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 June 30, 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

7,521,430 shares outstanding at August 1, 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	9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3. Quantitative and Qualitative Disclosures About Market Risk	52

Item 4. Controls and Procedures	53

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	53

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 6. Exhibits	54

SIGNATURES	56

PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Unaudited Condensed Consolidated Balance Sheets

	June 30,			December 31,
(In thousands, except share and per share data)	2018			2017
Assets
Cash and cash equivalents:
Cash and due from banks	$	23,922		$	25,581
Interest bearing deposits in other banks		31,303			58,154
Money market mutual funds		38,021			36,673
Total cash and cash equivalents		93,246			120,408
Investment securities:
Available for sale, amortized cost of $391,093 (2018) and $427,831 (2017)		379,979			423,318
Equity investments, amortized cost of $1,581 (2018) and $864 (2017)		1,573			935
Held to maturity, fair value of $2,868 (2018) and $3,478 (2017)		2,837			3,364
Total investment securities		384,389			427,617
Loans, net of unearned income		1,064,215			1,035,263
Allowance for loan losses		(10,001	)		(9,783	)
Loans, net		1,054,214			1,025,480
Premises and equipment, net		31,434			30,928
Company-owned life insurance		30,944			30,817
Other real estate owned		4,031			5,489
Other assets		33,704			33,133
Total assets	$	1,631,962		$	1,673,872
Liabilities
Deposits:
Noninterest bearing	$	357,657		$	361,855
Interest bearing		977,130			1,018,048
Total deposits		1,334,787			1,379,903
Securities sold under agreements to repurchase		33,532			34,252
Federal Home Loan Bank advances		3,392			3,479
Subordinated notes payable to unconsolidated trusts		33,506			33,506
Dividends payable, common stock		940			939
Other liabilities		27,913			28,440
Total liabilities		1,434,070			1,480,519
Shareholders’ Equity
Common stock, par value $.125 per share; 14,608,000 shares authorized; 7,521,101 and 7,517,446 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively		940			940
Capital surplus		52,348			52,201
Retained earnings		153,442			143,778
Accumulated other comprehensive loss		(8,838	)		(3,566	)
Total shareholders’ equity		197,892			193,353
Total liabilities and shareholders’ equity	$	1,631,962		$	1,673,872

See accompanying notes to unaudited condensed consolidated financial statements.

Unaudited Condensed Consolidated Statements of Income

	Three Months Ended					Six Months Ended
	June 30,					June 30,
(In thousands, except per share data)	2018		2017			2018			2017
Interest Income
Interest and fees on loans	$	13,038	$	12,106		$	25,507		$	23,828
Interest on investment securities:
Taxable		2,023		1,984			4,048			3,884
Nontaxable		449		579			924			1,170
Interest on deposits in other banks		280		128			549			270
Interest on federal funds sold and money market mutual funds		142		33			248			57
Total interest income		15,932		14,830			31,276			29,209
Interest Expense
Interest on deposits		614		523			1,200			1,056
Interest on securities sold under agreements to repurchase		20		16			39			41
Interest on Federal Home Loan Bank advances		27		129			55			289
Interest on subordinated notes payable to unconsolidated trusts		305		213			559			411
Total interest expense		966		881			1,853			1,797
Net interest income		14,966		13,949			29,423			27,412
Provision for loan losses		127		(499	)		(134	)		81
Net interest income after provision for loan losses		14,839		14,448			29,557			27,331
Noninterest Income
Service charges and fees on deposits		1,897		2,012			3,809			3,970
Allotment processing fees		677		651			1,397			1,366
Other service charges, commissions, and fees		1,490		1,328			2,862			2,700
Trust income		695		626			1,484			1,330
Net loss on sales of available for sale investment securities		-		(1	)		-			(10	)
Net realized gain on sales of equity investment securities		808		-			808			-
Gains on sale of mortgage loans, net		104		189			199			343
Income from company-owned life insurance		213		221			506			456
Other		89		76			109			198
Total noninterest income		5,973		5,102			11,174			10,353
Noninterest Expense
Salaries and employee benefits		7,410		7,475			14,900			15,335
Occupancy expenses, net		1,177		1,135			2,431			2,349
Equipment expenses		678		599			1,279			1,152
Data processing and communication expenses		1,055		1,093			2,138			2,386
Bank franchise tax		525		609			1,025			1,166
Deposit insurance expense		116		130			242			267
Other real estate expenses, net		522		326			639			400
Other		2,179		1,979			4,126			3,820
Total noninterest expense		13,662		13,346			26,780			26,875
Income before income taxes		7,150		6,204			13,951			10,809
Income tax expense		1,303		1,722			2,463			2,998
Net income	$	5,847	$	4,482		$	11,488		$	7,811
Per Common Share
Net income – basic and diluted	$	.78	$	.60		$	1.53		$	1.04
Cash dividends declared		.125		.10			.25			.20
Weighted Average Common Shares Outstanding
Basic and diluted		7,520		7,512			7,519			7,511

