,~~377~~751

3422,~~529~~477

23,~~788~~173

December 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

4,076

1,746

1,955

3,701

402

Real estate mortgage – residential

10,112

3,233

6,877

10,110

1,973

Real estate mortgage – farmland and other commercial enterprises

8,737

2,203

6,367

8,570

319

Commercial

Commercial and industrial

448

270

Consumer

Unsecured

312

218

Total

23,685

7,182

15,959

23,141

3,182

Three Months Ended March 31,	2018						2017
(In thousands)	Average		Interest Income Recognized		Cash Basis Interest Recognized		Average		Interest Income Recognized		Cash Basis Interest Recognized
Real Estate
Real estate mortgage – construction and land development	$	3,616	$	46	$	26	$	6,247	$	76	$	52
Real estate mortgage – residential		10,343		136		133		9,702		118		117
Real estate mortgage – farmland and other commercial enterprises		8,887		100		96		24,089		302		291
Commercial
Commercial and industrial		393		5		4		499		7		6
Consumer
Unsecured		320		4		4		335		5		2
Total	$	23,559	$	291	$	263	$	40,872	$	508	$	468

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

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, 2018 and December 31, 2017.

Three Months Ended September 30,	2017						2016
March 31, 2018 (In thousands)	Real Estate		Commercial		Consumer		Total
(In thousands)	Average		Interest Income Recognized		Cash Basis Interest Recognized		Average		Interest Income Recognized		Cash Basis Interest Recognized
Allowance for Loan Losses
Real Estate
Ending allowance balance attributable to loans:
Real estate mortgage – construction and land development	$	5,932	$	52	$	28	$	7,838	$	88	$	88
Individually evaluated for impairment	$	2,747	$	214	$	212	$	3,173
Real estate mortgage – residential		10,199		139		134		9,214		136		136
Collectively evaluated for impairment		5,854		622		99		6,575
Real estate mortgage – farmland and other commercial enterprises		19,166		224		223		26,401		292		292
Total ending allowance balance	$	8,601	$	836	$	311	$	9,748
Commercial
Loans
Commercial and industrial		401		6		6		409		4		2
Loans individually evaluated for impairment	$	21,781	$	391	$	305	$	22,477
Consumer
Loans collectively evaluated for impairment		902,113		103,627		7,252		1,012,992
Unsecured		333		4		4		150		2		2
Total ending loan balance, net of unearned income	$	923,894	$	104,018	$	7,557	$	1,035,469
Total	$	36,031	$	425	$	395	$	44,012	$	522	$	520

Nine Months Ended September 30,	2017						2016
December 31, 2017 (In thousands)	Real Estate		Commercial		Consumer		Total
(In thousands)	Average		Interest Income Recognized		Cash Basis Interest Recognized		Average		Interest Income Recognized		Cash Basis Interest Recognized
Allowance for Loan Losses
Real Estate
Ending allowance balance attributable to loans:
Real estate mortgage – construction and land development	$	5,464	$	186	$	161	$	8,319	$	243	$	231
Individually evaluated for impairment	$	2,694	$	270	$	218	$	3,182
Real estate mortgage – residential		10,329		393		385		8,957		348		323
Collectively evaluated for impairment		5,815		681		105		6,601
Real estate mortgage – farmland and other commercial enterprises		22,436		822		815		25,728		929		908
Total ending allowance balance	$	8,509	$	951	$	323	$	9,783
Commercial
Loans
Commercial and industrial		436		17		17		413		15		13
Loans individually evaluated for impairment	$	22,381	$	448	$	312	$	23,141
Other		8		-		-		-		-		-
Loans collectively evaluated for impairment		894,425		110,094		7,603		1,012,122
Consumer
Total ending loan balance, net of unearned income	$	916,806	$	110,542	$	7,915	$	1,035,263
Unsecured		331		13		12		152		5		4
Total	$	39,004	$	1,431	$	1,390	$	43,569	$	1,540	$	1,479

The following tables present the recorded investment in nonperforming loans by class of loans as of March 31, 2018 and December 31, 2017.

March 31, 2018 (In thousands)

Nonaccrual

Restructured

Loans

Loans Past

Due 90 Days

or More and

Still Accruing

Real Estate

Real estate mortgage – construction and land development

150

1,597

Real estate mortgage – residential

1,636

5,648

Real estate mortgage – farmland and other commercial enterprises

1,738

3,682

Commercial

Commercial and industrial

369

Consumer

Unsecured

165

126

Total

3,719

11,422

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 September 30, 2017 and December 31, 2016.

December 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

151

1,955

Real estate mortgage – residential

1,763

5,326

Real estate mortgage – farmland and other commercial enterprises

1,752

3,703

Commercial

Commercial and industrial

370

Consumer

Unsecured

168

128

Total

3,887

11,482

September 30, 2017 (In thousands)	Real Estate		Commercial		Consumer		Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2,348	$	219	$	221	$	2,788
Collectively evaluated for impairment		5,480		664		116		6,260
Total ending allowance balance	$	7,828	$	883	$	337	$	9,048
Loans
Loans individually evaluated for impairment	$	33,815	$	401	$	313	$	34,529
Loans collectively evaluated for impairment		848,115		104,010		8,457		960,582
Total ending loan balance, net of unearned income	$	881,930	$	104,411	$	8,770	$	995,111

The Company has allocated $1.7 million and $1.8 million of specific reserves as of March 31, 2018 and December 31, 2017, respectively, 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, 2018 and December 31, 2017. The Company had no credits during the first three months of 2018 or 2017 that were modified as troubled debt restructurings.

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 September 30, 2017 and December 31, 2016.

September 30, 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	$	380	$	1,957	$	-
Real estate mortgage – residential		1,490		5,356		-
Real estate mortgage – farmland and other commercial enterprises		1,908		14,461		-
Commercial
Commercial and industrial		-		372		-
Consumer
Unsecured		171		130		32
Total	$	3,949	$	22,276	$	32

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 $1.8 million and $2.0 million of specific reserves as of September 30, 2017 and December 31, 2016, respectively, 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 September 30, 2017 and December 31, 2016. The Company had no credits during the first nine 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.

