FARMERS CAPITAL BANK CORP - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - FARMERS CAPITAL BANK CORP	Financial_Report.xls
EX-32 - EXHIBIT 32 - FARMERS CAPITAL BANK CORP	ex32.htm
EX-31 - EXHIBIT 31.2 - FARMERS CAPITAL BANK CORP	ex31-2.htm
EX-31 - EXHIBIT 31.1 - FARMERS CAPITAL BANK CORP	ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT

Pursuant to Section 13 OR 15(d) of

The Securities Exchange Act of 1934

For the quarterly period ended September 30, 2014

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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 ☐

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

7,487,539 shares outstanding at November 6, 2014

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3. Quantitative and Qualitative Disclosures About Market Risk	53

Item 4. Controls and Procedures	53

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	54

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 5. Other Information	54

Item 6. Exhibits	55

SIGNATURES	57

PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Unaudited Condensed Consolidated Balance Sheets

	September 30,			December 31,
(Dollars in thousands, except share data)	2014			2013
Assets
Cash and cash equivalents:
Cash and due from banks	$	18,946		$	22,925
Interest bearing deposits in other banks		50,861			41,749
Federal funds sold and securities purchased under agreements to resell		1,036			3,579
Total cash and cash equivalents		70,843			68,253
Investment securities:
Available for sale, amortized cost of $613,004 (2014) and $618,395 (2013)		618,375			612,820
Held to maturity, fair value of $3,977 (2014) and $827 (2013)		3,801			765
Total investment securities		622,176			613,585
Loans, net of unearned income		953,832			999,883
Allowance for loan losses		(15,692	)		(20,577	)
Loans, net		938,140			979,306
Premises and equipment, net		35,313			36,273
Company-owned life insurance		29,132			28,899
Intangible assets, net		550			854
Other real estate owned		34,766			37,826
Other assets		38,951			44,559
Total assets	$	1,769,871		$	1,809,555
Liabilities
Deposits:
Noninterest bearing	$	283,582		$	277,294
Interest bearing		1,081,576			1,132,921
Total deposits		1,365,158			1,410,215
Federal funds purchased and other short-term borrowings		32,807			29,123
Securities sold under agreements to repurchase and other long-term borrowings		119,759			127,880
Subordinated notes payable to unconsolidated trusts		48,970			48,970
Dividends payable		225			188
Other liabilities		24,765			23,124
Total liabilities		1,591,684			1,639,500
Shareholders’ Equity
Preferred stock, no par value 1,000,000 shares authorized; 20,000 and 30,000 Series A shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively; Liquidation preference of $20,000 at September 30, 2014		20,000			29,988
Common stock, par value $.125 per share 14,608,000 shares authorized; 7,486,756 and 7,478,706 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively		936			935
Capital surplus		51,287			51,102
Retained earnings		101,993			91,242
Accumulated other comprehensive income (loss)		3,971			(3,212	)
Total shareholders’ equity		178,187			170,055
Total liabilities and shareholders’ equity	$	1,769,871		$	1,809,555

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)	2014			2013			2014			2013
Interest Income
Interest and fees on loans	$	12,441		$	13,313		$	37,759		$	40,335
Interest on investment securities:
Taxable		2,857			2,578			8,917			7,599
Nontaxable		644			629			1,905			1,885
Interest on deposits in other banks		32			42			96			114
Interest on federal funds sold and securities purchased under agreements to resell		2			1			4			3
Total interest income		15,976			16,563			48,681			49,936
Interest Expense
Interest on deposits		1,030			1,423			3,337			4,610
Interest on federal funds purchased and other short-term borrowings		12			21			42			60
Interest on securities sold under agreements to repurchase and other long-term borrowings		1,259			1,292			3,802			3,837
Interest on subordinated notes payable to unconsolidated trusts		212			217			631			650
Total interest expense		2,513			2,953			7,812			9,157
Net interest income		13,463			13,610			40,869			40,779
Provision for loan losses		(1,536	)		(586	)		(2,792	)		(1,580	)
Net interest income after provision for loan losses		14,999			14,196			43,661			42,359
Noninterest Income
Service charges and fees on deposits		1,993			2,116			5,900			6,094
Allotment processing fees		1,276			1,217			3,795			3,724
Other service charges, commissions, and fees		1,316			1,282			3,950			3,738
Trust income		812			497			1,880			1,451
Investment securities gains (losses), net		8			2			(67	)		(58	)
Gains on sale of mortgage loans, net		123			236			343			867
Income from company-owned life insurance		511			244			990			716
Other		103			84			715			(2	)
Total noninterest income		6,142			5,678			17,506			16,530
Noninterest Expense
Salaries and employee benefits		7,530			7,229			22,223			21,784
Occupancy expenses, net		1,229			1,247			3,720			3,578
Equipment expenses		637			619			1,824			1,760
Data processing and communication expenses		979			929			2,953			2,972
Bank franchise tax		585			603			1,807			1,803
Amortization of intangibles		101			135			303			405
Deposit insurance expense		426			559			1,327			1,698
Other real estate expenses, net		1,974			2,404			3,976			4,781
Legal expenses		293			209			715			575
Other		1,997			2,050			5,656			5,859
Total noninterest expense		15,751			15,984			44,504			45,215
Income before income taxes		5,390			3,890			16,663			13,674
Income tax expense		1,283			855			4,362			3,300
Net income		4,107			3,035			12,301			10,374
Less preferred stock dividends and discount accretion		450			489			1,550			1,461
Net income available to common shareholders	$	3,657		$	2,546		$	10,751		$	8,913
Per Common Share
Net income - basic and diluted	$	.49		$	.34		$	1.44		$	1.19
Cash dividends declared	N/A			N/A			N/A			N/A
Weighted Average Common Shares Outstanding
Basic and diluted		7,485			7,475			7,482			7,473

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)	2014			2013			2014		2013
Net Income	$	4,107		$	3,035		$	12,301	$	10,374
Other comprehensive (loss) income:
Unrealized holding (loss) gain on available for sale securities arising during the period on securities held at end of period, net of tax of $(820), $912, $3,796 and $(5,110), respectively		(1,522	)		1,694			7,049		(9,490	)

Reclassification adjustment for prior period unrealized (gain) loss previously reported in other comprehensive income recognized during current period, net of tax of $4, $1, $(36) and $20, respectively		(7	)		(1	)		66		(38	)

Change in unfunded portion of postretirement benefit obligation, net of tax of $12, $25, $37 and $71, respectively		22			43			68		131
Other comprehensive (loss) income		(1,507	)		1,736			7,183		(9,397	)
Comprehensive income	$	2,600		$	4,771		$	19,484	$	977

See accompanying notes to unaudited condensed consolidated financial statements.

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands, except per share data)													Accumulated
													Other			Total
Nine months ended	Preferred			Common Stock				Capital		Retained			Comprehensive			Shareholders’
September 30, 2014 and 2013	Stock			Shares		Amount		Surplus		Earnings			Income (Loss)			Equity
Balance at January 1, 2014	$	29,988			7,479	$	935	$	51,102	$	91,242		$	(3,212	)	$	170,055
Net income		-			-		-		-		12,301			-			12,301
Other comprehensive income		-			-		-		-		-			7,183			7,183
Cash dividends declared – preferred, $62.50 per share		-			-		-		-		(1,538	)		-			(1,538	)
Preferred stock discount accretion		12			-		-		-		(12	)		-			-
Redemption of preferred stock		(10,000	)		-		-		-		-			-			(10,000	)
Shares issued under director compensation plan		-			3		-		64		-			-			64
Shares issued pursuant to employee stock purchase plan		-			5		1		93		-			-			94
Expense related to employee stock purchase plan		-			-		-		28		-			-			28
Balance at September 30, 2014	$	20,000			7,487	$	936	$	51,287	$	101,993		$	3,971		$	178,187



Balance at January 1, 2013	$	29,537			7,470	$	934	$	50,934	$	79,747		$	6,869		$	168,021
Net income		-			-		-		-		10,374			-			10,374
Other comprehensive loss		-			-		-		-		-			(9,397	)		(9,397	)
Cash dividends declared – preferred, $37.50 per share		-			-		-		-		(1,125	)		-			(1,125	)
Preferred stock discount accretion		336			-		-		-		(336	)		-			-
Shares issued pursuant to employee stock purchase plan		-			7		1		98		-			-			99
Expense related to employee stock purchase plan		-			-		-		28		-			-			28
Balance at September 30, 2013	$	29,873			7,477	$	935	$	51,060	$	88,660		$	(2,528	)	$	168,000

See accompanying notes to unaudited condensed consolidated financial statements.

Unaudited Condensed Consolidated Statements of Cash Flows

Nine months ended September 30, (In thousands)	2014			2013
Cash Flows from Operating Activities
Net income	$	12,301		$	10,374
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,033			3,013
Net premium amortization of investment securities:
Available for sale		2,889			4,068
Held to maturity		29			-
Provision for loan losses		(2,792	)		(1,580	)
Deferred income tax expense		1,145			142
Noncash employee stock purchase plan expense		28			28
Noncash director fee compensation		64			-
Mortgage loans originated for sale		(19,289	)		(42,867	)
Proceeds from sale of mortgage loans		23,177			42,948
Gain on sale of mortgage loans, net		(343	)		(867	)
(Gain) loss on disposal and write downs of premises and equipment, net		(5	)		4
Net loss on sale and write downs of other real estate		2,622			3,820
Net loss on sale of available for sale investment securities		67			58
Increase in cash surrender value of company-owned life insurance		(694	)		(689	)
Death benefits in excess of cash surrender value on company-owned life insurance		(276	)		-
Decrease in accrued interest receivable		281			41
Decrease (increase) in other assets		231			(3	)
Decrease in accrued interest payable		(123	)		(209	)
Increase in other liabilities		1,869			4,208
Net cash provided by operating activities		24,214			22,489
Cash Flows from Investing Activities
Proceeds from maturities and calls of available for sale investment securities		68,702			102,757
Proceeds from sale of available for sale investment securities		12,866			948
Purchase of investment securities:
Available for sale		(79,133	)		(135,435	)
Held to maturity		(3,065	)		-
Proceeds from sale of restricted stock investments, net		148			-
Principal collected (disbursed) on loans originated for investment, net		34,554			(6,764	)
Purchase of premises and equipment		(1,620	)		(2,970	)
Proceeds from sale of other real estate		6,819			8,604
Proceeds from disposals of premises and equipment		5			31
Net cash provided by (used in) investing activities		39,276			(32,829	)
Cash Flows from Financing Activities
Net decrease in deposits		(45,057	)		(7,325	)
Net increase in federal funds purchased and other short-term borrowings		3,684			8,802
Proceeds from securities sold under agreements to repurchase and other long-term borrowings		7			-
Repayments of securities sold under agreements to repurchase and other long-term borrowings		(8,128	)		(2,132	)
Redemption of preferred stock		(10,000	)		-
Dividends paid, preferred stock		(1,500	)		(1,125	)
Shares issued under employee stock purchase plan		94			99
Net cash used in financing activities		(60,900	)		(1,681	)
Net increase (decrease) in cash and cash equivalents		2,590			(12,021	)
Cash and cash equivalents at beginning of year		68,253			95,855
Cash and cash equivalents at end of period	$	70,843		$	83,834
Supplemental Disclosures
Cash paid during the period for:
Interest	$	7,935		$	9,366
Income taxes		1,850			4,400
Transfers from loans to other real estate		7,630			5,589
Sale and financing of other real estate		1,771			4,091
Cash dividends payable, preferred		225			188

See accompanying notes to unaudited condensed consolidated financial statements.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Basis of Presentation and Nature of Operations

The condensed consolidated financial statements include the accounts of Farmers Capital Bank Corporation (the “Company” or “Parent Company”), a bank holding company, and its bank and nonbank subsidiaries. Bank subsidiaries include Farmers Bank & Capital Trust Company (“Farmers Bank”) in Frankfort, KY, United Bank & Trust Company (“United Bank”) in Versailles, KY, First Citizens Bank (“First Citizens”) in Elizabethtown, KY, and Citizens Bank of Northern Kentucky, Inc. (“Citizens Northern”) in Newport, KY.

Farmers Bank’s significant subsidiaries include EG Properties, Inc., Leasing One Corporation (“Leasing One”), and Farmers Capital Insurance Corporation (“Farmers Insurance”). EG Properties, Inc. is involved in real estate management and liquidation for certain repossessed properties of Farmers Bank. Leasing One is a commercial leasing company in Frankfort, KY, and Farmers Insurance is an insurance agency in Frankfort, KY. United Bank has one wholly-owned subsidiary, EGT Properties, Inc. EGT Properties, Inc. is involved in real estate management and liquidation for certain repossessed properties of United Bank. First Citizens has one wholly-owned subsidiary, HBJ Properties, LLC. HBJ Properties, LLC is involved in real estate management and liquidation for certain repossessed properties of First Citizens. Citizens Northern has one wholly-owned subsidiary, ENKY Properties, Inc. ENKY Properties, Inc. is involved in real estate management and liquidation for certain repossessed properties of Citizens Northern.