See accompanying notes to unaudited condensed consolidated financial statements.

Unaudited Condensed Consolidated Statements of Comprehensive Income

	Three Months Ended					Six Months Ended
	June 30,					June 30,
(In thousands)	2018			2017		2018			2017
Net Income	$	5,847		$	4,482	$	11,488		$	7,811
Other comprehensive (loss) income:
Unrealized holding (loss) gain on available for sale securities arising during the period, net of tax of $(294), $716, $(1,387) and $1,226, respectively		(1,112	)		1,329		(5,214	)		2,277

Reclassification adjustment for net realized loss included in net income, net of tax of $-, $-, $- and $(3), respectively		-			1		-			7

Change in unfunded portion of postretirement benefit obligation, net of tax of $-, $5, $- and $36, respectively		(1	)		9		(2	)		68

Other comprehensive (loss) income		(1,113	)		1,339		(5,216	)		2,352
Comprehensive income	$	4,734		$	5,821	$	6,272		$	10,163

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
Six months ended	Common Stock				Capital		Retained			Comprehensive			Shareholders’
June 30, 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		-		-		-		11,488			-			11,488
Other comprehensive loss		-		-		-		-			(5,216	)		(5,216	)
Adoption of Accounting Standards Update 2016-01		-		-		-		56			(56	)		-
Cash dividends declared – common, $.25 per share		-		-		-		(1,880	)		-			(1,880	)
Shares issued under director compensation plan		1		-		36		-			-			36
Shares issued pursuant to employee stock purchase plan		3		-		95		-			-			95
Expense related to employee stock purchase plan		-		-		16		-			-			16
Balance at June 30, 2018		7,521	$	940	$	52,348	$	153,442		$	(8,838	)	$	197,892


Balance at January 1, 2017		7,509	$	939	$	51,885	$	134,650		$	(3,408	)	$	184,066
Net income		-		-		-		7,811			-			7,811
Other comprehensive income		-		-		-		-			2,352			2,352
Cash dividends declared – common, $.20 per share		-		-		-		(1,502	)		-			(1,502	)
Shares issued under director compensation plan		1		-		46		-			-			46
Shares issued pursuant to employee stock purchase plan		3		-		87		-			-			87
Expense related to employee stock purchase plan		-		-		16		-			-			16
Balance at June 30, 2017		7,513	$	939	$	52,034	$	140,959		$	(1,056	)	$	192,876

See accompanying notes to unaudited condensed consolidated financial statements.