September 30, 2017 (In thousands)

30-89 Days Past Due

90 Days or More Past Due

Total

Current

Total Loans

March 31, 2018 (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

15-

~~314~~87

~~329~~87

~~111~~131,~~676~~289

~~112~~131,~~005~~376

Real estate mortgage – residential

~~763~~2,145

~~476~~250

12,~~239~~395

~~341~~349,~~111~~443

~~342~~351,~~350~~838

Real estate mortgage – farmland and other commercial enterprises

-712

~~1,090~~989

1,~~090~~701

~~426~~438,~~485~~979

~~427~~440,~~575~~680

Commercial

Commercial and industrial

-47

6368,~~853~~425

6368,~~853~~472

States and political subdivisions

2018,~~250~~883

Other

2016,~~308~~663

Consumer

Secured

43,~~728~~980

Unsecured

43,~~040~~576

43,~~042~~577

Total

~~780~~2,905

1,~~880~~326

24,~~660~~231

~~992~~1,~~451~~031,238

~~995~~1,~~111~~035,469

2221

December 31, 2016 (In thousands)

30-89 Days Past Due

90 Days or More Past Due

Total

Current

Total Loans

December 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

~~393~~15

~~227~~87

~~620~~102

~~119~~129,~~610~~079

~~120~~129,~~230~~181

Real estate mortgage – residential

1,~~935~~160

~~798~~538

21,~~733~~698

~~347~~353,~~562~~606

~~350~~355,~~295~~304

Real estate mortgage – farmland and other commercial enterprises

-966

~~2,483~~948

21,~~483~~914

~~397~~430,~~884~~407

~~400~~432,~~367~~321

Commercial

Commercial and industrial

-62

4863,~~607~~355

4863,~~607~~417

States and political subdivisions

1827,~~933~~209

Other

2421

2319,~~284~~895

2319,~~308~~916

Consumer

Secured

13-

4,~~541~~853

4,~~554~~853

Unsecured

309

389

43,~~643~~053

43,~~681~~062

Total

2,~~395~~233

31,~~516~~573

53,~~911~~806

~~965~~1,~~064~~031,457

~~970~~1,~~975~~035,263

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.

Real Estate

Commercial

March 31, 2018
(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

127,443

326,807

423,824

67,586

18,883

16,647

Special Mention

681

9,355

6,174

461

Substandard

3,252

15,676

10,682

425

Doubtful

Total

131,376

351,838

440,680

68,472

18,883

16,663

Real Estate

Commercial

December 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

124,926

330,401

414,663

62,490

27,209

19,898

Special Mention

396

9,196

7,556

474

Substandard

3,859

15,707

10,102

453

Doubtful

Total

129,181

355,304

432,321

63,417

27,209

19,916

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, 2018 and December 31, 2017.

March 31, 2018

December 31, 2017

Consumer

(In thousands)

Secured

Unsecured

Secured

Unsecured

Credit risk profile based on payment activity

Performing

3,980

3,286

4,853

2,766

Nonperforming

291

296

Total

3,980

3,577

4,853

3,062

~~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~~9. ~~Based~~Other onReal ~~the~~Estate 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.Owned

	Real Estate						Commercial
September 30, 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	$	107,517	$	317,404	$	399,738	$	62,964	$	20,250	$	19,679
Special Mention		408		9,591		17,564		487		-		629
Substandard		4,080		15,355		10,273		402		-		-
Doubtful		-		-		-		-		-		-
Total	$	112,005	$	342,350	$	427,575	$	63,853	$	20,250	$	20,308

	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		Commercia 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

	September 30, 2017				December 31, 2016
	Consumer				Consumer
(In thousands)	Secured		Unsecured		Secured		Unsecured
Credit risk profile based on payment activity
Performing	$	4,728	$	3,709	$	4,550	$	4,538
Nonperforming		-		333		4		143
Total	$	4,728	$	4,042	$	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 for the dates indicated:

(In thousands)	~~September~~March 3031, ~~2017~~2018		December 31, ~~2016~~2017
Construction and land development	$	4,~~526~~089	$	74,~~996~~433
Residential real estate		~~667~~35		~~871~~157
Farmland and other commercial enterprises		~~913~~963		~~1,806~~899
Total	$	65,~~106~~087	$	105,~~673~~489

OREO activity for the ~~nine~~three months ended March ~~September 30~~31, ~~2017~~2018 and ~~2016~~2017 was as follows:

Nine months ended September 30, (In thousands)	2017			2016
Three months ended March 31, (In thousands)	2018			2017
Beginning balance	$	105,~~673~~489		$	2110,~~843~~673
Transfers from loans and other increases		~~593~~104			~~1,790~~193
Proceeds from sales		(~~4,670~~430	)		(62,~~996~~871	)
Gain on sales, net		95			30
(Loss) gain on sales, net		(43	)		115
Write downs and other decreases, net		(~~585~~33	)		(~~1,331~~110	)
Ending balance	$	65,~~106~~087		$	158,~~336~~000

At March ~~September 30~~31, ~~2017~~2018, the Company had a total of $~~875~~136 thousand of loans secured by residential real estate mortgages that were in the process of foreclosure.

910. 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~~borrowings 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.

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
September 30, 2017 (In thousands)	Overnight/ Continuous		Less Than 30 Days		30-89 Days		90 Days to One Year		Over One Year to Three Years		Total
March 31, 2018 (In thousands)	Overnight/ Continuous		Less Than 30 Days		30-89 Days		90 Days to One Year		Over One Year to Three Years		Total
Obligations of U.S. government-sponsored entities	$	-	$	-	$	-	$	1,153	$	257	$	1,410
Mortgage-backed securities – residential	$	31,431	$	254	$	-	$	1,400	$	258	$	33,343
Mortgage-backed securities – residential		33,627		200		-		300		-		34,127
Total	$	31,431	$	254	$	-	$	1,400	$	258	$	33,343
Total	$	33,627	$	200	$	-	$	1,453	$	257	$	35,537

Remaining Contractual Maturity of the Agreements

December 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

Mortgage-backed securities – residential

32,341

1,200

454

257

34,252

Total

32,341

1,200

454

257

34,252

	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
Obligations of U.S. government-sponsored entities	$	5,596	$	301	$	-	$	258	$	1,027	$	7,182
Mortgage-backed securities – residential		28,086		902		-		200		-		29,188
Total	$	33,682	$	1,203	$	-	$	458	$	1,027	$	36,370

1011. 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~~2018 and ~~2016~~2017.