The Company has three active nonbank subsidiaries, FCB Services, Inc. (“FCB Services”), FFKT Insurance Services, Inc. (“FFKT Insurance”), and EKT Properties, Inc. (“EKT”). FCB Services is a data processing subsidiary located in Frankfort, KY that provides services to the Company’s banks as well as unaffiliated entities. FFKT Insurance is a captive property and casualty insurance company insuring primarily deductible exposures and uncovered liability related to properties of the Company. EKT was formed to manage and liquidate certain real estate properties repossessed by the Company. The Company has three subsidiaries organized as Delaware statutory trusts that are not consolidated into its financial statements. These trusts were formed for the purpose of issuing trust preferred securities. All significant intercompany transactions and balances are eliminated in consolidation.

The Company provides financial services at its 36 locations in 23 communities throughout Central and Northern Kentucky to individual, business, agriculture, government, and educational customers. Its primary deposit products are checking, savings, and term certificate accounts. Its primary lending products are residential mortgage, commercial lending, and consumer installment loans. Substantially all loans and leases are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans and leases are expected to be repaid from cash flow from operations of businesses. Other services include, but are not limited to, cash management services, issuing letters of credit, safe deposit box rental, and providing funds transfer services. Other financial instruments, which potentially represent concentrations of credit risk, include deposit accounts in other financial institutions and federal funds sold.

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

The consolidated balance sheet as of December 31, 2013 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, 2013 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.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

2. Reclassifications

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

3. Accumulated Other Comprehensive Income

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


Three months ended September 30,	2014								2013
(In thousands)	Unrealized Gains and Losses on Available for Sale Investment Securities			Postretirement Benefit Obligation		Total			Unrealized Gains and Losses on Available for Sale Investment Securities			Postretirement Benefit Obligation			Total
Beginning balance	$	5,021		$	457	$	5,478		$	(1,810	)	$	(2,454	)	$	(4,264	)
Other comprehensive (loss) income before reclassifications		(1,522	)		-		(1,522	)		1,694			-			1,694
Amounts reclassified from accumulated other comprehensive income		(7	)		22		15			(1	)		43			42
Net current-period other comprehensive (loss) income		(1,529	)		22		(1,507	)		1,693			43			1,736
Ending balance	$	3,492		$	479	$	3,971		$	(117	)	$	(2,411	)	$	(2,528	)


Nine months ended September 30,	2014								2013
(In thousands)	Unrealized Gains and Losses on Available for Sale Investment Securities			Postretirement Benefit Obligation		Total			Unrealized Gains and Losses on Available for Sale Investment Securities			Postretirement Benefit Obligation			Total
Beginning balance	$	(3,623	)	$	411	$	(3,212	)	$	9,411		$	(2,542	)	$	6,869
Other comprehensive income (loss) before reclassifications		7,049			-		7,049			(9,490	)		-			(9,490	)
Amounts reclassified from accumulated other comprehensive income		66			68		134			(38	)		131			93
Net current-period other comprehensive income (loss)		7,115			68		7,183			(9,528	)		131			(9,397	)
Ending balance	$	3,492		$	479	$	3,971		$	(117	)	$	(2,411	)	$	(2,528	)

The following table presents amounts reclassified out of accumulated other comprehensive income by component for the period 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 September 30,						Nine months ended September 30,
(In thousands)	2014			2013			2014			2013
Unrealized gains and losses on available for sale investment securities	$	11		$	2		$	(102	)	$	58		Investment securities gains (losses), net
		(4	)		(1	)		36			(20	)	Income tax expense
	$	7		$	1		$	(66	)	$	38		Net of tax

Amortization related to postretirement benefits
Prior service costs	$	(51	)	$	(65	)	$	(155	)	$	(193	)	Salaries and employee benefits
Actuarial gains (losses)		17			(3	)		50			(9	)	Salaries and employee benefits
		(34	)		(68	)		(105	)		(202	)	Total before tax
		12			25			37			71		Income tax benefit
	$	(22	)	$	(43	)	$	(68	)	$	(131	)	Net of tax

Total reclassifications for the period	$	(15	)	$	(42	)	$	(134	)	$	(93	)	Net of tax

4. Accounting Policy

Loans and Interest Income

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

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


Portfolio Segment	Class

Real estate loans	Real estate mortgage - construction and land development Real estate mortgage - residential Real estate mortgage - farmland and other commercial enterprises
Commercial loans	Commercial and industrial Depository institutions Agriculture production and other loans to farmers States and political subdivisions Leases 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 its loan grading process or as a result of regulatory examination. The Company’s charge-off policy for impaired loans does not differ from the charge-off policy for loans outside the definition of 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 Company’s risk-rated methodology includes segregating non-impaired watch list and past due loans from the general portfolio and allocating a loss percentage to these loans depending on their status. For example, watch list loans, which may be identified by the internal loan review risk-rating process or by regulatory examiner classification, are assigned a certain loss percentage while loans past due 30 days or more are assigned a different loss percentage. Each of these percentages considers past experience as well as current factors. The remainder of the general loan portfolio is segregated into portfolio segments having similar risk characteristics identified as follows: real estate loans, commercial loans, and consumer loans. Each of these portfolio segments is assigned a loss percentage based on their respective sixteen quarter rolling historical loss rates, adjusted for qualitative risk factors.

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

●

Delinquency trends

●

Trends in net charge-offs

●

Trends in loan volume

●

Lending philosophy risk

●

Management experience risk

●

Concentration of credit risk

●

Economic conditions risk

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

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

Recently Issued Accounting Standards

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the requirements for reporting discontinued operations and seeks to enhance the FASB and International Accounting Standards Board’s (“IASB”) convergence project regarding such reporting requirements. A discontinued operation may include a component of an entity, a group of components of an entity, a business or a non-profit activity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. This ASU, which is intended to reduce the frequency of disposals reported as discontinued operations, requires additional disclosures regarding discontinued operations. Those disclosures include among others, the requirement that an entity present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position.

For the Company, the guidance of ASU 2014-08 is effective prospectively for annual periods beginning on or after December 15, 2014, and interim periods within that year. The Company does not expect there to be a material impact on its consolidated financial position, results of operations, or cash flows upon adoption.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as part of a joint project with the IASB to clarify revenue-recognition principles and develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU No. 2014-09 is expected to remove inconsistencies and weaknesses in revenue requirements and improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The scope of the new ASU includes all contracts with customers to provide goods or services in the ordinary course of business, except the following contracts that are specifically excluded from the scope:

●

Lease contracts within the scope of ASC 840

●

Insurance contracts within the scope of ASC 944

●

Financial instruments and other contractual rights or obligations (e.g., receivables, debt and equity securities, derivatives)

●

Guarantees (other than product or service warranties) within the scope of ASC 460

●

Nonmonetary exchanges between entities in the same line of business to facilitate sales to customers other than the parties to the exchange

The primary principle of ASU 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. To achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation.

The amendments in this ASU are effective for the Company in annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. Entities should 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. If an entity elects the second method, then it should also provide the additional disclosures in reporting periods that include the date of initial application of (1) the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and (2) an explanation of the reasons for significant changes. The Company is evaluating the potential impact of ASU 2014-09 on its consolidated financial position, results of operations, and cash flows.

In June 2014, the FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860) - Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. This ASU amends guidance on the accounting for certain repurchase agreements. The new ASU (1) requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings. The accounting changes in this ASU are effective for the first interim or annual period beginning after December 15, 2014. In addition, the disclosure for certain transactions accounted for as a sale are effective for the first interim or annual period beginning on or after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. The Company does not expect there to be a material impact on its consolidated financial position, results of operations, or cash flows upon adoption.

In August 2014, the FASB issued ASU 2014-14, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force). The ASU requires that, upon foreclosure, a guaranteed mortgage loan be derecognized and a separate other receivable be recognized when specific criteria are met. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company does not expect there to be a material impact on its consolidated financial position, results of operations, or cash flows upon adoption.

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

5. Net Income Per Common Share

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

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

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share data)	2014		2013		2014		2013

Net income, basic and diluted	$	4,107	$	3,035	$	12,301	$	10,374
Less preferred stock dividends and discount accretion		450		489		1,550		1,461
Net income available to common shareholders, basic and diluted	$	3,657	$	2,546	$	10,751	$	8,913


Average common shares issued and outstanding, basic and diluted		7,485		7,475		7,482		7,473

Net income per common share, basic and diluted	$	.49	$	.34	$	1.44	$	1.19

Stock options for 18,049 and 22,049 shares of common stock were not included in the determination of diluted net income per common share for each period in 2014 and 2013, respectively, because they were antidilutive.

6. Investment Securities

The following tables summarize the amortized costs and estimated fair value of the securities portfolio at September 30, 2014 and December 31, 2013. The summary is divided into available for sale and held to maturity investment securities.


September 30, 2014 (In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available For Sale
Obligations of U.S. government-sponsored entities	$	99,069	$	241	$	1,436	$	97,874
Obligations of states and political subdivisions		133,097		2,936		443		135,590
Mortgage-backed securities – residential		372,455		7,002		2,636		376,821
Mortgage-backed securities – commercial		737		-		26		711
Corporate debt securities		6,728		34		303		6,459
Mutual funds and equity securities		918		9		7		920
Total securities – available for sale	$	613,004	$	10,222	$	4,851	$	618,375
Held To Maturity
Obligations of states and political subdivisions	$	3,801	$	176	$	-	$	3,977


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

The amortized cost and estimated fair value of the debt securities portfolio at September 30, 2014, by contractual maturity, are detailed below. The summary is divided into available for sale and held to maturity securities. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mutual funds and equity securities in the available for sale portfolio consist of investments attributed to the Company’s captive insurance subsidiary. These securities have no stated maturity and are not included in the maturity schedule that follows.

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


	Available For Sale				Held To Maturity
	Amortized		Estimated		Amortized		Estimated
September 30, 2014 (In thousands)	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	8,565	$	8,590	$	-	$	-
Due after one year through five years		128,067		128,821		-		-
Due after five years through ten years		85,755		86,111		765		855
Due after ten years		16,507		16,401		3,036		3,122
Mortgage-backed securities		373,192		377,532		-		-
Total	$	612,086	$	617,455	$	3,801	$	3,977

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2014		2013		2014			2013

Gross realized gains	$	8	$	3	$	186		$	6
Gross realized losses		-		1		253			64
Net realized gain (loss)	$	8	$	2	$	(67	)	$	(58	)

Investment securities with unrealized losses at September 30, 2014 and December 31, 2013 not recognized in income are presented in the tables below. The tables segregate investment securities that have been in a continuous unrealized loss position for less than twelve months from those that have been in a continuous unrealized loss position for twelve months or more. The tables also include the fair value of the related securities.


	Less than 12 Months				12 Months or More				Total
September 30, 2014 (In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored entities	$	8,609	$	32	$	66,628	$	1,404	$	75,237	$	1,436
Obligations of states and political subdivisions		11,006		20		25,704		423		36,710		443
Mortgage-backed securities – residential		72,689		315		96,817		2,321		169,506		2,636
Mortgage-backed securities – commercial		-		-		711		26		711		26
Corporate debt securities		52		1		5,574		302		5,626		303
Mutual funds and equity securities		39		1		100		6		139		7
Total	$	92,395	$	369	$	195,534	$	4,482	$	287,929	$	4,851


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

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

Corporate debt securities in the Company’s investment securities portfolio at September 30, 2014 include single-issuer trust preferred capital securities with an unrealized loss of $302 thousand and a carrying value of $5.6 million. These securities were issued by a national and global financial services firm and purchased by the Company during 2007. The securities are currently performing and continue to be rated as investment grade by major rating agencies. The issuer of the securities announced in the first quarter of 2014 an increase in per share common dividend payments and authorization of a common equity repurchase plan. The market price for these securities reached a twelve month high during the third quarter of 2014. The Company does not intend to sell these securities nor does the Company believe it is likely that it will be required to sell these securities prior to their anticipated recovery. The Company believes these securities are not impaired due to reasons of credit quality or other factors, but rather the unrealized loss is primarily attributed to continuing uncertainties in both international and domestic economies and market volatility. The Company believes that it will collect all amounts due according to the contractual terms of these securities and that the fair values of these securities will continue to recover as they approach their maturity dates.

The Company attributes the unrealized losses in other sectors of its investment securities portfolio to changes in market interest rates and volatility. Investment securities with unrealized losses at September 30, 2014 are performing according to their contractual terms, and the Company does not expect to incur a loss on these securities unless they are sold prior to maturity. The Company does not have the intent to sell these securities nor does it believe it is likely that it will be required to sell these securities prior to their anticipated recovery. The Company does not consider any of the securities to be impaired due to reasons of credit quality or other factors.