Unaudited Condensed Consolidated Statements of Cash Flows

Six months ended June 30, (In thousands)	2018			2017
Cash Flows from Operating Activities
Net income	$	11,488		$	7,811
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,654			1,740
Net premium amortization of investment securities:
Available for sale		1,199			1,694
Held to maturity		27			27
Provision for loan losses		(134	)		81
Deferred income tax (benefit) expense		(16	)		18
Noncash employee stock purchase plan expense		16			16
Noncash director fee compensation		36			46
Mortgage loans originated for sale		(5,475	)		(12,088	)
Proceeds from sale of mortgage loans		5,604			13,793
Gain on sale of mortgage loans, net		(199	)		(343	)
(Gain) loss on disposal of premises and equipment, net		(19	)		50
Net loss on sale and write downs of other real estate		571			278
Net loss on sales of available for sale investment securities		-			10
Net realized gain on sales of equity investment securities		(808	)		-
Unrealized loss on equity investment securities		79			-
Curtailment gain on postretirement benefits plan liability		-			(351	)
Increase in cash surrender value of company-owned life insurance		(426	)		(437	)
Death benefits in excess of cash surrender value on company-owned life insurance		(67	)		-
Decrease in accrued interest receivable		138			312
Decrease in other assets		1,360			1,816
Increase (decrease) in accrued interest payable		135			(42	)
Decrease in other liabilities		(664	)		(1,049	)
Net cash provided by operating activities		14,499			13,382
Cash Flows from Investing Activities
Proceeds from maturities and calls investment securities:
Available for sale		37,833			60,210
Held to maturity		500			-
Purchase of available for sale investment securities		(2,621	)		(41,274	)
Purchase of equity investment securities		(717	)		(12	)
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		(29,921	)		(16,711	)
Purchase of loans held for investment		(1,206	)		(1,804	)
Principal collected on purchased loans		2,681			1,329
Proceeds from death benefits of company-owned life insurance		366			-
Purchase of premises and equipment		(2,072	)		(1,462	)
Proceeds from sale of other real estate		929			1,761
Proceeds from disposal of premises and equipment		35			-
Net cash provided by (used in) investing activities		6,046			(1,533	)
Cash Flows from Financing Activities
Net decrease in deposits		(45,116	)		(17,069	)
Net decrease in short-term securities sold under agreements to repurchase		(468	)		(3,548	)
Proceeds from long-term securities sold under agreements to repurchase		2			5
Repayments of long-term securities sold under agreements to repurchase		(254	)		(258	)
Repayments of Federal Home Loan Bank advances		(87	)		(5,084	)
Dividends paid, common stock		(1,879	)		(1,502	)
Shares issued under employee stock purchase plan		95			87
Net cash used in financing activities		(47,707	)		(27,369	)
Net decrease in cash and cash equivalents		(27,162	)		(15,520	)
Cash and cash equivalents at beginning of year		120,408			113,534
Cash and cash equivalents at end of period	$	93,246		$	98,014

Unaudited Condensed Consolidated Statements of Cash Flows—(Continued)

Six months ended June 30, (In thousands)	2018		2017
Supplemental Disclosures
Cash paid during the period for:
Interest	$	1,718	$	1,839
Income Taxes		2,150		1,835
Transfers from loans to other real estate		-		339
Sale and financing of other real estate		84		2,792
Cash dividends payable, common		940		751

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 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”).

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, 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, 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 for the six-month period comparison includes a $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 June 30,	2018									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	$	(7,668	)	$	(57	)	$	(7,725	)	$	(2,409	)	$	14	$	(2,395	)
Other comprehensive (loss) income before reclassifications		(1,112	)		-			(1,112	)		1,329			8		1,337
Amounts reclassified from accumulated other comprehensive income		-			(1	)		(1	)		1			1		2
Net current-period other comprehensive (loss) income		(1,112	)		(1	)		(1,113	)		1,330			9		1,339
Ending balance	$	(8,780	)	$	(58	)	$	(8,838	)	$	(1,079	)	$	23	$	(1,056	)

Six Months Ended June 30,	2018									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	$	(3,510	)	$	(56	)	$	(3,566	)	$	(3,363	)	$	(45	)	$	(3,408	)
Other comprehensive (loss) income before reclassifications		(5,214	)		-			(5,214	)		2,277			17			2,294
Amounts reclassified from accumulated other comprehensive income		-			(2	)		(2	)		7			51			58
Net current-period other comprehensive (loss) income		(5,214	)		(2	)		(5,216	)		2,284			68			2,352
Adoption of Accounting Standards Update 2016-01		(56	)		-			(56	)		-			-			-
Ending balance	$	(8,780	)	$	(58	)	$	(8,838	)	$	(1,079	)	$	23		$	(1,056	)