	Three months ended					Nine months ended
Three months ended March 31, (In thousands)	2018		2017
	September 30,					September 30,
Service cost	$	140	$	146
(In thousands)	2017		2016			2017			2016
Interest cost		153		167
Service cost	$	137	$	159		$	420		$	478
Curtailment gain recognized		-		(417	)
Interest cost		164		171			496			512
Recognized prior service cost		-		75
Curtailment gain recognized		-		-			(351	)		-
Net periodic benefit cost	$	293	$	(29	)
Recognized prior service cost		-		12			8			37
Net periodic benefit cost	$	301	$	342		$	573		$	1,027

Service costs and recognized prior service costs are recorded as a component of salaries and employee benefits with the remaining portion of net periodic benefit cost recorded in other noninterest expense on the Company’s unaudited condensed consolidated statements of income. In connection with the merger of certain of its subsidiaries in February 2017, the Company recognized a curtailment gain of $417 thousand and prior service costs of $66 thousand, for a net gain of $351 thousand ~~during~~at the ~~first~~time ~~quarter~~ of ~~2017~~curtailment. asThis gain is a result of revaluing its postretirement medical benefits plan liability due to a reduction in workforce. ~~The~~during ~~gain~~the isfirst ~~net~~quarter of ~~$67 thousand of prior service costs recognized due to the curtailment~~2017.

The Company expects benefit payments of $~~468~~459 thousand for ~~2017~~2018, of which $~~262~~96 thousand have been made during the first ~~nine~~three months of ~~2017~~2018.

1112. 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:

	September 30, 2017												December 31, 2016
	March 31, 2018												December 31, 2017
	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		17.0907	%		19.8882	%		20.6665	%		13.8399	%		16.4356	%		19.2830	%		20.1012	%		13.2075	%
United Bank & Capital Trust Company		15.29			15.29			16.08			10.75			*			*			*			*
United Bank		14.63			14.63			15.47			10.47			14.05			14.05			14.88			10.13
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

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.25

1213. 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~~debt securities, equity securities, and money market mutual funds classified as cash equivalents that meet the requirement. The carrying value of the $2735.80 million and $1836.67 million in money market mutual funds at March ~~September 30~~31, ~~2017~~2018 and December 31, ~~2016~~2017, respectively, is equivalent to its fair value and based on Level 1 inputs.

27Available for sale debt securities and equity securities

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 September 30, 2017 and December 31, 2016 are as follows:~~26

			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)
September 30, 2017
Obligations of U.S. government-sponsored entities	$	72,740	$	-	$	72,740	$	-
Obligations of states and political subdivisions		121,587		-		121,587		-
Mortgage-backed securities – residential		199,599		-		199,599		-
Mortgage-backed securities – commercial		45,060		-		45,060		-
Corporate debt securities		7,624		-		7,624		-
Mutual funds and equity securities		905		905		-		-
Total	$	447,515	$	905	$	446,610	$	-

Fair value disclosure for available for sale debt securities and equity securities classified as investments on the balance sheet as of March 31, 2018 and December 31, 2017 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)
(In thousands) March 31, 2018	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
Available For Sale Securities
Obligations of U.S. government-sponsored entities	$	7141,~~694~~956	$	-	$	7141,~~694~~956	$	-
Obligations of states and political subdivisions		~~132~~107,~~292~~568		-		~~132~~107,~~292~~568		-
Mortgage-backed securities – residential		~~224~~181,~~307~~601		-		~~224~~181,~~307~~601		-
Mortgage-backed securities – commercial		4547,~~613~~874		-		4547,~~613~~874		-
Corporate debt securities		6,125		-		6,125		-
Asset-backed securities		15,517		-		15,517		-
Mutual funds and equity securities		833		833		-		-
Corporate debt securities		7,772		-		7,772		-
Total	$	480,864	$	833	$	480,031	$	-
Total available for sale securities	$	402,288	$	-	$	402,288	$	-
Equity Securities
Mutual funds and equity securities	$	1,575	$	1,575	$	-	$	-
December 31, 2017
Available For Sale Securities
Obligations of U.S. government-sponsored entities	$	43,208	$	-	$	43,208	$	-
Obligations of states and political subdivisions		114,249		-		114,249		-
Mortgage-backed securities – residential		193,393		-		193,393		-
Mortgage-backed securities – commercial		49,352		-		49,352		-
Asset-backed securities		15,574		-		15,574		-
Corporate debt securities		7,542		-		7,542		-
Total available for sale securities	$	423,318	$	-	$	423,318	$	-
Equity Securities
Mutual funds and equity securities	$	935	$	935	$	-	$	-

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 collateral-dependent impaired loans and OREO.

Adjustments to the fair value of collateral-dependent loans are recorded by either direct loan charge-offs through the allowance for loan losses or an adjustment to the specific reserve through an increase or decrease to the provision for loan losses. 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 during the period in a manner as described above; therefore, these amounts will differ from the total amounts outstanding. With the exception of those calculated using the collateral valuation method, collateral-dependent impaired loan amounts in the tables below exclude restructured loans that 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)
September 30, 2017
March 31, 2018
Collateral-dependent Impaired Loans
Real estate mortgage – construction and land development	$	1,~~324~~271	$	-	$	-	$	1,~~324~~271
Real estate mortgage – residential		~~769~~4,176		-		-		~~769~~4,176
Real estate mortgage – farmland and other commercial enterprises		962		-		-		962
Total	$	5,447	$	-	$	-	$	5,447
Total	$	3,055	$	-	$	-	$	3,055
OREO
Construction and land development	$	~~3,118~~125	$	-	$	-	$	~~3,118~~125
Residential real estate		~~204~~35		-		-		~~204~~35
Farmland and other commercial enterprises		836		-		-		836
Total	$	160	$	-	$	-	$	160
Total	$	4,158	$	-	$	-	$	4,158

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, 2017

Collateral-dependent Impaired Loans

Real estate mortgage – construction and land development

1,553

Real estate mortgage – residential

4,687

Real estate mortgage – farmland and other commercial enterprises

2,645

Total

8,885

OREO

Construction and land development

3,468

Residential real estate

157

Farmland and other commercial enterprises

821

Total

4,446

			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 fair value adjustments recorded in earnings for the periods indicated on assets measured at fair value on a nonrecurring basis.