7. Loans and Allowance for Loan Losses

Major classifications of loans outstanding are summarized as follows:


(In thousands)	September 30, 2014		December 31, 2013

Real Estate:
Real estate mortgage - construction and land development	$	97,270	$	101,352
Real estate mortgage - residential		361,315		371,582
Real estate mortgage - farmland and other commercial enterprises		382,789		418,147
Commercial:
Commercial and industrial		53,859		47,426
States and political subdivisions		24,355		21,561
Lease financing		241		902
Other		20,022		23,840
Consumer:
Secured		8,184		8,579
Unsecured		5,799		6,513
Total loans		953,834		999,902
Less unearned income		2		19
Total loans, net of unearned income	$	953,832	$	999,883

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, 2014
Balance, beginning of period	$	15,448		$	1,338		$	337		$	17,123
Provision for loan losses		(1,036	)		(496	)		(4	)		(1,536	)
Recoveries		114			691			20			825
Loans charged off		(436	)		(230	)		(54	)		(720	)
Balance, end of period	$	14,090		$	1,303		$	299		$	15,692

Nine months ended September 30, 2014
Balance, beginning of period	$	18,716		$	1,409		$	452		$	20,577
Provision for loan losses		(3,395	)		634			(31	)		(2,792	)
Recoveries		471			736			94			1,301
Loans charged off		(1,702	)		(1,476	)		(216	)		(3,394	)
Balance, end of period	$	14,090		$	1,303		$	299		$	15,692


(In thousands)	Real Estate			Commercial			Consumer			Total
Three months ended September 30, 2013
Balance, beginning of period	$	20,240		$	2,177		$	526		$	22,943
Provision for loan losses		(528	)		(2	)		(56	)		(586	)
Recoveries		70			25			37			132
Loans charged off		(407	)		(98	)		(35	)		(540	)
Balance, end of period	$	19,375		$	2,102		$	472		$	21,949

Nine months ended September 30, 2013
Balance, beginning of period	$	22,254		$	1,513		$	678		$	24,445
Provision for loan losses		(2,028	)		615			(167	)		(1,580	)
Recoveries		254			122			187			563
Loans charged off		(1,105	)		(148	)		(226	)		(1,479	)
Balance, end of period	$	19,375		$	2,102		$	472		$	21,949

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


September 30, 2014 (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	$	15,152	$	8,297	$	4,159	$	12,456	$	647
Real estate mortgage - residential		10,237		3,164		6,961		10,125		1,370
Real estate mortgage - farmland and other commercial enterprises		26,167		7,403		18,648		26,051		1,440
Commercial
Commercial and industrial		222		23		199		222		132
Consumer
Unsecured		27		-		27		27		27
Total	$	51,805	$	18,887	$	29,994	$	48,881	$	3,616


December 31, 2013 (In thousands)	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Allowance for Loan Losses Allocated
Real Estate
Real estate mortgage - construction and land development	$	17,234	$	9,742	$	4,699	$	14,441	$	930
Real estate mortgage - residential		11,595		2,871		8,612		11,483		1,443
Real estate mortgage - farmland and other commercial enterprises		32,102		12,262		19,746		32,008		1,443
Commercial
Commercial and industrial		311		24		293		317		200
Consumer
Secured		18		-		18		18		15
Unsecured		71		-		72		72		71
Total	$	61,331	$	24,899	$	33,440	$	58,339	$	4,102


Three Months Ended September 30,	2014						2013
(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	$	13,157	$	46	$	46	$	16,815	$	128	$	109
Real estate mortgage – residential		10,651		150		143		11,799		94		105
Real estate mortgage – farmland and other commercial enterprises		27,014		495		495		33,925		329		318
Commercial
Commercial and industrial		375		2		2		1,037		4		4
Consumer
Secured		-		-		-		18		-		-
Unsecured		30		-		-		75		-		-
Total	$	51,227	$	693	$	686	$	63,669	$	555	$	536


Nine Months Ended September 30,	2014						2013
(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	$	14,735	$	279	$	275	$	17,683	$	405	$	402
Real estate mortgage – residential		11,137		412		393		13,023		356		340
Real estate mortgage – farmland and other commercial enterprises		29,141		1,240		1,217		33,006		1,137		1,120
Commercial
Commercial and industrial		290		6		5		966		37		37
Consumer
Secured		6		-		-		20		1		1
Unsecured		56		4		3		167		6		6
Total	$	55,365	$	1,941	$	1,893	$	64,865	$	1,942	$	1,906

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, 2014 and December 31, 2013.


September 30, 2014 (In thousands)	Real Estate		Commercial		Consumer		Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	3,457	$	132	$	27	$	3,616
Collectively evaluated for impairment		10,633		1,171		272		12,076
Total ending allowance balance	$	14,090	$	1,303	$	299	$	15,692

Loans
Loans individually evaluated for impairment	$	48,632	$	222	$	27	$	48,881
Loans collectively evaluated for impairment		792,742		98,253		13,956		904,951
Total ending loan balance, net of unearned income	$	841,374	$	98,475	$	13,983	$	953,832


December 31, 2013 (In thousands)	Real Estate		Commercial		Consumer		Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	3,816	$	200	$	86	$	4,102
Collectively evaluated for impairment		14,900		1,209		366		16,475
Total ending allowance balance	$	18,716	$	1,409	$	452	$	20,577

Loans
Loans individually evaluated for impairment	$	57,932	$	317	$	90	$	58,339
Loans collectively evaluated for impairment		833,149		93,393		15,002		941,544
Total ending loan balance, net of unearned income	$	891,081	$	93,710	$	15,092	$	999,883

The following tables present the recorded investment in nonperforming loans by class of loans as of September 30, 2014 and December 31, 2013.


September 30, 2014 (In thousands)	Nonaccrual		Restructured Loans		Loans Past Due 90 Days or More and Still Accruing
Real Estate:
Real estate mortgage - construction and land development	$	4,525	$	3,981	$	-
Real estate mortgage - residential		4,854		4,735		-
Real estate mortgage - farmland and other commercial enterprises		6,027		16,563		-
Commercial:
Commercial and industrial		111		-		-
Other		8		-		-
Consumer:
Secured		4		-		-
Unsecured		1		10		-
Total	$	15,530	$	25,289	$	-


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

The Company has allocated $2.3 million and $2.7 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings and that are in compliance with those terms as of September 30, 2014 and December 31, 2013, respectively. The Company had no commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings at September 30, 2014 and December 31, 2013.

The Company had no credits during 2014 that were modified as troubled debt restructurings. The Company had seven credits in 2013 that were modified as troubled debt restructurings. Six of these credits with an aggregate recorded investment of $331 thousand represent debt by borrowers discharged under Chapter 7 bankruptcy. The borrower in each case did not reaffirm their debt, and the release of personal liability by the court was deemed a concession. However, each borrower continues to make payments under the original terms of the loan agreement. The remaining restructuring consists of a credit secured by commercial real estate whereby the maturity date was extended 48 months.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three and nine months ended September 30, 2013. There were no loans modified as troubled debt restructurings during 2014.


(Dollars in thousands) Troubled Debt Restructurings:	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Three Months Ended September 30, 2013
Real Estate:
Real estate mortgage – farmland and other commercial enterprises		1	$	598	$	598
Consumer:
Secured		1		7		7
Total		2	$	605	$	605
Nine Months Ended September 30, 2013
Real Estate:
Real estate mortgage – residential		3	$	309	$	309
Real estate mortgage – farmland and other commercial enterprises		1		598		598
Commercial:
Commercial and industrial		1		13		13
Consumer:
Secured		2		9		9
Total		7	$	929	$	929

The troubled debt restructurings identified above increased the allowance for loan losses by $7 thousand and $30 thousand in the three and nine months ended September 30, 2013, respectively. There were no charge-offs related to these loans. For the nine months ended September 30, 2013, the Company had one restructured credit for which there was a payment default within twelve months following the modification. This credit is secured by residential real estate with an outstanding balance of $9 thousand. No charge-offs have been recorded for this credit. There were no payment defaults during the first nine months of 2014 for credits that were restructured during the previous twelve months.

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, 2014 (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	$	-	$	272	$	272	$	96,998	$	97,270
Real estate mortgage - residential		2,090		1,999		4,089		357,226		361,315
Real estate mortgage - farmland and other commercial enterprises		1,474		4,317		5,791		376,998		382,789
Commercial:
Commercial and industrial		-		39		39		53,820		53,859
States and political subdivisions		-		-		-		24,355		24,355
Lease financing, net		-		-		-		239		239
Other		21		-		21		20,001		20,022
Consumer:
Secured		67		-		67		8,117		8,184
Unsecured		133		-		133		5,666		5,799
Total	$	3,785	$	6,627	$	10,412	$	943,420	$	953,832


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

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


	Real Estate						Commercial
September 30, 2014 (In thousands)	Real Estate Mortgage -Construction and Land Development		Real Estate Mortgage-Residential		Real Estate Mortgage-Farmland and Other Commercial Enterprises		Commercial and Industrial		States and Political Subdivisions		Lease Financing		Other
Credit risk profile by internally assigned rating grades:
Pass	$	77,703	$	325,540	$	328,846	$	52,185	$	24,355	$	239	$	20,004
Special Mention		5,166		15,035		23,616		964		-		-		11
Substandard		14,401		20,740		29,858		710		-		-		7
Doubtful		-		-		469		-		-		-		-
Total	$	97,270	$	361,315	$	382,789	$	53,859	$	24,355	$	239	$	20,022


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

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 September 30, 2014 and December 31, 2013.


	September 30, 2014				December 31, 2013
	Consumer				Consumer
(In thousands)	Secured		Unsecured		Secured		Unsecured
Credit risk profile based on payment activity:
Performing	$	8,180	$	5,788	$	8,576	$	6,461
Nonperforming		4		11		3		52
Total	$	8,184	$	5,799	$	8,579	$	6,513

8. Other Real Estate Owned

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


(In thousands)	September 30, 2014		December 31, 2013
Construction and land development	$	19,982	$	23,504
Residential real estate		2,112		2,695
Farmland and other commercial enterprises		12,672		11,627
Total	$	34,766	$	37,826

OREO activity for the nine months ended September 30, 2014 and 2013 was as follows:


Nine months ended September 30, (In thousands)	2014			2013
Beginning balance	$	37,826		$	52,562
Transfers from loans and other increases		8,152			5,589
Proceeds from sales		(8,590	)		(12,695	)
Loss on sales, net		(546	)		(24	)
Write downs and other decreases, net		(2,076	)		(3,771	)
Ending balance	$	34,766		$	41,661

9. Postretirement Medical Benefits

Prior to 2003, the Company provided lifetime medical and dental benefits upon retirement for certain employees meeting the eligibility requirements as of December 31, 1989 (Plan 1). During 2003, the Company implemented an additional postretirement health insurance program (Plan 2). Under Plan 2, any employee meeting the service requirement of 20 years of full time service to the Company and is at least age 55 years of age upon retirement is eligible to continue their health insurance coverage. Under both plans, retirees not yet eligible for Medicare have coverage identical to the coverage offered to active employees. Under both plans, Medicare-eligible retirees are provided with a Medicare Advantage plan. The Company pays 100% of the cost of Plan 1. The Company and the retirees each pay 50% of the cost under Plan 2. Both plans are unfunded.

The following disclosures of the net periodic benefit cost components of Plan 1 and Plan 2 were measured at January 1, 2014 and 2013.


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(In thousands)	2014			2013		2014			2013
Service cost	$	121		$	157	$	362		$	472
Interest cost		142			138		427			414
Recognized prior service cost		51			65		155			193
Recognized net actuarial gain		(15	)		-		(47	)		-
Net periodic benefit cost	$	299		$	360	$	897		$	1,079

The Company expects benefit payments of $340 thousand for 2014, of which $68 thousand and $201 thousand have been made during the three and nine months ended September 30, 2014, respectively.

10. Regulatory Matters

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

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


	September 30, 2014									December 31, 2013
	Tier 1 Risk-based Capital¹			Total Risk-based Capital¹			Tier 1 Leverage²			Tier 1 Risk-based Capital¹			Total Risk-based Capital¹			Tier 1 Leverage²
Consolidated		20.22	%		21.47	%		12.33	%		18.95	%		20.21	%		11.90	%
Farmers Bank		18.77			19.90			10.01			17.56			18.82			9.60
United Bank		17.35			18.62			10.74			15.06			16.33			9.67
First Citizens		14.20			14.88			9.80			12.92			13.67			9.03
Citizens Northern		14.35			15.60			9.70			13.57			14.82			9.67

¹Tier 1 Risk-based and Total Risk-based Capital ratios are computed by dividing a bank’s Tier 1 or Total Capital, as defined by regulation, by a risk-weighted sum of the bank’s assets, with the risk weighting determined by general standards established by regulation. The safest assets (e.g., government obligations) are assigned a weighting of 0% with riskier assets receiving higher ratings (e.g., ordinary commercial loans are assigned a weighting of 100%).