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
	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands)	2018		2017			2018		2017
Unrealized gains (losses) on available for sale investment securities	$	-	$	(1	)	$	-	$	(10	)	Net loss on sales of available for sale investment securities
		-		-			-		3		Income tax expense
	$	-	$	(1	)	$	-	$	(7	)	Net of tax

Amortization related to postretirement benefits
Prior service costs	$	-	$	-		$	-	$	(75	)	Salaries and employee benefits
Actuarial gains (losses)		1		(2	)		2		(3	)	Other noninterest expense
		1		(2	)		2		(78	)	Total before tax
		-		1			-		27		Income tax expense
	$	1	$	(1	)	$	2	$	(51	)	Net of tax

Total reclassifications for the period	$	1	$	(2	)	$	2	$	(58	)	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, 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.

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

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 were 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 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 and is in the process of reviewing its leases and assessing 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 has identified an independent third party for validation of the impending changes to the Company’s 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.

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. Revenue From Contracts With Customers

The Company records revenue from contracts with customers in accordance with ASC Topic 606, “Revenue from Contracts with Customers.” ASC Topic 606 requires an entity to recognize revenue to depict the transfer of goods 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 the Company’s revenue from contracts with customers in the scope of ASC Topic 606 is recognized within noninterest income. Net gains or losses on the sale of 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 and six months ended June 30, 2018 and 2017. Amounts in the table are within the scope of ASC Topic 606 unless otherwise noted.

	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands)	2018		2017			2018		2017
Service charges and fees on deposits
Overdraft fees	$	968	$	969		$	1,924	$	1,896
Dormant account fees		574		659			1,167		1,324
Service charges on checking and savings accounts		304		328			618		638
Other		51		56			100		112
Allotment processing fees		677		651			1,397		1,366
Other service charges, commissions, and fees
Interchange fees		917		808			1,744		1,589
Other¹		573		520			1,118		1,111
Trust income		695		626			1,484		1,330
Net loss on sales of available for sale investment securities²		-		(1	)		-		(10	)
Net gain on sales of equity investment securities²		808		-			808		-
Gain on sale of mortgage loans, net²		104		189			199		343
Income from company-owned life insurance²		213		221			506		456
Other		89		76			109		198
Total noninterest income	$	5,973	$	5,102		$	11,174	$	10,353

¹Includes fees totaling $147 thousand and $139 thousand for the three months ended June 30, 2018 and 2017, respectively, and $289 thousand and $272 thousand for the six months ended June 30, 2018 and 2017, respectively, which are primarily servicing fees on loans originated for sale on the secondary market and are not 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 $33 thousand and $43 thousand for the three months ended June 30, 2018 and 2017, respectively, and a net loss of $76 thousand and a net gain of $72 thousand for the six months ended June 30, 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 June 30, 2018 and 2017.

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

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share data)	2018		2017		2018		2017

Net income, basic and diluted	$	5,847	$	4,482	$	11,488	$	7,811


Average common shares issued and outstanding, basic and diluted		7,520		7,512		7,519		7,511

Net income per common share, basic and diluted	$	.78	$	.60	$	1.53	$	1.04

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 $38.0 million and $36.7 million at June 30, 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 June 30, 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 were 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 and six months ended June 30, 2018, the Company recognized unrealized losses of $24 thousand and $79 thousand, respectively, on the equity securities held at June 30, 2018, which was recorded in other noninterest income. Net realized gain on sales of equity securities during 2018 consist of a realized gain of $808 thousand related to the sale of 7,672 shares of Visa Class B stock held at a no cost basis and no realized losses. The Company holds no additional shares of the VISA Class B stock.

Debt 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 Company’s debt securities at June 30, 2018 and December 31, 2017.