	Three months ended					Nine months ended
(In thousands)
	September 30,					September 30,
Three months ended March 31,	2018			2017
(In thousands)	2017			2016		2017		2016
Net decrease in fair value:
Net (increase) decrease in fair value:
Collateral-dependent impaired loans	$	115		$	65
Collateral-dependent impaired loans	$	(3	)	$	33	$	12	$	540
OREO		33			110
OREO		235			599		435		1,165
Total	$	148		$	175
Total	$	232		$	632	$	447	$	1,705

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 may also result from contracts to sell properties entered into during the period. The range of discounts is presented in the table below for ~~2017~~2018 and ~~2016~~2017.

(In thousands)	Fair Value		Valuation Technique	Unobservable Inputs	Range				~~Average~~	Weighted Average
September 30, 2017
M arch 31, 2018
Collateral-dependent impaired loans	$	35,~~055~~447	Discounted appraisals	Marketability discount	~~1.1~~0%	-	2273.8%6	%		~~9.7~~	%1.3	%
OREO	$	~~4,158~~160	Discounted appraisals	Marketability discount	0%	-	5235.4%9	%		~~17.5~~	%10.8	%
December 31, 2016
December 31, 2017
Collateral-dependent impaired loans	$	68,~~397~~885	Discounted appraisals	Marketability discount	0%	-	6722.8%	%		~~3.5~~	%3.1	%
OREO	$	64,~~187~~446	Discounted appraisals	Marketability discount	0%	-	5071.0%7	%		~~11.2~~	%4.0	%

3029

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~~table presents the estimated fair values of the Company’s financial instruments and ~~assumptions~~the ~~were~~level ~~used~~within tothe ~~estimate~~fair value hierarchy in which the fair value ofmeasurements ~~each~~fall ~~class~~at March of31, ~~financial~~2018 ~~instruments~~and December ~~not~~31, ~~presented~~2017. ~~elsewhere~~Information for ~~which~~available itfor sale investment securities is ~~practicable~~presented towithin ~~estimate~~this ~~that~~footnote ~~value~~in greater detail above. In accordance with the prospective adoption of ASU 2016-01, the fair values as of March 31, 2018 were measured using an exit price notion.

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

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, 2018

Assets

Cash and cash equivalents

153,221

Held to maturity investment securities

3,350

3,424

Loans, net

1,025,721

1,007,469

Accrued interest receivable

4,572

Federal Home Loan Bank and Federal Reserve Bank Stock

12,996

Liabilities

Deposits

1,394,091

1,393,901

1,181,392

212,509

Securities sold under agreements to repurchase

33,343

33,349

Federal Home Loan Bank advances

3,436

3,488

Subordinated notes payable to unconsolidated trusts

33,506

23,918

Accrued interest payable

265

December 31, 2017

Assets

Cash and cash equivalents

120,408

Held to maturity investment securities

3,364

3,478

Loans, net

1,025,480

1,012,959

Accrued interest receivable

4,935

Federal Home Loan Bank and Federal Reserve Bank Stock

13,235

Liabilities

Deposits

1,379,903

1,380,122

1,157,045

223,077

Securities sold under agreements to repurchase

34,252

34,257

Federal Home Loan Bank advances

3,479

3,546

Subordinated notes payable to unconsolidated trusts

33,506

22,709

Accrued interest payable

261

~~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.~~30

~~Investment~~14. ~~Securities~~Subsequent ~~Held to Maturity~~Event

~~Fair~~On ~~value~~April is19, ~~based~~2018, onthe ~~quoted~~Company ~~market~~and ~~price~~Wesbanco, ~~if available~~Inc. If(“WesBanco”), a ~~quoted~~multi-state ~~market~~bank ~~price~~holding iscompany ~~not~~with ~~available~~$10.2 billion in assets at March 31, ~~fair~~2018, ~~value~~entered isinto ~~estimated~~a ~~using~~definitive ~~quoted~~Agreement ~~market~~and ~~prices~~Plan of Merger (the “Merger Agreement”) providing for ~~similar~~the ~~securities~~merger orof the Company with ~~available~~and ~~market~~into ~~information~~WesBanco ~~through~~(the ~~processes~~“Merger”) ~~using~~subject ~~benchmark~~to ~~yields~~the terms and conditions set forth in the Merger Agreement. As a result of the Merger, ~~matrix~~the ~~pricing~~separate corporate existence of the Company will cease and WesBanco will continue as the surviving corporation in the Merger. The Merger Agreement also provides that, ~~prepayment~~immediately ~~speeds~~following the completion of the Merger, ~~cash~~the ~~flows~~Company’s subsidiary bank, ~~live~~United ~~trading~~Bank, ~~data~~will merge with and into Wesbanco Bank, Inc., a West Virginia banking corporation and ~~market~~a ~~spreads~~wholly-owned ~~sourced~~subsidiary ~~from~~of ~~new~~WesBanco ~~issues,~~(the ~~dealer~~“Bank ~~quotes~~Merger”), ~~and~~with ~~trade~~Wesbanco ~~prices~~Bank, ~~among~~Inc. ~~other~~continuing ~~sources~~as the surviving bank in the Bank Merger. The Merger Agreement was unanimously approved by the Board of Directors of both WesBanco and the Company.