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

Summary of Regulatory Agreements

Below is a summary of the agreements that two of the Company’s subsidiary banks have entered into with their primary banking regulators. The agreement entered into during 2009 between the Parent Company and its primary regulators was terminated in March 2014 as a result of continued satisfactory compliance, most notably from the progress made in lowering nonperforming assets and increasing capital levels. Therefore, the Company is no longer required to receive permission from its banking regulators to make interest payments on its trust preferred securities or to pay dividends on its common and preferred stock. However, the Company’s current goal is to redeem all of its outstanding preferred stock before considering the payment of a dividend on its common stock. The Company redeemed 10,000 shares, or one-third, of its outstanding preferred stock on May 15, 2014. Further redemptions, which require regulatory approval, will be based on satisfactory financial performance and take into consideration the Company’s capital position, earnings, asset quality, and other factors. The timing and amount of any further redemption by the Company of its remaining outstanding preferred stock will be disclosed when assured.

On October 29, 2014, the Company announced that it will repurchase 10,000 shares, or one-half, of its remaining outstanding Series A preferred stock. The Company will redeem, on a pro-rata basis, the preferred shares at the stated liquidation value of $1,000 per share, plus any accrued dividends. The timing of the repurchase is expected to occur during the fourth quarter of 2014. The total redemption amount will be $10.0 million, plus accrued dividends at 9.0% per share.

The Company originally issued 30,000 shares of its Series A preferred stock in 2009. The current action will be the second partial redemption of the original shares issued. No additional debt or equity was issued in connection with the first redemption of 10,000 shares during May 2014. Likewise, none will be issued in connection with the current redemption.

United Bank

In November of 2009, the Federal Deposit Insurance Corporation (“FDIC”) and the Kentucky Department of Financial Institutions (“KDFI”) entered into a Cease and Desist Order (“C&D”) with United Bank primarily as a result of its level of nonperforming assets. The C&D was terminated in December 2011 coincident with the issuance of a Consent Order (“Consent Order”) entered into between the parties. The Consent Order is substantially the same as the C&D, with the primary exception being that United Bank must achieve and maintain a Tier 1 Leverage ratio of 9.0% and a Total Risk-based Capital ratio of 13.0%.

During January 2014, the formal Consent Order entered into during 2011 with United Bank was terminated and replaced with a stepped-down enforcement action in the form of an informal Memorandum of Understanding (“Memorandum”). The informal Memorandum includes many of the same provisions covered by the Consent Order.

Other components in the regulatory order include oversight and reporting obligations to its regulators in terms of complying with the Memorandum. It also includes requirements in the level of reporting by management to its board of directors of its financial results, budgeting, and liquidity analysis, as well as restricting the bank from extending additional credit to borrowers with credits classified as substandard, doubtful or special mention in the report of examination. There is also a requirement to obtain written consent prior to declaring or paying a dividend and to develop a written contingency plan if the bank is unable to meet the capital levels established in the Memorandum.

Citizens Northern

The FDIC and KDFI entered into a Memorandum with Citizens Northern on September 8, 2010. The Memorandum was terminated July 7, 2013 upon the issuance of an updated Memorandum. The updated Memorandum contains many of the same provisions included in the terminated Memorandum, with a new requirement that Citizens Northern maintain a Tier 1 leverage ratio at or above 9.0%. In addition, the updated Memorandum requires having and retaining qualified management in the areas of loan administration and collection. It also requires Citizens Northern to address credit underwriting and administration weaknesses identified in the most recent examination of the bank by the FDIC and KDFI.

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

Regulators continue to monitor the Company’s progress and compliance with the regulatory agreements through periodic on-site examinations, regular communications, and quarterly data analysis. The Company believes it is adequately addressing all issues of the regulatory agreements to which it is subject. However, only the respective regulatory agencies can determine if compliance with the applicable regulatory agreements has been met. The Company believes that each of its subsidiary banks are in compliance with the requirements identified in their regulatory agreements as of September 30, 2014.

The Parent Company maintains cash available to fund a certain amount of additional injections of capital to its bank subsidiaries as determined by management or if required by its regulators. If needed, further amounts in excess of available cash may be funded by future public or private sales of securities, although the Parent Company is currently under no directive by its regulators to raise any additional capital.

11. Fair Value Measurements

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

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

Level 1:

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

Level 2:

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

Level 3:

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

Following is a description of the valuation method used for financial instruments measured at fair value on a recurring basis. For this disclosure, the Company only has available for sale investment securities that meet the requirement.

Available for sale investment securities

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

●

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

●

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

Available for sale investment securities are the Company’s only balance sheet item that meets the disclosure requirements for instruments measured at fair value on a recurring basis. Disclosures as of September 30, 2014 and December 31, 2013 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)
September 30, 2014
Obligations of U.S. government-sponsored entities	$	97,874	$	-	$	97,874	$	-
Obligations of states and political subdivisions		135,590		-		135,590		-
Mortgage-backed securities – residential		376,821		-		376,821		-
Mortgage-backed securities – commercial		711		-		711		-
Corporate debt securities		6,459		-		6,459		-
Mutual funds and equity securities		920		920		-		-
Total	$	618,375	$	920	$	617,455	$	-


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

December 31, 2013
Obligations of U.S. government-sponsored entities	$	93,750	$	-	$	93,750	$	-
Obligations of states and political subdivisions		131,970		-		131,970		-
Mortgage-backed securities – residential		378,077		-		378,077		-
Mortgage-backed securities – commercial		689		-		689		-
Corporate debt securities		6,257		-		6,257		-
Mutual funds and equity securities		2,077		2,077		-		-
Total	$	612,820	$	2,077	$	610,743	$	-

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

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

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

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


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

September 30, 2014
Collateral-dependent Impaired Loans
Real estate mortgage – construction and land development	$	283	$	-	$	-	$	283
Real estate mortgage – residential		1,023		-		-		1,023
Real estate mortgage – farmland and other commercial enterprises		380		-		-		380
Total	$	1,686	$	-	$	-	$	1,686

OREO
Construction and land development	$	7,855	$	-	$	-	$	7,855
Residential real estate		676		-		-		676
Farmland and other commercial enterprises		1,325		-		-		1,325
Total	$	9,856	$	-	$	-	$	9,856


			Fair Value Measurements Using
(In thousands) Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2013
Collateral-dependent Impaired Loans
Real estate mortgage – construction and land development	$	334	$	-	$	-	$	334
Real estate mortgage – residential		2,085		-		-		2,085
Real estate mortgage – farmland and other commercial enterprises		3,152		-		-		3,152
Commercial and industrial		88		-		-		88
Total	$	5,659	$	-	$	-	$	5,659

OREO
Construction and land development	$	14,465	$	-	$	-	$	14,465
Residential real estate		1,116		-		-		1,116
Farmland and other commercial enterprises		9,152		-		-		9,152
Total	$	24,733	$	-	$	-	$	24,733

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2014		2013		2014		2013
Impairment charges:
Collateral-dependent impaired loans	$	395	$	448	$	611	$	1,481
OREO		662		1,698		1,549		3,288
Total	$	1,057	$	2,146	$	2,160	$	4,769

The following table presents quantitative information about unobservable inputs for assets measured on a nonrecurring basis using Level 3 measurements. As previously discussed, the fair value of real estate securing impaired loans and OREO are based on current third party appraisals. It is often necessary, however, for the Company to discount the appraisal amounts supporting its impaired loans and OREO. These discounts relate primarily to marketing and other holding costs that are not included in certain appraisals or to update values as a result of market declines of similar properties for which newer appraisals are available. Discounts also result from contracts to sell properties entered into during the period. The range of discounts is presented in the table below for 2014.


(In thousands)	Fair Value at September 30, 2014		Valuation Technique	Unobservable Inputs	Range			Average
Collateral-dependent impaired loans	$	1,686	Discounted appraisals	Marketability discount		0% - 30.1	%		5.0	%
OREO	$	9,856	Discounted appraisals	Marketability discount		0.5% - 25.5	%		8.3	%

Fair Value of Financial Instruments

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

The following methods and assumptions were used to estimate the fair value of each of the financial instruments in the table that follows.

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

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

Investment Securities Held to Maturity

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

Loans

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

Federal Home Loan Bank and Federal Reserve Bank Stock

It is not practical to determine the fair value of Federal Home Loan Bank and Federal Reserve Bank stock due to restrictions placed on its transferability.

Deposit Liabilities

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

Federal Funds Purchased and Other Short-term Borrowings

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

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

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

Commitments to Extend Credit and Standby Letters of Credit

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

The following table presents the estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2014 and December 31, 2013. 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, 2014
Assets
Cash and cash equivalents	$	70,843	$	70,843	$	70,843	$	-	$	-
Held to maturity investment securities		3,801		3,977		-		3,977		-
Loans, net		938,140		938,934		-		-		938,934
Accrued interest receivable		5,620		5,620		-		5,620		-
Federal Home Loan Bank and Federal Reserve Bank Stock		9,368	N/A			-		-		-

Liabilities
Deposits		1,365,158		1,366,704		950,334		-		416,370
Federal funds purchased and other short-term borrowings		32,807		32,807		-		32,807		-
Securities sold under agreements to repurchase and other long-term borrowings		119,759		129,694		-		129,694		-
Subordinated notes payable to unconsolidated trusts		48,970		23,297		-		-		23,297
Accrued interest payable		1,014		1,014		-		1,014		-

December 31, 2013
Assets
Cash and cash equivalents	$	68,253	$	68,253	$	68,253	$	-	$	-
Held to maturity investment securities		765		827		-		827		-
Loans, net		979,306		977,846		-		-		977,846
Accrued interest receivable		5,901		5,901		-		5,901		-
Federal Home Loan Bank and Federal Reserve Bank Stock		9,516	N/A			-		-		-

Liabilities
Deposits		1,410,215		1,412,572		938,700		-		473,872
Federal funds purchased and other short-term borrowings		29,123		29,123		-		29,123		-
Securities sold under agreements to repurchase and other long-term borrowings		127,880		139,375		-		139,375		-
Subordinated notes payable to unconsolidated trusts		48,970		26,070		-		-		26,070
Accrued interest payable		1,137		1,137		-		1,137		-

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 and close anticipated transactions; unexpected claims or litigation against the Company; expected insurance 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 banks’ ability to maintain required capital levels and adequate funding sources and liquidity; and other risks or uncertainties detailed in the Company’s filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company.

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

RESULTS OF OPERATIONS

Third Quarter 2014 Compared to Third Quarter 2013

The Company reported net income of $4.1 million for the quarter ended September 30, 2014, an increase of $1.1 million or 35.3% compared with net income of $3.0 million for the third quarter of 2013. On a per common share basis, net income was $.49 and $.34 for the current and year-ago quarters, respectively. This represents an increase of $.15 or 44.1%. Selected income statement amounts and related data are summarized in the table below.


(In thousands except per share data)
Three Months Ended September 30,	2014			2013			Increase (Decrease)
Interest income	$	15,976		$	16,563		$	(587	)
Interest expense		2,513			2,953			(440	)
Net interest income		13,463			13,610			(147	)
Provision for loan losses		(1,536	)		(586	)		(950	)
Net interest income after provision for loan losses		14,999			14,196			803
Noninterest income		6,142			5,678			464
Noninterest expenses		15,751			15,984			(233	)
Income before income taxes		5,390			3,890			1,500
Income tax expense		1,283			855			428
Net income		4,107			3,035			1,072
Less preferred stock dividends and discount accretion		450			489			(39	)
Net income available to common shareholders	$	3,657		$	2,546		$	1,111

Basic and diluted net income per common share	$	.49		$	.34		$	.15

Weighted average common shares outstanding – basic and diluted		7,485			7,475			10
Return on average assets		.91	%		.67	%	24 bp
Return on average equity		9.17	%		7.33	%	184 bp
bp = basis points.

The $1.1 million increase in net income is attributed primarily to a lower provision for loan losses of $950 thousand, an increase in noninterest income of $464 thousand or 8.2%, and lower noninterest expense of $233 thousand or 1.5%. Net interest income decreased $147 thousand or 1.1%. Income tax expense increased $428 thousand or 50.1%. Further information related to the more significant components making up the increase in net income follows.

Net Interest Income

The overall interest rate environment at September 30, 2014, as measured by the Treasury yield curve, remains at very low levels when compared with historical trends. During the current quarter, yields for three-month maturities were relatively unchanged, while the six-month and three-year maturities increased 27 and 17 basis points, respectively. Yields on longer-term maturities declined 4 and 16 basis points for the ten and thirty-year maturity periods, respectively. At September 30, 2014, the short-term federal funds target interest rate remained between zero and 0.25%, unchanged since December 2008. The Federal Reserve Board has indicated that the low federal funds rate will likely be appropriate for a considerable period of time, particularly in light of current inflation projections and its longer-run goal of supporting maximum employment. At September 30, 2014, the national and Kentucky unemployment rate was 5.9% and 6.7%, respectively.

Net interest income was $13.5 million for the current quarter, a decrease of $147 thousand or 1.1% compared to $13.6 million for the prior year third quarter. The decrease in net interest income was driven by a decrease in interest income of $587 thousand or 3.5%, which exceeded a decline in interest expense of $440 thousand or 14.9%. Interest income on loans decreased $872 thousand or 6.5%, partially offset by higher interest income from investment securities of $294 thousand or 9.2%. Interest expense on deposits decreased $393 thousand or 27.6%.