June 30, 2018 (In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available For Sale
Obligations of U.S. government-sponsored entities	$	34,676	$	5	$	857	$	33,824
Obligations of states and political subdivisions		105,616		263		2,450		103,429
Mortgage-backed securities – residential		178,426		242		5,830		172,838
Mortgage-backed securities – commercial		49,387		-		2,478		46,909
Asset-backed securities		15,493		32		26		15,499
Corporate debt securities		7,495		22		37		7,480
Total securities – available for sale	$	391,093	$	564	$	11,678	$	379,979
Held To Maturity
Obligations of states and political subdivisions	$	2,837	$	31	$	-	$	2,868

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	$	43,601	$	44	$	437	$	43,208
Obligations of states and political subdivisions		114,960		562		1,273		114,249
Mortgage-backed securities – residential		195,605		523		2,735		193,393
Mortgage-backed securities – commercial		50,518		42		1,208		49,352
Asset-backed securities		15,569		9		4		15,574
Corporate debt securities		7,578		1		37		7,542
Total securities – available for sale	$	427,831	$	1,181	$	5,694	$	423,318
Held To Maturity
Obligations of states and political subdivisions	$	3,364	$	114	$	-	$	3,478

Debt securities with a carrying value of $207 million and $214 million at June 30, 2018 and December 31, 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 June 30, 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. 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
June 30, 2018 (In thousands)	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	19,847	$	19,828	$	-	$	-
Due after one year through five years		53,443		52,717		-		-
Due after five years through ten years		51,363		49,493		732		748
Due after ten years		38,627		38,194		2,105		2,120
Mortgage-backed securities		227,813		219,747		-		-
Total	$	391,093	$	379,979	$	2,837	$	2,868

Gross realized gains and losses on the sale of available for sale debt securities are presented in the table below for the periods indicated.

	Three Months Ended					Six Months Ended
	June 30,					June 30,
(In thousands)	2018		2017			2018		2017

Gross realized gains	$	-	$	-		$	-	$	-
Gross realized losses		-		1			-		10
Net realized loss	$	-	$	(1	)	$	-	$	(10	)

Debt securities with unrealized losses at June 30, 2018 and December 31, 2017 not recognized in income are presented in the tables below. The tables segregate 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
June 30, 2018 (In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored entities	$	10,175	$	282	$	22,987	$	575	$	33,162	$	857
Obligations of states and political subdivisions		50,261		1,051		33,147		1,399		83,408		2,450
Mortgage-backed securities – residential		74,287		2,010		90,087		3,820		164,374		5,830
Mortgage-backed securities – commercial		14,509		611		32,400		1,867		46,909		2,478
Asset-backed securities		3,729		26		-		-		3,729		26
Corporate debt securities		3,102		34		248		3		3,350		37
Total	$	156,063	$	4,014	$	178,869	$	7,664	$	334,932	$	11,678

	Less than 12 Months				12 Months or More				Total
December 31, 2017 (In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored entities	$	11,544	$	43	$	25,298	$	394	$	36,842	$	437
Obligations of states and political subdivisions		40,402		413		33,965		860		74,367		1,273
Mortgage-backed securities – residential		77,312		481		99,986		2,254		177,298		2,735
Mortgage-backed securities – commercial		7,758		62		34,139		1,146		41,897		1,208
Asset-backed securities		1,166		4		-		-		1,166		4
Corporate debt securities		7,251		36		200		1		7,451		37
Total	$	145,433	$	1,039	$	193,588	$	4,655	$	339,021	$	5,694

Unrealized losses included in the tables above have not been recognized in income since they have been identified as temporary. The Company evaluates 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 debt securities portfolio to changes in market interest rates and volatility. Debt securities with unrealized losses at June 30, 2018 and December 31, 2017 are performing according to their contractual terms, and the Company does not expect to incur a loss on these securities unless they are sold prior to maturity. The Company does not have the intent to sell these securities nor does it believe it is likely that it will be required to sell these securities prior to their anticipated recovery. The Company does not consider any of the securities to be impaired due to reasons of credit quality or other factors.