~~Loans~~Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, the Company’s shareholders will have the right to receive (i) 1.053 shares of WesBanco common stock and (ii) $5.00 in cash, without interest, for each share of the Company’s common stock. As of the date of the announcement, the transaction was valued at approximately $378.2 million. The Merger Agreement contains certain termination rights for both WesBanco and the Company and further provides that, upon termination of the Merger Agreement under certain circumstances, the Company may be obligated to pay WesBanco a termination fee of $12,000,000.

~~The~~Consummation ~~fair value~~ of ~~loans~~the Merger is ~~estimated~~subject byto ~~discounting~~a ~~expected~~number ~~future~~of ~~cash~~customary ~~flows~~conditions, ~~using~~including, ~~current~~but ~~discount~~not ~~rates~~limited atto, ~~which~~the ~~similar~~approval ~~loans~~of ~~would~~the beMerger ~~made~~Agreement toby ~~borrowers~~the ~~with~~shareholders ~~similar~~of ~~credit~~the ~~ratings~~Company and ~~for~~ the ~~same~~receipt ~~remaining~~of ~~maturities.~~all ~~Expected~~required ~~future~~regulatory ~~cash~~approvals. ~~flows~~The ~~are~~transaction ~~projected~~is ~~based~~expected onto ~~contractual~~close ~~cash~~in ~~flows~~the ~~adjusted~~third ~~for~~or ~~estimated~~fourth ~~prepayments~~quarter of 2018.

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 September 30, 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)
September 30, 2017
Assets
Cash and cash equivalents	$	117,608	$	117,608	$	117,608	$	-	$	-
Held to maturity investment securities		3,448		3,597		-		3,597		-
Loans, net		986,063		976,344		-		-		976,344
Accrued interest receivable		4,695		4,695		-		4,695		-
Federal Home Loan Bank and Federal Reserve Bank Stock		13,235		13,235		-		-		13,235
Liabilities
Deposits		1,361,824		1,361,653		1,128,645		-		233,008
Securities sold under agreements to repurchase		35,537		35,542		-		35,542		-
Federal Home Loan Bank advances		3,521		3,608		-		3,608		-
Subordinated notes payable to unconsolidated trusts		33,506		21,142		-		-		21,142
Accrued interest payable		344		344		-		344		-
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
Securities sold under agreements to repurchase		36,370		36,381		-		36,381		-
Federal Home Loan Bank advances		18,646		19,114		-		19,114		-
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.

3332

RESULTS OF OPERATIONS

Net income ~~for the third quarter of 2017~~ was $5.36 million, or $.7175 per common share, anand ~~increase of 22.8% compared to~~ $43.3 million, or $.5844 per common share, for the ~~third~~quarters ~~quarter~~ended ofMarch ~~2016.~~31, ~~For~~2018 ~~the~~and ~~nine~~2017, ~~months~~respectively. ~~ended~~This ~~September~~represents ~~30,~~an ~~2017,~~increase ~~net~~of ~~income was~~ $132.13 million, or 69.5%, and $1.7531, or 70.5%, on a per common share, abasis. ~~decline~~The first quarter of ~~6.7%~~2017 ~~compared~~includes topre-tax expenses of $~~14.1~~472 ~~million~~thousand ($307 thousand after tax), or $1.8704 per common share, ~~for~~related to the ~~first~~Company’s ~~nine~~consolidation ~~months~~ of ~~2016~~its four bank subsidiaries and data processing subsidiary into one bank, which was completed in February 2017.

The current nine-months 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. For both the three and nine months ended September 30, 2016, net income includes pre-tax consolidation expenses of $259 thousand ($168 thousand after tax), or $.02 per common share. This consolidation was completed in February 2017.

Selected income statement amounts and related data are summarized in the table below.

Three Months Ended September 30

Nine Months Ended September 30

(In thousands except per share data)

2017

2016

Increase (Decrease)

2017

2016

Increase (Decrease)

Three Months Ended March 31,

2018

2017

Increase (Decrease)

Interest income

1415,~~983~~344

14,~~619~~379

~~364~~965

~~44,192~~

~~44,922~~

~~(730~~

)

Interest expense

~~893~~887

~~1,809~~916

(~~916~~29

)

~~2,690~~

~~5,827~~

~~(3,137~~

)

Net interest income

14,~~090~~457

1213,~~810~~463

~~1,280~~994

~~41,502~~

~~39,095~~

~~2,407~~

Provision for loan losses

(~~379~~261

)

~~(190~~580

)

(~~189~~841

)

~~(298~~

)

~~(819~~

)

~~521~~

Net interest income after provision for loan losses

14,~~469~~718

1312,~~000~~883

1,~~469~~835

~~41,800~~

~~39,914~~

~~1,886~~

Noninterest income

5,~~627~~201

105,~~772~~251

(~~5,145~~50

)

~~15,980~~

~~25,835~~

~~(9,855~~

)

Noninterest expenses

1213,~~708~~118

1713,~~888~~529

(~~5,180~~411

)

~~39,583~~

~~46,179~~

~~(6,596~~

)

Income before income taxes

76,~~388~~801

54,~~884~~605

12,~~504~~196

~~18,197~~

~~19,570~~

~~(1,373~~

)

Income tax expense

21,~~076~~160

1,~~560~~276

~~516~~(116

)

~~5,074~~

~~5,510~~

~~(436~~

)

Net income

5,~~312~~641

43,~~324~~329

~~988~~2,312

~~13,123~~

~~14,060~~

~~(937~~

)

Basic and diluted net income per common share

.7175

.5844

.1331

~~1.75~~

~~1.87~~

~~(.12~~

)

Cash dividends declared per common share

.10125

.0710

.03025

~~.30~~

~~.21~~

~~.09~~

Weighted average common shares outstanding – basic and diluted

7,~~514~~518

7,~~505~~510

~~7,512~~

~~7,503~~

Return on average assets

1.2637

.9881

2856 bp

~~1.05~~

~~1.07~~

~~(2) bp~~

Return on average equity

1011.7786

97.0727

~~170~~459 bp

~~9.20~~

~~10.14~~

~~(94) bp~~

bp – basis points.