The decrease to interest income on loans resulted from both a decline in average balances outstanding and lower rates. Interest income on investment securities is up due mainly to volume increases. The higher volume of investment securities correlates with an overall lack of high quality loan demand. As loans have declined, available funds have been redirected more into investment securities. The decrease in interest expense on deposits was driven by rate declines and lower average outstanding balances. Rate declines on loans and deposits are the result of an overall slow growing economy and related low interest rate environment, competitive pressures, and the Company’s 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 the 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 allowing them to mature without renewal, as liquidity has been adequate.

Average investment securities for the quarter increased $46.3 million or 8.0% from a year ago mainly due to a decline in loans outstanding. In periods when quality loan demand is low, available funds are invested in lower yielding investment securities or cash equivalents or otherwise used to manage liquidity, such as for deposit outflows or for the repayment of long-term debt.

The net interest margin on a taxable equivalent basis was 3.33% for the current quarter, a decrease of three basis points compared with 3.36% a year earlier. Net interest spread decreased one basis point to 3.18% compared to 3.19% a year ago. The Company expects its net interest margin to remain relatively flat in the near term according to internal modeling using expectations about future market interest rates, the maturity structure of the Company’s earning assets and liabilities, and other factors. Future results could be significantly different than current expectations.

The following tables present an analysis of net interest income for the quarterly periods ended September 30.

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


Three Months Ended September 30,	2014									2013
(In thousands)	Average Balance			Interest			Average Rate			Average Balance			Interest			Average Rate
Earning Assets
Investment securities
Taxable	$	507,142		$	2,857			2.24	%	$	469,585		$	2,578			2.18	%
Nontaxable¹		121,271			957			3.13			112,494			932			3.29
Interest bearing deposits in banks, federal funds sold and securities purchased under agreements to resell		64,018			34			.21			73,305			43			.23
Loans^1,2,3		960,914			12,552			5.18			1,003,905			13,433			5.31
Total earning assets		1,653,345		$	16,400			3.94	%		1,659,289		$	16,986			4.06	%
Allowance for loan losses		(16,878	)								(22,650	)
Total earning assets, net of allowance for loan losses		1,636,467									1,636,639
Nonearning Assets
Cash and due from banks		24,503									22,483
Premises and equipment, net		35,650									36,433
Other assets		95,718									109,271
Total assets	$	1,792,338								$	1,804,826
Interest Bearing Liabilities
Deposits
Interest bearing demand	$	315,380		$	45			.06	%	$	305,989		$	53			.07	%
Savings		362,702			149			.16			339,660			170			.20
Time		425,052			836			.78			499,207			1,200			.95
Federal funds purchased and other short-term borrowings		27,661			12			.17			30,768			21			.27
Securities sold under agreements to repurchase and other long-term borrowings		172,971			1,471			3.37			176,149			1,509			3.40
Total interest bearing liabilities		1,303,766		$	2,513			.76	%		1,351,773		$	2,953			.87	%
Noninterest Bearing Liabilities
Demand deposits		285,522									259,678
Other liabilities		25,438									29,121
Total liabilities		1,614,726									1,640,572
Shareholders’ equity		177,612									164,254
Total liabilities and shareholders’ equity	$	1,792,338								$	1,804,826
Net interest income					13,887									14,033
TE basis adjustment					(424	)								(423	)
Net interest income				$	13,463								$	13,610
Net interest spread								3.18	%								3.19	%
Impact of noninterest bearing sources of funds								.15									.17
Net interest margin								3.33	%								3.36	%

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

²Loan balances include principal balances on nonaccrual loans.

³Loan fees included in interest income amounted to $312 thousand and $281 thousand in 2014 and 2013, respectively.

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


(In thousands)	Variance			Variance Attributed to
Three Months Ended September 30,	2014/2013¹			Volume			Rate

Interest Income
Taxable investment securities	$	279		$	208		$	71
Nontaxable investment securities²		25			237			(212	)
Interest bearing deposits in banks, federal funds sold and securities purchased under agreements to resell		(9	)		(5	)		(4	)
Loans²		(881	)		(561	)		(320	)
Total interest income		(586	)		(121	)		(465	)
Interest Expense
Interest bearing demand deposits		(8	)		10			(18	)
Savings deposits		(21	)		63			(84	)
Time deposits		(364	)		(165	)		(199	)
Federal funds purchased and other short-term borrowings		(9	)		(2	)		(7	)
Securities sold under agreements to repurchase and other long-term borrowings		(38	)		(25	)		(13	)
Total interest expense		(440	)		(119	)		(321	)
Net interest income	$	(146	)	$	(2	)	$	(144	)
Percentage change		100.0	%		1.4	%		98.6	%

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

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

Provision for Loan Losses

The provision for loan losses represents charges (or credits) to earnings that are necessary to maintain an allowance for loan losses at an adequate level to cover credit losses specifically identified in the loan portfolio, as well as management’s best estimate of incurred probable loan losses in the remainder of the portfolio at the balance sheet date. The credit quality of the Company’s loan portfolio continues to improve, but remains hampered by the lingering effects of the downturn of the overall economy and financial markets that began in late 2007. Economic expansion remains slow and labor force participation rates are at the lowest level in over 30 years.

The Company recorded a credit to the provision for loan losses in the amount of $1.5 million and $586 thousand in the current and year ago quarters, respectively. The allowance for loan losses as a percentage of outstanding loans (net of unearned income) was 1.65% at September 30, 2014 compared to 2.06% and 2.17% at year-end 2013 and September 30, 2013, respectively. The decrease in the provision for loan losses is attributed to continuing improvement in the credit quality of the loan portfolio and a decline in outstanding loans. The Company recorded net recoveries of $105 thousand in the current quarter compared with net charge-offs of $408 thousand a year ago. Loan recoveries for the current quarter include $671 thousand related to a group of fraudulent loans that were charged off during the first quarter of 2014.

Nonperforming and watch list loans declined when compared with a year earlier. Historical loss rates have also improved as lower recent charge-off activity has replaced the higher levels experienced in the early part of the Company’s rolling quarterly four year look-back period used when evaluating the allowance for loan losses. For further information about improvements in the Company’s overall credit quality, please refer to the discussion under the captions “Allowance for Loan Losses” and “Nonperforming Loans” that follows.

Noninterest Income

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


Three Months Ended September 30, (In thousands)	2014		2013		Increase (Decrease)			%
Service charges and fees on deposits	$	1,993	$	2,116	$	(123	)		(5.8	)%
Allotment processing fees		1,276		1,217		59			4.8
Other service charges, commissions, and fees		1,316		1,282		34			2.7
Trust income		812		497		315			63.4
Investment securities gains, net		8		2		6			300.0
Gain on sale of mortgage loans, net		123		236		(113	)		(47.9	)
Income from company-owned life insurance		511		244		267			109.4
Other		103		84		19			22.6
Total noninterest income	$	6,142	$	5,678	$	464			8.2	%

The increase in noninterest income was driven mainly by higher trust fee income and income from company-owned life insurance. Trust fee income is up sharply due to an unusually large nonrecurring estate fee of $250 thousand. The increase from company-owned life insurance relates to a tax-free death benefit that exceeded the cash surrender value by $276 thousand. Service charges and fees on deposits decreased primarily due to lower overdraft fees of $95 thousand or 7.4%. Net gains on the sale of loans decreased as a result of lower mortgage loan origination activity of $6.3 million or 48.5%.

Noninterest Expense

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


Three Months Ended September 30, (In thousands)	2014		2013		Increase (Decrease)			%
Salaries and employee benefits	$	7,530	$	7,229	$	301			4.2	%
Occupancy expenses, net		1,229		1,247		(18	)		(1.4	)
Equipment expenses		637		619		18			2.9
Data processing and communication expenses		979		929		50			5.4
Bank franchise tax		585		603		(18	)		(3.0	)
Amortization of intangibles		101		135		(34	)		(25.2	)
Deposit insurance expenses		426		559		(133	)		(23.8	)
Other real estate expenses, net		1,974		2,404		(430	)		(17.9	)
Legal expenses		293		209		84			40.2
Other		1,997		2,050		(53	)		(2.6	)
Total noninterest expense	$	15,751	$	15,984	$	(233	)		(1.5	)%

The decrease in noninterest expenses was driven mainly by lower expenses related to repossessed real estate and deposit insurance. The $430 thousand or 17.9% decrease in repossessed real estate expenses was driven by lower impairment charges of $1.1 million or 61.8%. Expenses related to development, operating, and maintenance of repossessed properties increased $494 thousand, driven primarily to increasing the marketability of two real estate construction properties and to better position them for sale. Net losses from the sale of repossessed real estate increased $148 thousand.

The $133 thousand or 23.8% reduction in deposit insurance expense is due to the improvement in the risk ratings at the Company’s subsidiary banks, which is used in the determination of the related insurance premiums.

The increase in salaries and employee benefits is attributed to higher benefit costs of $193 thousand or 15.1% and normal employee pay increases and related payroll taxes of $109 thousand or 1.8%. The increase in benefit costs is attributed mainly to higher claims related to the Company’s self-funded health insurance plan. The Company had 517 full time equivalent employees at quarter-end compared to 516 a year earlier.

Amortization of intangible assets decreased as a result of actuarial determined reductions related to core deposit and customer relationship intangible assets arising from previous business acquisitions. Intangible assets are scheduled to fully amortize by 2015. The increase in legal expenses is attributed to several ongoing cases at various stages of the legal process and in which the Company may be either the plaintiff or defendant in actions arising from the ordinary course of business.

Income Taxes

Income tax expense was $1.3 million for the current quarter, an increase of $428 thousand or 50.1% compared to $855 thousand for the third quarter of 2013. The effective income tax rates were 23.8% and 22.0% for the current and year-ago quarters, respectively. The effective income tax rate decreased 129 basis points in the current quarter as a result of the tax-free death benefit from company-owned life insurance.

First Nine Months of 2014 Compared to First Nine Months of 2013

Net income was $12.3 million for the first nine months of 2014, an increase of $1.9 million or 18.6% compared with net income of $10.4 million for 2013. On a per common share basis, net income for the current nine months was $1.44, an increase of $.25 or 21.0% compared to $1.19 reported a year earlier. Selected income statement amounts and related data are presented in the table below.


(In thousands except per share data)
Nine Months Ended September 30,	2014			2013			Increase (Decrease)
Interest income	$	48,681		$	49,936		$	(1,255	)
Interest expense		7,812			9,157			(1,345	)
Net interest income		40,869			40,779			90
Provision for loan losses		(2,792	)		(1,580	)		(1,212	)
Net interest income after provision for loan losses		43,661			42,359			1,302
Noninterest income		17,506			16,530			976
Noninterest expenses		44,504			45,215			(711	)
Income before income taxes		16,663			13,674			2,989
Income tax expense		4,362			3,300			1,062
Net income		12,301			10,374			1,927
Less preferred stock dividends and discount accretion		1,550			1,461			89
Net income available to common shareholders	$	10,751		$	8,913		$	1,838

Basic and diluted net income per common share	$	1.44		$	1.19		$	.25

Weighted average common shares outstanding – basic and diluted		7,482			7,473			9
Return on average assets		.91	%		.77	%	14 bp
Return on average equity		9.31	%		8.25	%	106 bp
bp = basis points.

The increase in net income is attributed primarily to a lower provision for loan losses of $1.2 million or 76.7%, an increase in noninterest income of $976 thousand or 5.9%, and lower noninterest expenses of $711 thousand or 1.6%. Net interest income was relatively unchanged at $40.9 million. Income tax expense increased $1.1 million or 32.2%. Further information related to the more significant components making up the increase in net income follows.

Net Interest Income

Net interest income was $40.9 million for the first nine months of 2014, up $90 thousand or 0.2% compared to $40.8 million for the first nine months of 2013. Interest expense decreased $1.3 million or 14.7%, offset by a decrease in interest income of $1.3 million or 2.5%. Interest expense on deposits and interest income on loans decreased $1.3 million or 27.6% and $2.6 million or 6.4%, respectively; interest on investment securities increased $1.3 million or 14.1%.

The decrease to interest income on loans was driven nearly equally by declines in both interest rates and average balances outstanding. Interest income on investment securities increased mainly due to higher volume, which primarily reflects a lack of high quality loan demand. The decrease in interest expense on deposits was driven by rate declines and lower average outstanding balances related to time deposits. Rate declines on both loans and deposits are the result of an overall slow growing economy and related low interest rate environment, competitive pressures, and the Company’s 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.

Average investment securities increased $45.5 million or 7.8% from a year earlier mainly as a result of a decline in loans outstanding. In periods when quality loan demand is low, available funds are invested in lower yielding investment securities or cash equivalents or otherwise used to manage liquidity, such as for deposit outflows or for the repayment of long-term debt.