8. Loans and Allowance for Loan Losses

Major classifications of loans outstanding are summarized as follows:

(In thousands)	June 30, 2018		December 31, 2017

Real Estate
Real estate mortgage – construction and land development	$	128,183	$	129,181
Real estate mortgage – residential		350,778		355,304
Real estate mortgage – farmland and other commercial enterprises		457,014		432,321
Commercial
Commercial and industrial		87,224		63,417
States and political subdivisions		17,686		27,209
Other		16,068		19,916
Consumer
Secured		4,215		4,853
Unsecured		3,047		3,062
Total loans		1,064,215		1,035,263
Less unearned income		-		-
Total loans, net of unearned income	$	1,064,215	$	1,035,263

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 June 30, 2018
Balance, beginning of period	$	8,601		$	836		$	311		$	9,748
Provision for loan losses		(148	)		296			(21	)		127
Recoveries		264			17			13			294
Loans charged off		(88	)		(65	)		(15	)		(168	)
Balance, end of period	$	8,629		$	1,084		$	288		$	10,001

Six months ended June 30, 2018
Balance, beginning of period	$	8,509		$	951		$	323		$	9,783
Provision for loan losses		(339	)		249			(44	)		(134	)
Recoveries		605			37			40			682
Loans charged off		(146	)		(153	)		(31	)		(330	)
Balance, end of period	$	8,629		$	1,084		$	288		$	10,001

(In thousands)	Real Estate			Commercial			Consumer			Total
Three months ended June 30, 2017
Balance, beginning of period	$	8,184		$	864		$	459		$	9,507
Provision for loan losses		(546	)		135			(88	)		(499	)
Recoveries		398			17			8			423
Loans charged off		(75	)		(116	)		(18	)		(209	)
Balance, end of period	$	7,961		$	900		$	361		$	9,222

Six months ended June 30, 2017
Balance, beginning of period	$	8,205		$	854		$	285		$	9,344
Provision for loan losses		(150	)		128			103			81
Recoveries		415			66			19			500
Loans charged off		(509	)		(148	)		(46	)		(703	)
Balance, end of period	$	7,961		$	900		$	361		$	9,222

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

June 30, 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	$	3,397	$	1,428	$	1,594	$	3,022	$	323
Real estate mortgage – residential		9,952		3,079		6,871		9,950		2,018
Real estate mortgage – farmland and other commercial enterprises		8,614		2,147		6,299		8,446		295
Commercial
Commercial and industrial		383		-		383		383		211
Other		3		-		3		3		3
Consumer
Unsecured		285		-		285		285		192
Total	$	22,634	$	6,654	$	15,435	$	22,089	$	3,042

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		-		448		448		270
Consumer
Unsecured		312		-		312		312		218
Total	$	23,685	$	7,182	$	15,959	$	23,141	$	3,182

Three Months Ended June 30,	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	$	3,463	$	44	$	44	$	4,216	$	58	$	58
Real estate mortgage – residential		10,122		137		135		11,080		136		134
Real estate mortgage – farmland and other commercial enterprises		8,835		97		95		24,108		296		296
Commercial
Commercial and industrial		389		5		5		409		4		4
Other		4		-		-		26		-		-
Consumer
Unsecured		306		5		5		325		4		4
Total	$	23,119	$	288	$	284	$	40,164	$	498	$	496

Six Months Ended June 30,	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	$	3,539	$	90	$	88	$	5,226	$	134	$	133
Real estate mortgage – residential		10,232		273		267		10,395		254		251
Real estate mortgage – farmland and other commercial enterprises		8,861		197		192		24,098		598		592
Commercial
Commercial and industrial		391		10		10		454		11		11
Other		2		-		-		13		-		-
Consumer
Unsecured		313		9		9		330		9		8
Total	$	23,338	$	579	$	566	$	40,516	$	1,006	$	995

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 June 30, 2018 and December 31, 2017.

June 30, 2018 (In thousands)	Real Estate		Commercial		Consumer		Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2,636	$	214	$	192	$	3,042
Collectively evaluated for impairment		5,993		870		96		6,959
Total ending allowance balance	$	8,629	$	1,084	$	288	$	10,001

Loans
Loans individually evaluated for impairment	$	21,418	$	386	$	285	$	22,089
Loans collectively evaluated for impairment		914,557		120,592		6,977		1,042,126
Total ending loan balance, net of unearned income	$	935,975	$	120,978	$	7,262	$	1,064,215

December 31, 2017 (In thousands)	Real Estate		Commercial		Consumer		Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2,694	$	270	$	218	$	3,182
Collectively evaluated for impairment		5,815		681		105		6,601
Total ending allowance balance	$	8,509	$	951	$	323	$	9,783

Loans
Loans individually evaluated for impairment	$	22,381	$	448	$	312	$	23,141
Loans collectively evaluated for impairment		894,425		110,094		7,603		1,012,122
Total ending loan balance, net of unearned income	$	916,806	$	110,542	$	7,915	$	1,035,263

The following tables present the recorded investment in nonperforming loans by class of loans as of June 30, 2018 and December 31, 2017.