The increase in net income in the ~~quarterly~~ comparison is attributed primarily to higher net interest income of $~~1.3~~994 ~~million~~thousand, or 107.04%, and a ~~higher~~lower ~~credit to the~~ provision for loan losses of $~~189~~841 thousand. Noninterest ~~income~~expenses declined $~~5.1~~411 ~~million~~thousand, or 473.80%, which was partially offset by a decrease in noninterest ~~expenses of $5.2 million, or 29.0%. The primary drivers of the decline in net~~ income ~~in the nine-month comparison were lower noninterest income~~ of $~~9.9~~50 ~~million, or 38.1%, and a decrease in the credit to the provision for loan losses of $521~~ thousand, ~~partially offset by lower noninterest expenses of $6.6 million,~~ or ~~14.3%. The decline in noninterest income is attributed primarily to a pretax gain during the first quarter of 2016 of $4.~~1 ~~million related to the early extinguishment of $15~~.~~5 million of debt. Net interest income was up $2.4 million, or 6.2~~0%~~, in the year-to-date comparison~~. Further information related to the more significant components making up the changes in net income follows.

Net Interest Income

The overall interest rate environment at ~~September~~March 3031, ~~2017,~~2018 (as measured by the Treasury yield curve) increased during the quarter, but remained at very low levels when compared with historical trends. During the quarter, the shape of the yield curve flattened as a result of yields on short-term maturities increasing more than yields on longer-term maturities. Yields for the two and three-year maturity periods were up 1038 and 841 basis points, respectively, while yields on ~~both~~ the ten and thirty-year maturities increased 333 ~~basis points. At September 30, 2017, the short-term federal funds target interest rate remained between 1.00%~~ and ~~1.25%.~~23 ~~The~~basis Federal Reserve Board 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 September 30points, ~~2017, the national and Kentucky unemployment rates were 4.2% and 5.2%,~~ respectively. ~~The national inflation rate at September 30, 2017 was 2.2% based on the Consumer Price Index published by the Bureau of Labor Statistics, up from 2.1% at year-end 2016.~~

The Federal Reserve Board increased the short-term federal funds target interest rate 25 basis points during March 2018 to a range between 1.50% and 1.75% and 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, 2018, the national and Kentucky unemployment rates were 4.1% and 4.0%, respectively. The national inflation rate at March 31, 2018 was 2.4% based on the Consumer Price Index published by the Bureau of Labor Statistics, up from 2.1% at year-end 2017.

Net interest income increased $994 thousand, or 7.4%, for the first quarter of 2018 compared to the first quarter of 2017. The increase was driven by overall loan growth and higher average rates earned on loans and investment securities, partially offset by declines in investment securities balances. Net interest margin increased 16 basis points in the comparison, reflecting the Company’s efforts to improve net interest income and net interest margin through loan growth combined with continued refinement of the Company’s investment securities portfolio.

Interest income on loans was up $747 thousand, or 6.4%, driven by a higher average loan balance outstanding of $61.5 million, or 6.3%, in the comparison. Interest income on loans in the current quarter includes the collection of $74 thousand in prepayment fees, which aided the average rate earned on loans by three basis points.

Interest income on investment securities is up $9 thousand, or 0.4%, for the comparison. An increase in the average rate earned on investment securities was mostly offset by lower volume. The average rate earned was up 14 basis points compared to the year-ago quarter. Average investment securities decreased $54.9 million, or 11.1%, mainly as the result of loan demand. As loan demand increases, the Company uses proceeds from maturities, calls, and sales of investment securities to fund higher-earning loans.

Interest expense on deposits was up $53 thousand, or 9.9%, compared to the first quarter of 2017. The average rate paid on deposits increased two basis points due to a higher average rate on interest bearing demand deposits of 15 basis points which correlates to the increase in market rates and local market competition. Rates on time deposits decreased 8 basis points. Average total deposits were down $8.9 million driven by a decline in average time deposits of $45.8 million, partially offset by higher volume of interest bearing demand deposits of $32.1 million. The Company has continued to aggressively reprice higher-rate maturing time deposits downward with lower rate offerings or to allow them to mature without renewal.

Interest expense on borrowed funds was down $82 thousand, or 21.4%, in the comparison primarily due to a lower average balance of FHLB advances. The Company had FHLB advances of $10.0 million and $5.0 million mature during September and February 2017, respectively. The average rate paid on subordinated notes payable to the Company’s unconsolidated trusts, which is tied to the 3-month LIBOR, increased 67 basis points. The 3-month LIBOR was 2.31% as of the end of the quarter, up from 1.15% at March 31, 2017.

The average rate earned from interest income on loans and average interest rate paid on deposits continue to be near historical lows as a result of the 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 has improved its mix of earning assets and interest bearing liabilities mainly through growth in the loan portfolio over the past year combined with a significant decrease in lower-yielding investment securities and a decline in higher-rate borrowings. On an average basis, loans represented 65.7% of earning assets for the first quarter of 2018, an increase of 325 basis points compared to 62.5% for the first quarter of 2017. Loans typically involve an increase in credit risk and higher yields when compared to investment securities.

For the current quarter, net interest margin on a taxable equivalent basis was 3.76%, an increase of 16 basis points compared with 3.60% a year earlier. Net interest spread increased 16 basis points to 3.66%, up from 3.50% in the year-ago quarter. Net interest margin and spread for the current quarter were negatively impacted four basis points by lower tax-equivalent adjustments related to tax-exempt loans and investment securities due to a reduction in Federal income tax rates that went to effect at the beginning of 2018. Net interest margin and spread for the current quarter were positively impacted two basis points from the collection of $74 thousand in prepayment fees during the quarter.

The Company expects its net interest margin to stay relatively flat or trend slightly upward in the near term according to internal modeling using expectations about future market interest rates, loan volume, the maturity structure of the Company’s earning assets and liabilities, and other factors. Future results could be significantly different than current expectations.