The net interest margin on a taxable equivalent basis was 3.38% for the first nine months of 2014 compared to 3.40% for the same period in 2013. Net interest spread was 3.22% and 3.24% for the current and year-ago periods, respectively. The Company expects its net interest margin to remain relatively flat in the near term according to internal modeling using expectations about future market interest rates, the maturity structure of the Company’s earning assets and liabilities, and other factors. Future results could be significantly different than current expectations.

The following tables present an analysis of net interest income for the nine months ended September 30.

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


Nine Months Ended September 30,	2014									2013
(In thousands)	Average Balance			Interest			Average Rate			Average Balance			Interest			Average Rate
Earning Assets
Investment securities
Taxable	$	507,773		$	8,917			2.35	%	$	472,503		$	7,599			2.15	%
Nontaxable¹		118,462			2,830			3.19			108,200			2,796			3.45
Interest bearing deposits in banks, federal funds sold and securities purchased under agreements to resell		60,309			100			.22			66,851			117			.23
Loans^1,2,3		977,759			38,051			5.20			1,007,309			40,684			5.40
Total earning assets		1,664,303		$	49,898			4.01	%		1,654,863		$	51,196			4.14	%
Allowance for loan losses		(18,303	)								(23,461	)
Total earning assets, net of allowance for loan losses		1,646,000									1,631,402
Nonearning Assets
Cash and due from banks		23,524									23,336
Premises and equipment, net		35,944									36,266
Other assets		96,626									109,309
Total assets	$	1,802,094								$	1,800,313
Interest Bearing Liabilities
Deposits
Interest bearing demand	$	320,383		$	142			.06	%	$	305,339		$	166			.07	%
Savings		356,183			460			.17			330,396			485			.20
Time		443,557			2,735			.82			513,771			3,959			1.03
Federal funds purchased and other short-term borrowings		29,701			42			.19			28,521			60			.28
Securities sold under agreements to repurchase and other long-term borrowings		175,023			4,433			3.39			176,397			4,487			3.40
Total interest bearing liabilities		1,324,847		$	7,812			.79	%		1,354,424		$	9,157			.90	%
Noninterest Bearing Liabilities
Demand deposits		275,897									249,960
Other liabilities		24,775									27,730
Total liabilities		1,625,519									1,632,114
Shareholders’ equity		176,575									168,199
Total liabilities and shareholders’ equity	$	1,802,094								$	1,800,313
Net interest income					42,086									42,039
TE basis adjustment					(1,217	)								(1,260	)
Net interest income				$	40,869								$	40,779
Net interest spread								3.22	%								3.24	%
Impact of noninterest bearing sources of funds								.16									.16
Net interest margin								3.38	%								3.40	%

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

²Loan balances include principal balances on nonaccrual loans.

³Loan fees included in interest income amounted to $978 thousand and $1.0 million in 2014 and 2013, respectively.

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


(In thousands)	Variance			Variance Attributed to
Nine Months Ended September 30,	2014/2013¹			Volume			Rate

Interest Income
Taxable investment securities	$	1,318		$	587		$	731
Nontaxable investment securities²		34			332			(298	)
Interest bearing deposits in banks, federal funds sold and securities purchased under agreements to resell		(17	)		(12	)		(5	)
Loans²		(2,633	)		(1,164	)		(1,469	)
Total interest income		(1,298	)		(257	)		(1,041	)
Interest Expense
Interest bearing demand deposits		(24	)		10			(34	)
Savings deposits		(25	)		60			(85	)
Time deposits		(1,224	)		(491	)		(733	)
Federal funds purchased and other short-term borrowings		(18	)		4			(22	)
Securities sold under agreements to repurchase and other long-term borrowings		(54	)		(39	)		(15	)
Total interest expense		(1,345	)		(456	)		(889	)
Net interest income	$	47		$	199		$	(152	)
Percentage change		100.0	%		423.4	%		(323.4	)%

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

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

Provision for Loan Losses

The Company recorded a credit to the provision for loan losses in the amount of $2.8 million and $1.6 million for the first nine months of 2014 and 2013, respectively. The allowance for loan losses as a percentage of outstanding loans (net of unearned income) was 1.65% at September 30, 2014 compared to 2.06% and 2.17% at year-end 2013 and September 30, 2013, respectively. The decrease in the provision for loan losses is attributed to further improving credit quality trends and a decline in outstanding loans. Nonperforming loans and watch list loans have declined when compared with a year earlier. Historical loss rates have also improved as lower recent charge-off activity has replaced the higher levels experienced in the early part of the Company’s rolling quarterly four year look-back period used when evaluating the allowance for loan losses. For further information about improvements in the Company’s overall credit quality, please refer to the discussion under the captions “Allowance for Loan Losses” and “Nonperforming Loans” that follows.

Noninterest Income

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


Nine Months Ended September 30, (In thousands)	2014			2013			Increase (Decrease)			%
Service charges and fees on deposits	$	5,900		$	6,094		$	(194	)		(3.2	)%
Allotment processing fees		3,795			3,724			71			1.9
Other service charges, commissions, and fees		3,950			3,738			212			5.7
Trust income		1,880			1,451			429			29.6
Investment securities losses, net		(67	)		(58	)		(9	)		15.5
Gain on sale of mortgage loans, net		343			867			(524	)		(60.4	)
Income from company-owned life insurance		990			716			274			38.3
Other		715			(2	)		717		N/M
Total noninterest income	$	17,506		$	16,530		$	976			5.9	%

N/M – Not meaningful.

The increase in noninterest income is attributed mainly to the Company’s equity interest in its three tax credit partnerships. The Company recorded income of $358 thousand related to these partnerships in the current year compared with a loss of $247 thousand for the prior year. Trust fees were boosted by an unusually large nonrecurring estate fee of $250 thousand during the current year third quarter. The increase in income from company-owned life insurance was driven by a $276 thousand tax-free death benefit that exceeded the cash surrender value occurring during the current quarter. The increase in nondeposit service charges, commissions, and fees was led by higher interchange fees of $88 thousand or 4.2% as a result of increased volume. Net gains on the sale of loans decreased as a result of a 55.0% decline in mortgage loan origination activity. Service charges and fees on deposits decreased primarily due to lower overdraft fees of $138 thousand or 3.8% due to volume declines.

The net loss on investment securities for the current year includes $95 thousand attributed to a municipal bond issuer that participated in the Build America Bond (“BAB”) program. The issuer exercised their extraordinary redemption privilege, which was triggered by Federal budget sequestration events. Since the carrying value of the bond exceeded the par value due to unamortized premium, the Company recorded a loss on this investment during the second quarter of 2014. The remaining unamortized premium of BAB investments at September 30, 2014 was $39 thousand, with the related carrying amount of the investments totaling $2.6 million. The Company believes it is unlikely that other bond investments by the Company of issuers participating in the BAB program will be called in the current interest rate environment.

Noninterest Expense

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


Nine Months Ended September 30, (In thousands)	2014		2013		Increase (Decrease)			%
Salaries and employee benefits	$	22,223	$	21,784	$	439			2.0	%
Occupancy expenses, net		3,720		3,578		142			4.0
Equipment expenses		1,824		1,760		64			3.6
Data processing and communication expenses		2,953		2,972		(19	)		(0.6	)
Bank franchise tax		1,807		1,803		4			0.2
Amortization of intangibles		303		405		(102	)		(25.2	)
Deposit insurance expense		1,327		1,698		(371	)		(21.8	)
Other real estate expenses, net		3,976		4,781		(805	)		(16.8	)
Legal expenses		715		575		140			24.3
Other		5,656		5,859		(203	)		(3.5	)
Total noninterest expense	$	44,504	$	45,215	$	(711	)		(1.6	)%

The decrease in noninterest expenses was driven primarily by lower expenses related to repossessed real estate and deposit insurance, partially offset by an increase in salaries and employee benefits. The decrease in repossessed real estate expenses is attributed mainly to lower impairment charges of $1.7 million or 45.3%. The decrease in impairment charges was partially offset by an increase in the net loss on property sales of $522 thousand and higher development, operating, and maintenance expenses of $393 thousand. The increase in development, operating, and maintenance expenses relate primarily to increasing the marketability of two real estate construction projects and to better position them for sale.

The decrease in deposit insurance expense is due to an improvement in the risk ratings at the Company’s subsidiary banks, which is used in determining the related insurance premiums. The increase in salaries and employee benefits primarily reflects normal employee pay increases and related payroll taxes of $468 thousand or 2.6%, partially offset by lower benefit costs of $29 thousand or 0.7%. The decrease in benefit costs was driven by lower actuary-determined postretirement medical costs. The Company had 517 full time equivalent employees at the end of the period compared to 516 a year earlier.

Income Taxes

Income tax expense was $4.4 million for the current nine months, an increase of $1.1 million or 32.2% compared to $3.3 million for the prior year. The effective income tax rates were 26.2% and 24.1% for the current and year-ago periods, respectively. The increase in the effective income tax rate is mainly attributed to higher pretax income, driven by a higher mix of taxable versus tax-exempt sources of revenue.

FINANCIAL CONDITION

Total assets were $1.8 billion at September 30, 2014, a decrease of $39.7 million or 2.2% from year-end 2013. Loans (net of unearned income) and other real estate owned (“OREO”) decreased $46.1 million or 4.6% and $3.1 million or 8.1%, respectively. Investment securities increased $8.6 million or 1.4%. Deferred income tax assets decreased $5.0 million or 23.3%.

Generating high quality loan demand remains a challenge, and the decrease in outstanding loans has been accelerated by early payoffs of several larger balance credits. Loan totals have also declined as a result of a decrease in nonperforming loans. OREO decreased primarily due to property sales and impairment charges, which outpaced new additions. The increase in investment securities was driven by higher market values related to the available for sale investment portfolio. The increase in value is attributed to favorable changes in market interest rates, primarily of longer dated maturities. The decrease in deferred income taxes relates mainly to the increase in market value of the available for sale investment securities portfolio. The portfolio improved from an unrealized loss position of $5.6 million at year end 2013 to an unrealized gain of $5.4 million at September 30, 2014.

Total liabilities were $1.6 billion at September 30, 2014, a decrease of $47.8 million or 2.9% compared to December 31, 2013. The decrease in total liabilities is mainly attributed to a $45.1 million or 3.2% reduction in total deposits, primarily higher-priced time deposits. Borrowed funds decreased $4.4 million or 2.2%.

Shareholders’ equity was $178 million at September 30, 2014, an increase of $8.1 million or 4.8% compared to $170 million at year-end 2013. The increase in shareholders’ equity was driven by the after-tax increase in the unrealized gain on available for sale investment securities in the amount of $7.1 million and is attributed primarily to a decrease in longer-term market interest rates. Net income added $12.3 million to shareholders’ equity during the period, partially offset by dividends on preferred stock of $1.5 million. The Company redeemed a portion of its preferred stock in the amount of $10.0 million during the second quarter.

Selected balance sheet amounts and related data are presented in the table below and discussion that follows.


(Dollars in thousands)	September 30, 2014		December 31, 2013			Increase (Decrease)			%
Cash and cash equivalents	$	70,843	$	68,253		$	2,590			3.8	%
Investment securities		622,176		613,585			8,591			1.4
Loans, net of allowance of $15,692 and $20,577		938,140		979,306			(41,166	)		(4.2	)
Other real estate owned		34,766		37,826			(3,060	)		(8.1	)
Other assets		103,946		110,585			(6,639	)		(6.0	)
Total assets	$	1,769,871	$	1,809,555		$	(39,684	)		(2.2	)%

Deposits	$	1,365,158	$	1,410,215		$	(45,057	)		(3.2	)%
Federal funds purchased and other short-term borrowings		32,807		29,123			3,684			12.6
Other borrowings		168,729		176,850			(8,121	)		(4.6	)
Other liabilities		24,990		23,312			1,678			7.2
Total liabilities		1,591,684		1,639,500			(47,816	)		(2.9	)

Preferred stock		20,000		29,988			(9,988	)		(33.3	)
Common stock		936		935			1			.1
Capital surplus		51,287		51,102			185			.4
Retained earnings		101,993		91,242			10,751			11.8
Accumulated other comprehensive income (loss)		3,971		(3,212	)		7,183			(223.6	)
Total shareholders’ equity		178,187		170,055			8,132			4.8
Total liabilities and shareholders’ equity	$	1,769,871	$	1,809,555		$	(39,684	)		(2.2	)%

End of period tangible book value per common share¹	$	21.06	$	18.61		$	2.45			13.2	%
End of period per common share closing price		22.53		21.75			.78			3.6

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

Temporary Investments

Temporary investments consist of interest bearing deposits in other banks and federal funds sold and securities purchased under agreements to resell. The Company uses these funds in the management of liquidity and interest rate sensitivity or as a short-term holding prior to subsequent movement into other investments with higher yields or for other purposes. At September 30, 2014, temporary investments were $51.9 million, an increase of $6.6 million or 14.5% from year-end 2013.