June 30, 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	$	149	$	1,595	$	-
Real estate mortgage – residential		1,441		5,618		-
Real estate mortgage – farmland and other commercial enterprises		2,355		3,660		-
Commercial
Commercial and industrial		11		367		-
Consumer
Unsecured		146		125		-
Total	$	4,102	$	11,365	$	-

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		53		370		-
Consumer
Unsecured		168		128		-
Total	$	3,887	$	11,482	$	-

The Company has allocated $1.7 million and $1.8 million of specific reserves as of June 30, 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 June 30, 2018 and December 31, 2017. The Company had no credits during the first six months of 2018 or 2017 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.

June 30, 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	$	87	$	102	$	128,081	$	128,183
Real estate mortgage – residential		630		240		870		349,908		350,778
Real estate mortgage – farmland and other commercial enterprises		496		1,621		2,117		454,897		457,014
Commercial
Commercial and industrial		-		-		-		87,224		87,224
States and political subdivisions		-		-		-		17,686		17,686
Other		-		-		-		16,068		16,068
Consumer
Secured		-		-		-		4,215		4,215
Unsecured		6		-		6		3,041		3,047
Total	$	1,147	$	1,948	$	3,095	$	1,061,120	$	1,064,215

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	$	15	$	87	$	102	$	129,079	$	129,181
Real estate mortgage – residential		1,160		538		1,698		353,606		355,304
Real estate mortgage – farmland and other commercial enterprises		966		948		1,914		430,407		432,321
Commercial
Commercial and industrial		62		-		62		63,355		63,417
States and political subdivisions		-		-		-		27,209		27,209
Other		21		-		21		19,895		19,916
Consumer
Secured		-		-		-		4,853		4,853
Unsecured		9		-		9		3,053		3,062
Total	$	2,233	$	1,573	$	3,806	$	1,031,457	$	1,035,263

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
June 30, 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	$	124,342	$	326,533	$	440,095	$	86,390	$	17,686	$	16,051
Special Mention		668		8,975		6,216		448		-		14
Substandard		3,173		15,270		10,703		386		-		3
Doubtful		-		-		-		-		-		-
Total	$	128,183	$	350,778	$	457,014	$	87,224	$	17,686	$	16,068

	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		-		18
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 June 30, 2018 and December 31, 2017.

	June 30, 2018				December 31, 2017
	Consumer				Consumer
(In thousands)	Secured		Unsecured		Secured		Unsecured
Credit risk profile based on payment activity
Performing	$	4,215	$	2,776	$	4,853	$	2,766
Nonperforming		-		271		-		296
Total	$	4,215	$	3,047	$	4,853	$	3,062

9. Other Real Estate Owned

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

(In thousands)	June 30, 2018		December 31, 2017
Construction and land development	$	3,050	$	4,433
Residential real estate		-		157
Farmland and other commercial enterprises		981		899
Total	$	4,031	$	5,489

OREO activity for the six months ended June 30, 2018 and 2017 was as follows:

Six months ended June 30, (In thousands)	2018			2017
Beginning balance	$	5,489		$	10,673
Transfers from loans and other increases		126			345
Proceeds from sales		(1,013	)		(4,553	)
(Loss) gain on sales, net		(76	)		72
Write downs and other decreases, net		(495	)		(350	)
Ending balance	$	4,031		$	6,187

At June 30, 2018, the Company had a total of $601 thousand of loans secured by residential real estate mortgages that were in the process of foreclosure.

10. Securities Sold under Agreements to Repurchase

Securities sold under agreements to repurchase represent transactions where the Company sells

FARMERS CAPITAL BANK CORP 10-Q