Net interest income increased $1.3 million, or 10.0%, and $2.4 million, or 6.2%, for the third quarter and first nine months of 2017, respectively, compared to the same periods in 2016. The increase in both comparisons was driven by overall lower average rates paid on borrowings and declines in the average balances of borrowings, as well as loan growth, partially offset by declines in investment securities balances. Net interest margin increased in both comparisons, reflecting the Company’s efforts to improve net interest income and net interest margin through loan growth combined with the balance sheet deleverage transaction and related repositioning of the Company’s investment securities portfolio during the second half of 2016, which is more fully described below.

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 from 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 November 2017 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 at the time of the transaction increased to 4.0 years from 3.5 years.

Interest income on loans was up $567 thousand, or 4.8%, and $469 thousand, or 1.3%, in the three and nine-month comparisons, respectively, driven by a higher average loan balance outstanding in both comparisons. Average loans grew $42.8 million, or 4.5%, in the quarterly comparison and $27.9 million, or 2.9%, in the year-to-date comparison. Interest income on loans in the current quarter includes the collection of $120 thousand related to two nonaccrual loans that fully paid off during the quarter, which aided the average rate earned on loans by four basis points. For the first nine months of 2017, interest income on loans includes a $73 thousand prepayment fee and the collection of $158 thousand related to three nonaccrual loans that fully paid off during the period. The prior year nine-month period includes the collection of $236 thousand related to a nonaccrual loan that fully paid off during the year-ago first quarter. For both the nine months ended September 30, 2017 and 2016, the average rate earned on loans was boosted three basis points related to the collections of interest on the nonaccrual loans and the prepayment fee discussed above.

Interest income on investment securities is down $369 thousand, or 13.2%, and $1.5 million, or 16.6%, for the quarterly and year-to-date comparisons, respectively, primarily due to lower volume. Average investment securities decreased $102 million, or 17.7%, and $96.6 million, or 16.6%, for the third quarter and first nine months of 2017, respectively, from the same periods a year ago. Volume declines are mainly the result of the balance sheet deleverage transaction during 2016, which is more fully described above. The average rate earned on investment securities was up 12 basis points in the quarterly comparison and 3 basis points in the year-to-date comparison.

Interest expense on deposits was down $38 thousand, or 6.6%, and $227 thousand, or 12.5%, for the third quarter and first nine months of 2017, respectively, compared to the same periods in 2016. The decline in both comparisons was driven by rate declines and lower average outstanding balances related to time deposits. Interest expense on borrowed funds was down $878 thousand, or 71.3%, and $2.9 million, or 72.7%, for the quarterly and year-to-date comparisons, respectively, primarily due to the early repayment of $100 million of high fixed-rate borrowings during the third quarter of 2016 related to the deleveraging transaction discussed above.

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.

The Company has improved its mix of earning assets and interest bearing liabilities through growth in the loan portfolio over the past year combined with a significant decrease in lower-yielding investment securities and higher-rate borrowings. On an average basis, loans represented 63.4% of earning assets for the third quarter of 2017, an increase of 511 basis points compared to 58.3% for the third quarter of 2016. For the first nine months of 2017, average loans represented 63.1% of average earnings assets, up 460 basis points compared to 58.5% for the first nine months of 2016. Loans typically involve an increase in credit risk and higher yields when compared to investment securities.

For the current quarter, net interest margin on a taxable equivalent basis was 3.67%, an increase of 44 basis points compared with 3.23% a year earlier. Net interest spread increased 50 basis points to 3.57%, up from 3.07% in the year-ago quarter. Net interest margin and spread for the current quarter were positively impacted three basis points from the collection of $120 thousand related to two nonaccrual loans that fully paid off during the quarter.

For the first nine months of 2017, net interest margin on a taxable equivalent basis was 3.65%, an increase of 36 basis points from 3.29% in the comparable period a year ago. Net interest spread increased 42 basis points to 3.55%, up from 3.13% for the first nine months of 2016. For both the nine months ended September 30, 2017 and 2016, net interest margin and spread were positively impacted two basis points each related to the collection of interest on nonaccrual loans and a prepayment fee. During the current nine months, interest income on loans includes a $73 thousand prepayment fee and the collection of $158 thousand related to three nonaccrual loans that fully paid off during the period. The prior year nine-month period includes the collection of $236 thousand related to a nonaccrual loan that fully paid off during the year-ago first quarter

The Company expects its net interest margin to stay relatively flat in the near term according to internal modeling using expectations about future market interest rates, the maturity structure of the Company’s earning assets and liabilities, and other factors. Future results could be significantly different than current expectations.

The following tables present an analysis of net interest income for periods indicated.

Distribution of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest Differential
Three Months Ended September 30,	2017									2016
(In thousands)	Average Balance			Interest			Average Rate			Average Balance			Interest			Average Rate
Earning Assets
Investment securities1
Taxable	$	359,207		$	1,857			2.05	%	$	451,199		$	2,159			1.90	%
Nontaxable2		114,974			847			2.92			124,820			941			3.00
Interest bearing deposits in banks, federal funds sold and securities purchased under agreements to resell, and money market mutual funds		97,458			282			1.15			102,021			116			.45
Loans2,3,4		991,579			12,357			4.94			948,734			11,792			4.94
Total earning assets		1,563,218		$	15,343			3.89	%		1,626,774		$	15,008			3.67	%
Allowance for loan losses		(9,261	)								(9,388	)
Total earning assets, net of allowance for loan losses		1,553,957									1,617,386
Nonearning Assets
Cash and due from banks		24,778									23,766
Premises and equipment, net		31,426									32,462
Other assets		60,543									80,147
Total assets	$	1,670,704								$	1,753,761
Interest Bearing Liabilities
Deposits
Interest bearing demand	$	360,949		$	177			.19	%	$	334,349		$	60			.07	%
Savings		417,337			108			.10			410,214			126			.12
Time		238,892			255			.42			289,327			392			.54
Federal funds purchased		-			-			-			141			-			-
Short-term securities sold under agreements to repurchase		34,679			15			.17			35,743			27			.30
Long-term securities sold under agreements to repurchase		696			2			1.14			83,505			840			4.00
Federal Home Loan Bank advances		11,312			109			3.82			19,260			187			3.86
Subordinated notes payable to unconsolidated trusts		33,506			227			2.69			33,506			177			2.10
Total interest bearing liabilities		1,097,371		$	893			.32	%		1,206,045		$	1,809			.60	%
Noninterest Bearing Liabilities
Demand deposits		350,058									328,351
Other liabilities		27,622									29,792
Total liabilities		1,475,051									1,564,188
Shareholders’ equity		195,653									189,573
Total liabilities and shareholders’ equity	$	1,670,704								$	1,753,761
Net interest income					14,450									13,199
TE basis adjustment					(360	)								(389	)
Net interest income				$	14,090								$	12,810
Net interest spread								3.57	%								3.07	%
Impact of noninterest bearing sources of funds								.10									.16
Net interest margin								3.67	%								3.23	%