Investment Securities

The investment securities portfolio is comprised primarily of residential mortgage-backed securities, tax-exempt securities of states and political subdivisions, and debt securities issued by U.S. government-sponsored agencies. Substantially all of the Company’s investment securities are designated as available for sale. Proceeds received from maturing or called investment securities not needed to fund higher-earning loans are either reinvested in similar investments or used to manage liquidity, such as for deposit outflows or other payment obligations. Total investment securities had a carrying amount of $622 million at September 30, 2014, an increase of $8.6 million or 1.4% compared to $614 million at year-end 2013.

The increase in investment securities was driven by a $10.9 million increase in the market value adjustment related to the available for sale portfolio, partially offset by net premium amortization of $2.9 million. The increase in the value of the available for sale securities portfolio is attributed to higher bond prices related to longer term maturity periods. Yields for the ten and 30-year Treasury securities declined 54 and 77 basis points, respectively, during the first nine months of 2014. Generally, as market interest rates decrease, the value of fixed rate investments increases.

Investment securities include single-issuer trust preferred capital securities of a U.S. based global financial services firm. The amortized cost and estimated fair value of this investment at September 30, 2014 was $5.9 million and $5.6 million, respectively. This represents an increase in fair value of $758 thousand or 15.7% compared to $4.8 million at year-end 2013. These securities reached a twelve-month high price point during the current quarter.

The Company’s investment in the single-issuer trust preferred capital securities continues to perform according to contractual terms and the issuer of these securities is rated as investment grade by major rating agencies. The issuer of the securities announced in the first quarter of 2014 an increase in per share common dividend payments and authorization of a common equity repurchase plan. The Company does not intend to sell these securities nor does the Company believe it is likely that it will be required to sell these securities prior to their anticipated recovery. The Company believes these securities are not impaired due to reasons of credit quality or other factors, but rather the unrealized loss is primarily attributed to continuing uncertainties in both international and domestic economies and market volatility. The Company believes that it will collect all amounts due according to the contractual terms of these securities and that the fair values of these securities will continue to recover as they approach their maturity dates.

Loans

Loans, net of unearned income, were $954 million at September 30, 2014, a decrease of $46.1 million or 4.6% compared to year-end 2013. High quality loan demand remains weak, and the Company continues a measured and cautious approach to loan originations while working to further reduce its level of nonperforming assets in a slow growth economy. Generating high quality loan demand continues to be a challenge, and the decrease in outstanding loans has been accelerated by early payoffs of several larger balance credits. The larger early payoffs relate primarily to nonbank competitors willing to offer nonrecourse and other terms that are significantly below the Company’s underwriting standards. Other significant factors contributing to the decrease in loans include the migration of nonaccrual loans to OREO in the amount of $7.6 million and principal paydowns on nonaccrual loans of $4.6 million.

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


	September 30, 2014					December 31, 2013
(Dollars in thousands)	Amount		%			Amount		%

Real estate mortgage - construction and land development	$	97,270		10.2	%	$	101,352		10.1	%
Real estate mortgage - residential		361,315		37.9			371,582		37.2
Real estate mortgage - farmland and other commercial enterprises		382,789		40.1			418,147		41.8
Commercial, financial, and agriculture		98,236		10.3			92,827		9.3
Installment		13,983		1.5			15,092		1.5
Lease financing		239		-			883		.1
Total	$	953,832		100.0	%	$	999,883		100.0	%

On an average basis, loans represented 58.7% of earning assets for the first nine months of 2014, a decrease of 186 basis points compared to 60.6% for the year 2013. The decrease in the level of loans as a percentage of earning assets reflects the overall lack of high quality loan demand for which the Company desires. As loan demand changes, available funds are reallocated between temporary investments or investment securities, which typically involve a decrease in credit risk and result in lower yields.

Allowance for Loan Losses

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

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

The allowance for loan losses was $15.7 million or 1.65% of outstanding loans (net of unearned income) at September 30, 2014. This compares to $20.6 million or 2.06% of net loans outstanding at year-end 2013. The decrease in the allowance as a percentage of net loans outstanding from the prior year-end is attributed to net charge-offs of $2.1 million combined with a credit to the provision for loan losses of $2.8 million. As a percentage of nonperforming loans, the allowance for loan losses was 38.4% at September 30, 2014 compared to 40.7% at year-end 2013. Nonperforming loans include $25.3 million and $26.3 million of accruing restructured loans at September 30, 2014 and year-end 2013, respectively. As a percentage of nonaccrual loans and loans past due 90 days or more, the allowance for loan losses was 101% and 84.7% for the current quarter and year-end 2013, respectively.

The $2.1 million of net charge-offs for the current year includes $755 thousand recorded during the first quarter related to a single credit secured by commercial real estate. The collateral securing this credit was repossessed by the Company during the second quarter and has a carrying value of $1.1 million.

The overall improvement in the credit quality of the loan portfolio experienced during 2013 continued during the first nine months of 2014. Certain credit quality measures are summarized in the table that follows for the periods indicated. Several of these measures are at the best level in the last three years.


(In thousands)	September 30, 2014		December 31, 2013		September 30, 2013		Three-year High		Three-year Low
Nonperforming loans	$	40,819	$	50,537	$	51,498	$	78,959	$	40,819
Nonaccrual loans		15,530		23,838		25,063		61,358		15,530
Loans past due 30-89 days and still accruing		3,016		1,460		2,533		11,940		1,460
Loans graded substandard or below		66,185		75,688		82,627		155,801		66,185
Impaired loans		48,881		58,339		62,281		137,743		48,881
Loans, net of unearned income		953,832		999,883		1,010,131		1,072,108		953,832

Nonperforming Loans

Nonperforming loans consist of nonaccrual loans, accruing restructured loans, and loans 90 days or more past due and still accruing interest. The accrual of interest on loans is discontinued when it is determined that the collection of interest or principal is doubtful, or when a default of interest or principal has existed for 90 days or more, unless such loan is well secured and in the process of collection. Restructured loans occur when a lender, because of economic or legal reasons related to a borrower’s financial difficulty, grants a concession to the borrower that it would not otherwise consider. Restructured loans typically include a reduction of the stated interest rate or an extension of the maturity date, among other possible concessions. The Company gives careful consideration to identifying which of its challenged credits merit a restructuring of terms that it believes will result in maximum loan repayments and mitigate possible losses. Cash flow projections are carefully scrutinized prior to restructuring any credits; past due credits are typically not granted concessions.

Nonperforming loans were $40.8 million at September 30, 2014, a decrease of $9.7 million or 19.2% compared to $50.5 million at year-end 2013. Nonperforming loans are at the lowest level since the first quarter of 2009, but remain elevated and reflect continuing weaknesses of a slow growing economy and its impact on many of the Company’s customers. Accruing restructured loans make up $25.3 million or 62% of the Company’s nonperforming loans at September 30, 2014 compared with $15.5 million or 38% related to nonaccrual loans. Nonaccrual loans have decreased to the lowest level since the third quarter of 2007. Nonperforming loans, presented by class, were as follows for the periods indicated.

Nonperforming Loans


(In thousands)	September 30, 2014			December 31, 2013
Nonaccrual Loans
Real Estate:
Real estate mortgage - construction and land development	$	4,525		$	5,821
Real estate mortgage - residential		4,854			5,154
Real estate mortgage - farmland and other commercial enterprises		6,027			12,677
Commercial:
Commercial and industrial		111			160
Lease financing		-			22
Other		8			-
Consumer:
Secured		4			3
Unsecured		1			1
Total nonaccrual loans	$	15,530		$	23,838

Restructured Loans
Real Estate:
Real estate mortgage - construction and land development	$	3,981		$	4,391
Real estate mortgage - residential		4,735			4,826
Real estate mortgage - farmland and other commercial enterprises		16,563			16,987
Consumer:
Unsecured		10			51
Total restructured loans	$	25,289		$	26,255

Past Due 90 Days or More and Still Accruing
Real Estate:
Real estate mortgage - residential	$	-		$	10
Real estate mortgage - farmland and other commercial enterprises		-			434
Total past due 90 days or more and still accruing	$	-		$	444

Total nonperforming loans	$	40,819		$	50,537

Ratio of total nonperforming loans to total loans (net of unearned income)		4.3	%		5.1	%

The most significant components of nonperforming loans include nonaccrual and restructured loans. Activity during 2014 related to these two components was as follows:


(In thousands)	Nonaccrual Loans			Restructured Loans
Balance at December 31, 2013	$	23,838		$	26,255
Loans placed on nonaccrual status		5,339			-
Loans restructured		-			-
Principal paydowns		(4,631	)		(929	)
Transfers to performing status		(413	)		-
Transfers to other real estate owned/other foreclosed assets		(7,667	)		-
Charge-offs		(936	)		(37	)
Balance at September 30, 2014	$	15,530		$	25,289

The Company’s comprehensive risk-grading and loan review program includes a review of loans to assess risk and assign a grade to those loans, a review of delinquencies, and an assessment of loans for needed charge-offs or placement on nonaccrual status. The Company had loans in the amount of $70.5 million and $79.0 million at September 30, 2014 and year-end 2013, respectively, which were performing but considered potential problem loans and are not included in the nonperforming loan totals in the table above. These loans, however, are considered in establishing an appropriate allowance for loan losses. The balance outstanding for potential problem credits is mainly attributed to continuing weaknesses in the overall economy which continue to strain many of the Company’s customers. Potential problem loans include a variety of borrowers and are secured primarily by various types of real estate including commercial, construction properties, and residential real estate developments. At September 30, 2014, the five largest potential problem credits were $16.3 million in the aggregate compared to $16.7 million at year-end 2013.

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

Other Real Estate

OREO includes real estate properties acquired by the Company through, or in lieu of, actual foreclosure. At September 30, 2014, OREO was $34.8 million, a decrease of $3.1 million or 8.1% compared to $37.8 million at year-end 2013. OREO has declined $17.8 million or 33.9% from its peak of $52.6 million, which occurred at year-end 2012. A summary of OREO activity for 2014 follows.


(In thousands)	Amount
Balance at December 31, 2013	$	37,826
Transfers from loans and other increases		8,152
Proceeds from sales		(8,590	)
Net loss on sales		(546	)
Write-downs and other decreases, net		(2,076	)
Balance at September 30, 2014	$	34,766

Deposits

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


	End of Period							Average
(In thousands)	September 30, 2014		December 31, 2013		Increase (Decrease)			Nine Months September 30, 2014		Twelve Months December 31, 2013		Increase (Decrease)
Noninterest Bearing	$	283,582	$	277,294	$	6,288		$	275,897	$	256,518	$	19,379

Interest Bearing
Demand		308,073		320,503		(12,430	)		320,383		306,945		13,438
Savings		358,679		340,903		17,776			356,183		333,457		22,726
Time		414,824		471,515		(56,691	)		443,557		505,738		(62,181	)
Total interest bearing		1,081,576		1,132,921		(51,345	)		1,120,123		1,146,140		(26,017	)

Total Deposits	$	1,365,158	$	1,410,215	$	(45,057	)	$	1,396,020	$	1,402,658	$	(6,638	)

The decrease in total end of period deposits was driven by lower time deposits of $56.7 million or 12.0%. The decrease in time deposits is a result of the Company’s overall high liquidity position and a strategy to lower overall funding costs, mainly by allowing higher-rate certificates of deposit to roll off or reprice at lower interest rates. Many of those balances have been rolled into interest and noninterest bearing demand accounts or savings accounts by the customer. As rates have decreased throughout the deposit portfolio, many customers have opted to transfer funds from maturing time deposits or investments from other sources into short-term demand or savings accounts. The Company has not sought out or accepted brokered deposits in the past nor does it have plans to do so in the future.

Borrowed Funds

Total borrowed funds were $202 million at September 30, 2014, a decrease of $4.4 million or 2.2% from year-end 2013. The decrease in borrowed funds was driven by an $8.1 million or 4.6% decrease in long-term borrowings. Long-term borrowings decreased as a result of a scheduled repayment during the third quarter of maturing Federal Home Loan Bank (“FHLB”) borrowings in the amount of $8.0 million that carried a 4.5% interest rate. Short-term borrowings increased $3.7 million or 12.6%. Short-term borrowings primarily represent funds that have been swept out of the deposit accounts of certain qualifying commercial customers into repurchase agreements and accounted for as secured borrowings by the Company.

LIQUIDITY

The primary source of funds for the Parent Company is the receipt of dividends from its subsidiary banks, cash balances maintained, and borrowings from nonaffiliated sources. Payment of dividends by the Company’s subsidiary banks is subject to certain regulatory restrictions as set forth in national and state banking laws and regulations. Furthermore, United Bank & Trust Company (“United Bank”) and Citizens Bank of Northern Kentucky, Inc. (“Citizens Northern”) each must obtain regulatory approval to declare or pay dividends to the Parent Company as a result of increased capital required in connection with prior regulatory exams. Capital ratios at each of the Company’s four subsidiary banks exceed regulatory established “well-capitalized” status at September 30, 2014 under the prompt corrective action regulatory framework; however, United Bank and Citizens Northern are required to maintain capital ratios at higher levels as outlined in their regulatory agreements. The capital ratios at these two banks exceeded those required higher amounts at September 30, 2014.

The Parent Company’s primary uses of cash include the payment of dividends to its preferred and common shareholders, injecting capital into subsidiaries, paying interest expense on borrowings, and paying for general operating expenses. The regulatory agreement entered into during 2009 between the Company and its primary banking regulators was terminated in March 2014. Therefore, the Company is no longer required to receive permission from its banking regulators to make interest payments on its trust preferred securities or to pay dividends on its common and preferred stock. However, the Company’s current goal is to redeem all of its outstanding preferred stock before considering the payment of a dividend on its common stock. The Company redeemed 10,000 shares, or one-third, of its outstanding preferred stock on May 15, 2014. Further redemptions, which require regulatory approval, will be based on satisfactory financial performance and take into consideration the Company’s capital position, earnings, asset quality, and other factors. The timing and amount of any further redemption by the Company of its remaining outstanding preferred stock will be disclosed when it is assured.

The Parent Company had cash balances of $34.1 million and $36.5 million at September 30, 2014 and year-end 2013, respectively. Significant cash receipts of the Parent Company for 2014 include dividend payments from its bank and nonbanking subsidiaries of $6.0 million and $1.5 million, respectively, a return of capital from nonbank subsidiaries in the amount of $1.5 million, and management fees from subsidiaries of $2.4 million. Significant cash payments by the Parent Company in 2014 include $10.0 million to redeem a portion of its outstanding preferred stock, $1.8 million for salaries, payroll taxes, and employee benefits, and $1.5 million for the payment of dividends on outstanding preferred stock.

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

As of September 30, 2014, the Company had $233 million of additional borrowing capacity under various FHLB, federal funds, and other borrowing agreements. However, there is no guarantee that these sources of funds will continue to be available to the Company, or that current borrowings can be refinanced upon maturity, although the Company is not aware of any events or uncertainties that are likely to cause a decrease in the Company’s liquidity from these sources. The Company’s borrowing capacity was $228 million at year-end 2013.

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

Liquid assets consist of cash, cash equivalents, and available for sale investment securities. At September 30, 2014, consolidated liquid assets were $689 million, up $8.1 million or 1.2% compared to $681 million at year-end 2013. The Company’s liquidity position remains elevated mainly as a result of the Company’s overall net funding position and weak loan demand. The overall funding position of the Company changes as loan demand, deposit levels, and other sources and uses of funds fluctuate.

Net cash provided by operating activities was $24.2 million and $22.5 million for the first nine months of 2014 and 2013, respectively. This represents an increase of $1.7 million or 7.7%, led by an increase in net mortgage loans sold. Net cash flow from investing activities was $39.3 million for 2014 compared with a net use of $32.8 million for 2013. This represents a change of $72.1 million and was driven by net loan and investment securities activity. The Company had net loan repayment activity of $34.6 million for 2014 as overall paydowns exceeded new demand. For 2013, an increase in loan demand resulted in net origination activity of $6.8 million. For investment securities, the Company had net cash outflows of $630 thousand for 2014 compared with net cash outflows of $31.7 million for the year-ago period. Net cash outflows related to investments represent net purchase activity, where purchases exceeded proceeds received from the sale, maturity, and calls of investment securities. For 2014, excess cash flows from investment and loan activity were used more to fund deposit runoff, debt repayments, and the redemption of a portion of the Company’s preferred stock. In 2013, cash inflows were used more to purchase additional investment securities.

Net cash used in financing activities was $60.9 million and $1.7 million for the first nine months of 2014 and 2013, respectively. The increase in net cash used was driven primarily by deposit runoff, the redemption of a portion of the Company’s preferred stock outstanding of $10.0 million, and repayments of long-term borrowings. Net outflows related to deposits were $45.1 million for the first nine months of 2014, an increase of $37.7 million when compared to $7.3 million for a year earlier. Net repayments on long-term borrowings were $8.1 million for 2014 compared to $2.1 million for 2013.

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

CAPITAL RESOURCES

Shareholders’ equity was $178 million at September 30, 2014, an increase of $8.1 million or 4.8% compared to $170 million at year-end 2013. The increase in shareholders’ equity was driven by a $7.1 million after-tax increase in the unrealized gain on available for sale investment securities, which is attributed to a decrease in longer-term market interest rates. Generally, as market interest rates fall, the value of fixed rate investments increases. Net income for the period increased shareholders’ equity by $12.3 million, partially offset by dividends on preferred stock of $1.5 million. The Company redeemed a portion of its preferred stock in the amount of $10.0 million during the second quarter of 2014, which resulted in a reduction to shareholders’ equity by the same amount.

On January 9, 2009, the Company issued 30 thousand shares of Series A, no par value cumulative perpetual preferred stock. The dividend rate on the preferred shares increased on February 15, 2014 to 9% from 5%. During the second quarter of 2014, the Company redeemed 10 thousand, or one-third, of the preferred shares for $10.0 million plus accrued dividends. The redemption of the shares mitigates the impact of the rate increase on earnings per common share. The amount of dividends payable for a full quarter without the redemption would have resulted in an increase of $300 thousand, equal to $.04 per common share per quarter. After the redemption, the increase in dividends for a full quarter amount to only $75 thousand or $.01 per common share per quarter. The Company’s goal is to redeem the remaining outstanding preferred shares as soon as its capital position, earnings, asset quality, and other factors indicate it is warranted. Further redemptions, however, require the approval of banking regulators. The timing and amount of any further redemption by the Company of its remaining outstanding preferred shares will be disclosed when it is assured. Please refer to Part II, Item 5 “Other Information” included in this Form 10-Q for further information regarding the Company’s announcement in October, 2014 to redeem an additional 10,000 shares of its Series A preferred shares.

During the first quarter of 2014, the Parent Company received notice that it was no longer subject to the regulatory agreement that had been in place since the fourth quarter of 2009. The agreement was terminated as a result of continued satisfactory compliance, most notably from the progress made in lowering nonperforming assets and increasing capital levels. Since the agreement has been terminated, the Company is no longer required to receive permission from its banking regulators to make interest payments on its trust preferred securities or to pay dividends on its common and preferred stock. However, the Company’s current goal is to redeem all of its outstanding preferred stock before considering the payment of a dividend on its common stock.

The Parent Company is under no directive by its regulators to raise any additional capital, although it periodically evaluates potential capital raising scenarios. However, no determination has been made as to if or when a capital raise will be completed. Net proceeds from a potential sale of securities could be used for any corporate purpose determined by the Company’s board of directors.

At September 30, 2014, the Company’s tangible capital ratio was 10.04%, an increase of 69 basis points compared to 9.35% at year-end 2013. The tangible capital ratio is defined as tangible equity as a percentage of tangible assets and excludes intangible assets. Tangible common equity to tangible assets, which further excludes outstanding preferred stock, was 8.91% and 7.70% at September 30, 2014 and year-end 2013, respectively. This represents an increase of 121 basis points in the comparison.

Consistent with the objective of operating a sound financial organization, the Company’s goal is to maintain capital ratios well above the regulatory minimum requirements. The Company's capital ratios and the regulatory minimums are as follows as of the dates indicated.


	September 30, 2014									December 31, 2013
	Tier 1 Risk-based Capital¹			Total Risk-based Capital¹			Tier 1 Leverage²			Tier 1 Risk-based Capital¹			Total Risk-based Capital¹			Tier 1 Leverage²
Consolidated		20.22	%		21.47	%		12.33	%		18.95	%		20.21	%		11.90	%

Farmers Bank & Capital Trust Company		18.77			19.90			10.01			17.56			18.82			9.60
United Bank³		17.35			18.62			10.74			15.06			16.33			9.67
First Citizens Bank		14.20			14.88			9.80			12.92			13.67			9.03
Citizens Northern³		14.35			15.60			9.70			13.57			14.82			9.67

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

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

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

Regulatory Agreements

United Bank and Citizens Northern are each a party to supervisory agreements with their primary banking regulator. These agreements are summarized in Note 10 to the unaudited condensed consolidated financial statements of this Form 10-Q. These agreements are discussed in significantly greater detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 under the caption “Capital Resources” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The agreement entered into during 2009 between the Parent Company and its primarily regulators was terminated during the first quarter 2014 as a result of continued satisfactory compliance.

There have been no changes to the regulatory agreement at Citizens Northern in 2014. For United Bank, the Consent Order it was under with its regulators was terminated and replaced in the first quarter of 2014 with a stepped-down enforcement action in the form of an informal Memorandum of Understanding. The Company believes it is adequately addressing all issues of the regulatory agreements to which it is subject and is in compliance with those agreements. However, only the respective regulatory agencies can determine if compliance with the applicable regulatory agreements have been met. Regulators continue to monitor the Company’s progress and compliance with the agreements through periodic on-site examinations, regular communications, and quarterly data analysis. The results of these examinations and communications show satisfactory progress toward meeting the requirements included in the regulatory agreements.

The Parent Company maintains cash available to fund a certain amount of additional injections of capital to its bank subsidiaries if required by its regulators. If needed, further amounts in excess of available cash may be funded by future public or private sales of securities, although the Parent Company is currently under no directive by its regulators to raise any additional capital.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

At September 30, 2014, the model indicated that if rates were to gradually increase by 75 basis points during the remainder of the calendar year, then net interest income and net income would decrease 0.1% and 0.2%, respectively for the year ending December 31, 2014 when compared to the forecasted results for the most likely rate environment. The model indicated that if rates were to gradually decrease by 75 basis points over the same period, then net interest income and net income would decrease 0.1% and 0.1%, respectively.

Item 4. Controls and Procedures

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

The Company’s Chief Executive Officer and Chief Financial Officer have also concluded that there were no significant changes during the quarter ended September 30, 2014 in the Company’s internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

As of September 30, 2014, there were various pending legal actions and proceedings against the Company arising from the normal course of business and in which claims for damages are asserted. It is the opinion of management, after discussion with legal counsel, that the disposition or ultimate resolution of such claims and legal actions will not have a material effect upon the consolidated financial statements of the Company.

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

Beginning January 1, 2014, the Company changed the payment form of its board meeting fees and quarterly fees from 100% cash to 50% in cash and 50% in Company common stock. The shares are issued as part of a plan adopted by the board of directors. Each director has elected to participate by entering an agreement with the Company to accept common stock in lieu of cash for 50% of the director’s board meeting and quarterly fees. As the shares are only issued to directors as part of a plan approved by the board, the shares are exempt from the registration requirements of the Securities Act of 1933, as amended (the “1933 Act”), as a sale not involving any public offering under Section 4(2) of the 1933 Act. The value of the shares issued in payment is determined by the closing price of the Company’s common stock on the NASDAQ Global Select Market on the business trading day immediately preceding the meeting day for board meeting fees and the business trading day immediately preceding the first meeting of the quarter for each quarterly fee. Attendance for committee meetings will continue to be paid completely in cash. As employee directors are not paid director’s fees, only non-employee directors receive stock under this plan.

In the quarter ended September 30, 2014, the Company issued a total of 1,224 shares of common stock to its non-employee directors under this plan as compensation for $28 thousand of director fees. Since January 1, 2014, the Company has issued a total of 3,005 shares of common stock to its directors under this plan as compensation for $65 thousand of director fees. The cash retained by the Company by issuing common stock in lieu of paying cash is used for general corporate purposes. There are no brokers involved in the issuance of stock to directors and no commissions or other broker fees are paid.

At various times, the Company’s Board of Directors has authorized the purchase of shares of the Company’s outstanding common stock. No stated expiration dates have been established under any of the previous authorizations. There were no Company shares purchased during the quarter ended September 30, 2014. There are 84,971 shares that may still be purchased under the various authorizations.

Item 5. Other Information

Item 6. Exhibits

List of Exhibits

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

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

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

3.4	Amended and Restated Bylaws of Farmers Capital Bank Corporation (incorporated by reference to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009 (File No. 000-14412)).

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

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

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

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

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

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

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

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

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

4.10	Form of Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated by reference to the Current Report on Form 8-K dated January 13, 2009 (File No. 000-14412)).

4.11	Letter Agreement, dated January 9, 2009, between Farmers Capital Bank Corporation and the United States Treasury, with respect to the issuance and sale of the Series A Preferred Stock and the Warrant, and Securities Purchase Agreement-Standard Terms attached thereto as Exhibit A (incorporated by reference to the Current Report on Form 8-K dated January 13, 2009 (File No. 000-14412)).

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

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

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

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

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

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

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

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

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

101	Interactive Data Files

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

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

SIGNATURES

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

Date:	November 6, 2014	/s/ Lloyd C. Hillard, Jr.
		Lloyd C. Hillard, Jr.
		President and CEO
		(Principal Executive Officer)

Date:	November 6, 2014	/s/ Doug Carpenter
		C. Douglas Carpenter
		Executive Vice President, Secretary, and CFO
		(Principal Financial and Accounting Officer)

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