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

Three Months Ended March 31,	2018									2017
(In thousands)	Average Balance			Interest			Average Rate			Average Balance			Interest			Average Rate
Earning Assets
Investment securities¹
Taxable	$	342,307		$	2,025			2.40	%	$	369,635		$	1,900			2.08	%
Nontaxable²		95,647			598			2.54			123,174			887			2.92
Interest bearing deposits in banks, federal funds sold, and money market mutual funds		102,484			375			1.48			92,593			166			.73
Loans^2,3,4		1,036,527			12,518			4.90			974,987			11,796			4.91
Total earning assets		1,576,965		$	15,516			3.99	%		1,560,389		$	14,749			3.83	%
Allowance for loan losses		(9,815	)								(9,448	)
Total earning assets, net of allowance for loan losses		1,567,150									1,550,941
Nonearning Assets
Cash and due from banks		22,299									25,462
Premises and equipment, net		30,806									31,852
Other assets		48,452									58,660
Total assets	$	1,668,707								$	1,666,915
Interest Bearing Liabilities
Deposits
Interest bearing demand	$	381,339		$	248			.26	%	$	349,212		$	91			.11	%
Savings		426,007			115			.11			421,230			124			.12
Time		218,799			223			.41			264,585			318			.49
Federal funds purchased		-			-			-			39			-			-
Short-term securities sold under agreements to repurchase		34,215			18			.21			33,723			23			.28
Long-term securities sold under agreements to repurchase		512			1			.79			1,287			2			.63
Federal Home Loan Bank advances		3,450			28			3.29			16,000			160			4.06
Subordinated notes payable to unconsolidated trusts		33,506			254			3.07			33,506			198			2.40
Total interest bearing liabilities		1,097,828		$	887			.33	%		1,119,582		$	916			.33	%
Noninterest Bearing Liabilities
Demand deposits		350,183									337,016
Other liabilities		27,732									24,541
Total liabilities		1,475,743									1,481,139
Shareholders’ equity		192,964									185,776
Total liabilities and shareholders’ equity	$	1,668,707								$	1,666,915
Net interest income					14,629									13,833
TE basis adjustment					(172	)								(370	)
Net interest income				$	14,457								$	13,463
Net interest spread								3.66	%								3.50	%
Impact of noninterest bearing sources of funds								.10									.10
Net interest margin								3.76	%								3.60	%

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 21% for 2018 and 35% for 2017.

³Loan balances include principal balances on nonaccrual loans.

4Loan fees included in interest income amounted to $~~272~~298 thousand and $326 thousand in ~~2017~~2018 and ~~2016~~2017, respectively.

3735

Distribution of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest Differential
Nine Months Ended September 30,	2017									2016
(In thousands)	Average Balance			Interest			Average Rate			Average Balance			Interest			Average Rate
Earning Assets
Investment securities1
Taxable	$	366,281		$	5,741			2.10	%	$	459,125		$	7,095			2.06	%
Nontaxable2		119,263			2,605			2.92			122,970			2,783			3.02
Interest bearing deposits in banks, federal funds sold and securities purchased under agreements to resell, and money market mutual funds		90,601			609			.90			97,044			321			.44
Loans2,3,4		983,281			36,332			4.94			955,417			35,861			5.01
Total earning assets		1,559,426		$	45,287			3.88	%		1,634,556		$	46,060			3.76	%
Allowance for loan losses		(9,403	)								(9,756	)
Total earning assets, net of allowance for loan losses		1,550,023									1,624,800
Nonearning Assets
Cash and due from banks		23,749									22,947
Premises and equipment, net		31,734									32,590
Other assets		60,462									81,440
Total assets	$	1,665,968								$	1,761,777
Interest Bearing Liabilities
Deposits
Interest bearing demand	$	351,789		$	378			.14	%	$	333,457		$	191			.08	%
Savings		420,955			364			.12			406,639			387			.13
Time		251,539			854			.45			303,240			1,245			.55
Federal funds purchased		15			-			-			201			-			-
Short-term securities sold under agreements to repurchase		33,373			52			.21			34,407			70			.27
Long-term securities sold under agreements to repurchase		1,009			6			.80			95,373			2,842			3.98
Federal Home Loan Bank advances		13,631			398			.90			18,931			558			3.94
Subordinated notes payable to unconsolidated trusts		33,506			638			2.55			34,892			534			2.04
Total interest bearing liabilities		1,105,817		$	2,690			.33	%		1,227,140		$	5,827			.63	%
Noninterest Bearing Liabilities
Demand deposits		342,870									320,873
Other liabilities		26,525									28,502
Total liabilities		1,475,212									1,576,515
Shareholders’ equity		190,756									185,262
Total liabilities and shareholders’ equity	$	1,665,968								$	1,761,777
Net interest income					42,597									40,233
TE basis adjustment					(1,095	)								(1,138	)
Net interest income				$	41,502								$	39,095
Net interest spread								3.55	%								3.13	%
Impact of noninterest bearing sources of funds								.10									.16
Net interest margin								3.65	%								3.29	%

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

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

(In thousands)

Variance

Filing Compare · FARMERS CAPITAL BANK CORP